A Conversation With Didier Sornette

One problem many people have with Elliot Wave is this notion that chart patterns are somehow preordained, that we don't have free will. What does your work say about the inevitability of patterns you discuss?

A: Our theory outlines probabilities. It's not 100% deterministic and cast in stone. We try to identify a pattern, which expresses the collective behavior of investors interacting constantly. We try to calibrate a bubble and predict a crash but a crash is absolutely not a certain event. If we recognize a bubble is ripening we try to predict within a range of one month when a crash is most probable, but it's not a certain event. There's a 30% probability [that] where when we predict a crash, it doesn't happen.

Our theory also accounts for the fact that many investors are able to realize the probability is rising and a crash may occur. It's rational to remain invested while a crash is looming, if the crash is not certain. But it's not a free lunch on a risk-adjusted return [basis]. If people underestimate the risks, they will accrue big gains but suffer increasing risk.

Q: And are you predicting a "crash" in the U.S. today?

It looks like the market is approximately corresponding to [our models] and should not move much [higher], then start a slow acceleration toward negative trends within the next quarter. Not a crash but the opposite of a crash, a change of trend [from rally to decline] that will bottom in the summer of 2004.

I'm not in the business of giving advice, my interest is academic. But I'd certainly advise [investors] to take into account the risk, and hedge against it in some way.

And what about beyond mid-2004? What is your longer-term forecast?

A: "I expect the market to start a new super bubble after 2005, [although] the exact timing is very difficult: it could be 2006. This was chapter 10 of my book.