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A Rebuttal to Citique of Elliot Waves

June 17, 2000

Dear G. M. Ross

I was asked by Vronsky to reply to your recent essay, " An Elliott Waves critique". May I begin that it is very gratifying for the authors of "12,000 years of Elliott Wave" that you read and thought about the thrust of our effort and was interested enough to study it and to respond with a critique.

Firstly, I would like to thank you for the very complimentary things you said about "12,000 years.. " in your introductory remarks – even though these were more about the work and the research that went into it than about the conclusions we reached! Your comments are really appreciated.

For us to answer at length on all you said would become a very long article, so I will select certain of your comments and respond as best I can.

After saying that Elliott and Fibonacci has a mathematical nature and underpins market and monetary phenomena, you continue:

"Where Elliott wave theory does not work is when opinion rather than mathematical factual entities such as prices are used to calculate the waveforms. There is no doubt that the history listed in "12,000 Years of Elliott Waves" is factually correct and extremely well researched; however the interpretation of those events as components of impulse or corrective waves just does not hold up, being subjective. The effect of doing this is to make a non-mathematical series appear to be fitted to the wave."

If by 'opinion' you mean the subjective opinion of an outside observer, using some subjective measure, then I would agree. Yet I differ from you when you refer to prices as 'mathematical factual entities'. In my opinion prices may behave according to some rules of patterns – such as the Elliott wave, but also in terms of the method I developed for charting, (Chart Symmetry) that also relies heavily on the Fibonacci ratio – but that behavior is the result of decisions made by many people who are acting out of emotion and logic with little regard for the mathematical implications for the price of their decisions.

Markets are I believe driven more by emotion and perceptions than by hard rational logic, so that in a sense the "opinions" of the many people within the market determines what happens to the price. The fact that the Fibonacci ratio plays a major role in the outcome of the decisions is to me an example of complexity at work – in the form of a large and self-adaptive system that gets to display a certain hidden symmetry. In this case the symmetry appears through the role of the Fibonacci ratio in price behaviour.

You express yourself strongly against the idea that one can take a non-mathematical and subjective view of history as the basis for an Elliott count.

"In short to take one example, the invasion by Ethiopia of Egypt is definitely negative (corrective or downward wave) for the Egyptians. But what about from the point of view of the Ethiopians? . . . This viewing of historical events, the rise and fall of civilizations in particular, from a single perspective, even if it is the perspective of the majority of historians at one particular time, can in most cases be offset by a differing opinion as to whether it was positive or negative, or indeed neither. In any case even if we all agreed on a particular event, how can our opinion be attributed a mathematical certainty? Or a mathematical value as is required by Elliott wave theory."

This raises questions on a number of levels. Firstly, as said earlier, price is not really a mathematical quantity – it would not be a practical possibility to get an equation for a price chart, for example. Price is a measure of the emotional forces at work in a market. The emotions in turn are driven by what is happening in the "world out there", the economy included and how people perceive these outside developments.

In principle one will not have a major bull market when the economy goes into a major recession, nor a steep and lasting bear market when business is booming and everyone is making money. Which means that if one were able to chart changes in economic activity and people's perceptions and experiences of these changes, then it would again be possible to apply the Elliott wave theory to these charts. Of course, there is no better measure of how the economy performs and how people perceive the economy than the stock market!

If this observation is valid, and in researching and writing our essay we believe this to be true, then any reasonably good measure of the economy of a country should display the Elliott wave. Few measures are as flexible and useful as a stock index, but for by far the largest period of time that we covered there was no stock market! There are even no easily available data on the state of the economy of the early kingdoms and empires that span a major part of history.

We made the assumption that periods when major kingdoms existed and flourished alongside each other, then the economies of these kingdoms also flourished. And thus, that if there had been a stock exchange, prices would have been in a strong bull market – experiencing very bullish impulse waves.

Similarly, when there was major conflict and emperors and kings were being defeated left right and center or overthrown by revolt – what the Chinese curse refers to as 'interesting times' – any hypothetical stock exchange existing at that time would probably have been in a steep and lasting bear trend, or major corrective phase.

Your point of the Ethiopian and Egyptian is well put; all we could do is focus on the rise and fall of the major civilizations and empires and not on the peoples that they conquered in the process of amassing their kingdoms. In the same way that given a free choice most people would do an Elliott analysis of the Dow Jones index as the best proximate measure of "the state of the global economy" and not use the Financial Times 100 or the Nikkei, for example. Our focus was on the dominant empire of the day, not on the also-rans (We stated this fact in our article).

You seem to think that we might be drawing the 20th Century out of context, that the analysis that places the current moment of time at a new apex of economic expansion is not really valid.

"To use an extreme example the Twentieth Century is considered, in your essay, as the height of a boom period and the zenith of a Grand Super Cycle and X wave, expected to be followed by a 100 year correction, but some people I am certain (maybe a minority) would view the century as negative in the extreme – a period of extreme suffering & poverty throughout most of the world, with a record number of wars, not a period of unheard of wealth and progress (except for small groups of people in a handful of countries) but quite the opposite, hopefully to be followed by a new golden age of 100 years, which is already heralded by the computer and information age just in its infancy."

With the possible exception of the Sumerian civilization where much the same culture, religion and language survived practically unchanged for at least 2500 years, and where very liberal laws even by the standards of today applied, history has never really had a lengthy period anywhere without regular battles and wars, kingdoms in disarray and great inequity in the division of wealth and possessions.

