Friday, September 3, 2010

Random Walk - Not!

My assertion was that machines, with the proper programming, could be taught to think for themselves. This was many years ago. Today we refer to it as Artificial Intelligence. Then, the idea did not go over well. At first I didn't understand people's reaction to what seemed like a perfectly logical premise. Later, I realized that people do not like to by categorized, classified, and called predictable.

For decades, many have believed there was no pattern to the way in which prices moved in the stock markets. After all, people aren't that predictable! It is a belief that is still popular today. The financial services industry promotes the idea in order to convince customers to buy into the market and hold for the long term. Of course, if the markets moved in a truly random fashion, it would not make sense that they would have had an upward bias up until this point. Without that bias, buy and hold could not work.

I don't have any difficulty in believing there is a pattern. "To every thing there is a season", so says the Bible (ecclesiastes 3:1). The question is, what does this pattern look like? I tend to favour the Elliott Wave Principle. In my previous post I described some similarities with a couple of other theories. It would seem to have some predictive capability. Some would say it is too vague and imprecise to be of real value. Perhaps the fit is between what we want to find and how the price patterns can be used to portray the theory. After the fact, practically anyone can identify the wave patterns.

Perhaps it is more art than science. I am reminded of stories in "Blink" by Malcolm Gladwell about how we think. There are things we know which we are unable to articulate in words. Until we have a better explanation for how the theory works, it seems, for many, it will remain just a theory.

As for me, it would seem to be the best predictor of market direction. While even the most highly trained and experienced Elliott Wave analysts often seem to get the exact timing wrong (my experience), their ability to predict a market outcome is uncanny to me. What they are currently saying is the markets are headed much lower. That doesn't make me want to completely sit on the sidelines, but it does make me more cautious than usual. If all else is counted as equal - a fifty-fifty chance of the market going up, or down - I am going to give more weight to the Elliott Wave theory. I would rather be wrong and hold onto my life savings, than be wrong having lost them! That is one walk I am not willing to take.

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