A few months ago I wrote an article addressing the magical powers attributed by some to Fibonacci analysis. What I had planned to write next about was Elliot Wave Theory, which I consider to be an equally ridiculous and degrading part of technical analysis. But, a couple of things held me back. Firstly, there’s much more haziness here compared to Fibonacci. Secondly, and most important, Paul Tudor Jones is quoted in Market Wizards (1988) as being a supporter:
Are there any market advisers that you pay attention to ? Bob Prechter is the champion. Prechter is the best because he is the ultimate market opportunist.
What do you mean by opportunist ?
The reason he has been so successful is that the Elliott Wave theory allows one to create incredibly favorable risk/reward opportunities. That is the same reason I attribute a lot of my own success to the Elliott Wave approach.
Whenever I wanted to criticize the Elliot Wave aficionados, I got stopped in my tracks by the quote above. Well, this week I’ve been reading More Money Than God, a book which provides a history of hedge-funds. Paul Tudor Jones is of course mentioned, and new light is shone on a couple of things: the attribution of his trading success to Elliot Wave; the fact that together with his chief economist and statistician, Peter Borish, predicted the 1987 crash by noting an eerie parallelism when they superimposed the charts of the 1980s on the 1920s.
Firstly, as it can be seen in Trader: The Documentary (1987), Borish predicted that the crash would arrive in the spring of 1988. This forecast was no better than the many others made at a time when a lot of Wall Street players were expecting a market break – unsurprisingly after a five year bull run. Secondly, in an interview in Barron’s in the first half of 1987, Peter Borish admitted to fudging the results of the 1980s-1920s comparison, juggling with the starting points for the two lines until he got the fit he wanted.
How about the connection between Paul Tudor Jones, Elliott Wave theory and Robert (Bob) Prechter ? It must be said that Prechter was an investment guru in the 1980s, mainly because he had correctly predicted the start of the bull market in 1982 (by using Elliot Wave). After the crash, expecting the stocks to plunge at least 90%, he became a perma-bear and remains one to the present day. It’s clear that the stellar performance Paul Tudor Jones had in 1987 (200%) can’t be attributed to Prechter. Not only he didn’t pinpoint the date of the crash, but Jones said in an interview to Barron’s that he decided to fade Prechter (in other words, fade Elliot Wave), due to Prechter’s becoming such a large market force. A quote from More Money Than God offers what I believe to be the real reason for PTJ’s success:
The truth was that Jones’s trading profits came from agile short-term moves, not from understanding multidecade supercycles whose existence was dubious. Like the traders at Commodities Corporation, Jones was adept at riding market waves; he would get up on his surfboard when a swell seemed to be coming, ready to jump off quickly if the market turned against him. “When you take an initial position, you have no idea if you are right,” he once confessed, undermining the notion that any long-range analysis could explain his success. Rather, as he explained in his more candid moments, his method was “to write a script for the market,” setting out how it might behave; and then to test the hypothesis repeatedly with low-risk bets, hoping to catch the moment when his script became reality.
This sounds very similar to Jesse Livermore’s method of placing ‘exploratory bets’ until the market confirmed its direction and allowed him to add to the original position.
To conclude: although Paul Tudor Jones might have genuinely believed that his success was due to Elliot Wave, as he’s quoted in Market Wizards, all the evidence points to the contrary. Again, from More Money Than God:
In one example of Jones’s loose grip on the causes of his own success, analysis by Commodities Corporation, which had seeded Jones, determined that he tended to lose money on cotton, the market he believed he knew best. When the Commodities Corporation analysis was presented to Jones, he had difficulty accepting it.