Robert R. Prechter - Market Analysis for the New Millennium

Foreword

Conventional analysis is a wasteland of irrelevance. Financial analysts, economists and media commentators spend countless hours and pages discussing what effect the latest social events, political trends, central bank machinations, corporate earnings reports, etc. will have on stock prices, and yet there are no studies to back up adequately any of their working assumptions. Once you observe that financial market prices form a fractal with a set of mathematical properties, you understand that they must be independent of outside forces. Indeed, experience reveals that even the most dramatic current events have no more than an apparent fleeting effect on financial prices and rarely a predictable one.

Then what is really going on in the markets? The answer is that impulsive herding behavior is responsible for aggregate market pricing. Such behavior is the product of an unconscious mental process inherited through evolution. This process evolved with a purpose: to protect individuals and species, though it is not effective in every application. Since this impulse is purposeful, it must be patterned. How it is patterned may be open to debate, but one description greatly the subject of this book has survived tests of time and prediction.

People who investigate the characteristics of the human herding pattern as revealed in financial prices are working in the right direction, though with the most primitive of tools and understanding. Sometimes this leads to embarrassing errors of both thought and conclusion. Other times, it leads to brilliant insights. Those who espouse the extramarket causality of market trends enjoy a far larger community of support as well as the general presumption of authenticity. On the other hand, they never have useful insights, and they continually fail to predict trend changes.