Yet in most industrial countries today the larger part of the population enjoy a material wealth and personal freedom hardly experienced even by the ruling class of bygone empires, let alone the serfs and slaves. Even so, our stage has not been the whole world, but only that part of it that we could fit on a single thread of history, from the Sumerians in the Middle East through the Mediterranean civilizations and eventually into the New World. Perhaps one could do an Elliott on Asian history too, starting from the ancient Chinese civilizations, but that we are not prepared to do.

We believe that from whatever perspective this thread is viewed it would show a near continuous growth in overall wealth during each major impulse wave, interrupted by the observed large corrections when civilizations faltered and social structures collapsed to bring new poverty and hardship. Yet like the Phoenix that rises from the ashes of the fire in which it had been immolated, economies restarted on the path to greater overall wealth and prosperity for even more people. Until we are where we are today – at the top of the heap and perhaps at the end of the line.

Yes, our speculation about the factors that could contribute to a long corrective wave is more opinion than hard fact. At the time we wrote the essay we had little more to go on. Since then more information has come to light. One example is the article at . There are more, some even more gloomy.

You also took issue with a comment regarding the depreciation of fiat currencies and then wrote:

"But the dollar itself is a fiat currency, and currencies if valued against gold as I think they should be when we discuss their value, have not really depreciated at all in general in recent history except for one or two. It is the US Dollar that has appreciated (against gold) along side super-inflation (against gold). Without getting further into that subject what I am illustrating by this is again an example of "corrective wave" arguments that could be rephrased as positive "impulse wave" arguments."

The whole theme of our essay was the long-term view. When you claim that the dollar has appreciated against gold and other currencies, consider that not too long ago as history goes, the gold price was a mere $35/oz. As recently as 1972 when President Nixon took the US off the remainder of its gold standard, gold was at $42/oz. Now it is $290/oz - which one has appreciated against the other?

In 1971 one dollar bought ¥365; in 1995 one only needed ¥80 to buy one dollar. Today it requires only ¥107 to buy a dollar. Yes, from mid-1995 to mid 1998 the dollar has been strong against the Yen, mostly because it was agreed between the US and Japan that the dollar was to be supported against the Yen. Again, taking the longer view, which one has done the most appreciation?

Between 1971 and 1995 the dollar lost as much as 76% in value against the Yen; over the same period the dollar lost 65% against the Deutschmark, so that it was not the Yen that was all powerful, but the dollar that lost value after the discipline imposed by the gold standard was abandoned.

At the end of your critique you return to the matter of fitting Elliott to the rise and fall of kingdoms and empires and other events.

"The point is that although human emotion when measured in a marketplace can be shown to exhibit Elliott waves, civilizations and historical events, even monetary ones, cannot be measured mathematically as with prices of stocks."

I think that if one were able to chart say the daily GDP figure for the US for the same period as the Dow Jones, much the same wave counts would be found – at least at the level of the more significant wave structure. Much the same result would also be found if one were to chart the unemployment rate, or even the rate of deaths of children less than one year old. Of course, different technicians would have different counts, but they even have that for the Dow Jones.

Whether one uses a stock index, some other measure of economic activity or a measure that reveals the increase in human misery when the economy falters and slips back, at the macro scale where "12,000 Years of Elliott Waves" was intended to apply, the results of an Elliott count probably would be much the same.

And this observation probably applies to all of human history.

Elliott himself has stated in 'Nature's Law' that, "(Elliott) Waves of different degrees occur whether or not recording machinery is present".

Based on this view, we wrote in the essay that "The recording machinery Elliott was talking about was a viable stock market average. In spite of the fact that adequate recording machinery was not available prior to circa1850, it is the opinion of the authors that the data as available and presented in this article displays remarkable adherence to the Elliott Principle and its rules over a span of 12,000 years."

In the early part of the essay we also spent some time explaining the problems that were encountered in an attempt to take the Elliott wave back that far. One could argue, as you in effect seem to do, that the whole process of applying Elliott to societies in the absence of an active and fair stock market is invalid, because there is no 'objective' measure of the markets in those societies. But that would mean that human nature changes depending on the absence or presence of a stock market.

We believe it does not change, which means that we had to use whatever measures for the state of an economy or market that are available. And for the olden times the data available to us were limited to the rise, expansion and fall of kingdoms and empires.

We thank you for your critique. You have raised some very interesting points that have compelled us to re-evaluate our premises and through that obtain improved clarity of what we set out to achieve and where improvements could be made were we to start the work again now. You may want to read the follow-up article by Mark Butler, one of the authors of "12,000 Years….", in which the role of money over this long period of time is discussed.

A last thought. Our speculation about factors that could contribute to the new Dark Ages that the long term Elliott count would suggest are soon to be on us, might be completely off the mark, but we do not really believe that. The core of the matter is that there are many factors that are so tightly intermingled that could go wrong with lasting results. These factors and their unpleasant consequences make the dire predictions encompassed in the article very possible, if not likely. These include the potential energy mentioned earlier; the probability that global warming is with us and the negative effects it may have on food production in years to come, plus the weather in general; perhaps a new Spanish flu, or something even more scary. Who knows?

If one lived with blinkers on all the time, a real crisis could be with us before any preparation had been made. The risks are just too great to continue living with the simple belief that nothing could go wrong. . go wrong . . go wrong. . go


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