My Opinion of the Elliott Wave

Since I started trading the Elliott wave in 1995, I qualify as an experienced Elliottician. I traded the Elliott wave following the Beckman method (see Amazon link at then of this article). The basics of the Beckman method is that an impulse move tends to remain between two trend lines that for a channel. Starting at a mayor bottom, an impulse rally is followed by a corrective wave. Draw a line between the mayor bottom and the bottom of the first correction. Then draw a parallel line to this one, starting at the top of the first rally (wave 1), to estimate the possible end of wave 3. The parallel line MUST be exceeded significantly. This was a great approach during the bull market of the late 90’s. This is how I first started trading options because I could easily tell when a correction was over, and at the bottom of the market, call options were usually cheap.

One not-so-good friend told me that the one thing he new about technical analysis methods is: “it works until it doesn’t”. My time of reckoning came in Sept 29, 2000. In the chart below, you see my channeling analysis on AAPL computer back in Aug. 2000. My expectation was for AAPL to go to new highs, as the 5th wave as yet to complete. My projection from the top of wave 3 was for wave 5 to complete at around $80 (split adjusted $40). Note: This analysis was done manually, using the channeling approach of Beckman using Photoshop on a screenshot of the RET chart.


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Instead, AAPL collapsed, from what then was about $63 a share to $28 a share overnight.

Please click on image to enlarge it.

In one single day, my confidence about owning stock (I had a large position on AAPL since 1997) and about my ability to read the Elliott wave was shattered, which was a good thing, because in the months to follow, I sold most of my stock holdings. I decided then and there that no matter what the system I used to interpret and that depended on my ability to read it could only be a probabilities game. From that point on, I decided to trade options ONLY. I had been doing it for a while, but I knew that AAPL was only the tip of the iceberg. AAPL was a wake up call to me. I thought then that there must be a better way. A way I could use options to limit my risk while maximizing my profits with leverage. Despite my big loses that day, I learned some invaluable lessons that are with my today:

1. Stocks are not a safe investment unless you limit your risk. Some approaches to accomplish this may include selling covered calls, buying married puts or both (a collar).
2. Any technical analysis you may use is in the end subjective and your own perception dictates what you believe or not. Technical analysis is a probabilities game and you may be very wrong in some, if not many cases.
3. Using options one can limit the risk in one individual trade, no matter what your forecast. It is better to lose 2% of our account than 10% of your account in one single overnight debacle like AAPL’s in that fateful day.
4. The last lesson was more of a question or a challenge I put to myself: there must be an options strategy that could take advantage of the two most powerful features of options: Risk management and Leverage.

I have gone back to the Elliott wave analysis using RET (I did not have this software back then) and picked a result that I could have live with back then. Notice how the analysis would have warned me that the wave 1 was concluded, but that a second stab at the highs was still likely before the collapse.


Please click on image to enlarge it.

People ask me from time to time what do I think of the Elliott wave, and whether the RET is worth the money. I’d say it is worth the money if you can examine a analysis critically and say: I agree with this count. In the end it is always a probabilities’ game and no matter what system you use, you are always in a “yes-no-maybe-so” situation.

My relationship with the Elliott wave is a love-hate one. You cannot help but believing that there is a logic to the chaos of the markets, and we would like to think that if we could bring order to that chaos, then riches would be just around the corner. For a time, I had that kind of results. I never made so much money in terms of ROR as in 1998 trading options, using my channeling approach and buying long calls. Complementing the Elliott wave with options to limit your risk can be quite profitable, but be sure that you limit your loss to 2% of your account in every trade you enter.

You can also do away with any technical or fundamental analysis by using my trading system of picking stocks right after earnings and the placing a PCCRC. After many years of searching, testing and actually trading the PCCRC, I am convinced that this approach fits my challenge in point 4 above. Today, I can use RET and TOS’s software to manag my trades. I have accumulated over a decade of experience on the Elliott wave and technical analysis, as well as a good understanding of options. I can say with confidence that I can place large trades using the PCCRC, and if another Sept 29, 2000 was to happen, I would actually profit handsomely, and that allows me to sleep well at night.





http://www.amazon.com/Elliott-Wave-Explained-Robert-Beckman/dp/8170945321/ref=sr_1_1?ie=UTF8&s=books&qid=1199811275&sr=8-1