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Who's Pretzel Logic? And what's this Elliott nonsense?

Pretzel Logic made a name for himself (actually, for his moniker) during the 2008 crash by calling most of the market turns with uncanny accuracy, often within a few SPX points.  He even called the exact March 2009 bottom in real-time on Capitalstool.com, in their intra-day trading forum (see Historic Real-time Bottom Call: 3-6-09). 

He has actively traded both sides of the market since the early-90's, but has especially enjoyed trading the bear markets of the past decade.  He has made, and lost, a fair sum of money in the market, and likes to think he's learned a few things along the way.

He's made human nature something of a life study, and his interest in psychology is one the factors that has made Elliott Wave Theory his "go to" trading tool, since psychology factors heavily into the wave structures.  He does not, however, rely on Elliott Wave exclusively, and often utilizes traditional technical analysis combined with confirming indicators to validate or invalidate certain counts.  Over the years, Pretzel has also developed his own, often unique, way of counting and viewing waveforms.  Some of his counting and labeling methods are "textbook" -- others aren't.  Pretzel believes the results stand on their own merit.

Elliott Wave is unique since it is both a technical system, in that there are concrete rules and laws; and also an organic system, since the count "evolves" with each successive tick.  It's not a simple TA pattern you spot, and then it completes and your work is done so you can go back to watching "American Dad!"; Elliott counts are continually evolving even as you observe them.  What was possible yesterday may, with the addition of a tick here or there, become impossible today.  Identifying those possibilities as they become validated or invalidated, and accurately assigning probabilities to them, is what separates the good Elliott Theorists from the not-so-good.

It is important to note that Elliott Wave Theory was derived from back-testing.  R.N. Elliott studied decades worth of charts at various time frames, and discovered that there were certain patterns (fractals) repeating across all time frames.  He developed Elliott Wave Theory as an attempt to quantify and explain these patterns.

Elliott found that these market fractals mimicked many natural mathematical laws.  Certain personalities find this outrageous: apparently they view man as being separate from nature, as opposed to being part of nature.  I find Elliott's discovery to be not only believable, but painfully obvious.

The whole of nature conforms to mathematical laws and aesthetics;
how could any market possibly operate outside of those laws? 

Assuming the market operates outside of natural law would be akin to assuming that a building doesn't need to obey the laws of gravity, since it's man-made.  Man is forced to work within natural laws, and as a result, those laws impact our behavior in quantifiable ways.  We all have an innate discomfort with heights -- because the law of gravity has impacted our psychology and altered our behavior (nobody jumps off a ten story building thinking it's a good idea).  Nature's laws impact man's psyche, both consciously and subconsciously; and our psyche impacts our behaviors in all things, including markets.

Elliott Wave Theory is also unique in that there is a definite aesthetic to it.  The patterns found in the market are often relatives of the golden ratio found throughout the natural world -- so the concept of aesthetic follows.  Grasping the aesthetic of Elliott is something that seems to come only through experience, and "seeing the true count" is often as much intuitive as it is analytical.

Are we always able to nail the count with 100% accuracy while it's unfolding?  No.  Imagine if you had 25 pieces of a 500-piece jigsaw puzzle.  Sometimes you can deduce what the entire puzzle is from those pieces, and sometimes you can't.  Each day, the market gives us another piece of the puzzle.  Some patterns can be extrapolated quickly, with your first few pieces.  Others take time and more pieces to deduce.  To carry the analogy further: sometimes you can only deduce the very next adjoining piece (in other words, the short term move coming).  More often than not, a good Elliottician can at least keep you on the right side of the trade. 

Every now and then, you get magic moments where you figure out the whole puzzle all at once, and you know what the market will do months, or even years, in advance.  It's an exciting "Eureka!" moment, second to none in the charting world.

But no matter how dedicated, no Elliott analyst can be right 100% of the time, just as no head and shoulders breakdown is 100% guaranteed.  And, going back to the jigsaw analogy, sometimes you just need more information than the market has given you.  Understand also that there is a difference between the Theory and the Theorist.  The theory generally works: it's us humans that sometimes make mistakes.  Elliott Wave is much less "fool-proof" than traditional TA.

But really: is there any type of market analysis that allows you to predict the future with 100% accuracy?  Funny how some people will screech "Charlatan!" when an Elliott Wave analyst makes a bad call (think Prechter), yet not bat an eye when a head and shoulders breakdown fails.

Herein lies another difference between Elliott Wave and traditional TA: with Elliott you can, theoretically, predict the market years into the future.  The problem is: if you make one mistake in your assumptions or calculations, that error becomes magnified tenfold as the projection gets further into the future (here I am still referring to Prechter.  I'm not a Prechter apologist, but we Elliotticians sometimes feel we need to mitigate all the bad press the guy has generated for a great system). 
 
There is no absolute perfection in this this world: the best any of us can hope for is to be right more often than we're wrong, and to practice sound trade management.

With that understanding: enjoy the ride!