Elliott Wave Analysis of the Dow Jones Industrial Average DJIA by Sid from ElliottWavePredictions.com.  Click on the charts twice to enlarge.

The following best represent the many questions I’ve received over the past 3 days:

1)  Is the top is in?  My answer: I’m afraid so.  Both the S&P-500 and Russell 2000 moved aggressively into the price territory of their respective wave 1’s today, invalidating the possibilty of any further impulsive upward movement to new highs for quite a while.

2)  Is a replay of the fractal from 1966 thru 1978/1982 continuing to play out?  My answer:  Not precisely.  There was a rapid downward movement out of the extended sideways trading range back in October 1976, but it didn’t even come close to moving into the price territory of wave 1.  So, I’ll be far less concerned with comparisons to “the fractal” moving forward.

3)  So what’s going to happen now?   Is the Dow going to tank to below 400, like Prechter & EWI have been predicting since 1987?  How about the S&P moving to 450, like some Elliotticians are calling for?   Answer:  In my opinion, definitely NOT.  I do believe that we’ve just entered into a bear market that is likely to continue for many months.  However, I think the doomsday targets under 1000 in the Dow are utterly ridiculous.  Here’s why:

Let me start by saying that I respect Robert Prechter very much.  His decades-long quest to move Elliott Wave theory from dusty library shelves into the mainstream is quite remarkable, and untold thousands of market participants owe him a huge debt of gratitude.  However, and quite unfortunately, his personal tendency toward extreme bearishness has been going on for some 25 years now, and  has tarnished the reputation of the Elliott Wave Principle itself, in my opinion.  For instance, most Elliotticians (myself included) have relied, or are still relying on Prechter’s super long-term Dow Jones Industrials wave count, which he claims to have pieced together by connecting the historical financial markets of the United States since the Revolutionary War period together with fabricated “waves”, created from reported economic periods of growth and decay dating back through pre-1700’s England and Europe.  I don’t doubt his research, but I do find some major holes in his conclusions.  For instance, according to Prechter, when the 1929-32 correction of 90% (!!!) occurred (from 386.1 in 1929 down to 40.56 in 1932), he labeled it a wave 3 top, down to a wave 4 bottom. I’m sorry, but I’ve never counted a wave 4 at any degree of trend that retraced 90% of the net traveled by waves 1 though 3!  The crash of 1929-32 must therefore have been a wave 2.  There is absolutely no question in my mind about that.

Also, if the year 2000 was the actual Grand Supercycle wave 3 top, as Prechter has gone to great lengths to “prove” in numerous books, the subsequent GS4 could theoretically be “expected” to move below 400 in the Industrials, not because of an Elliott Wave rule, but because of a guideline, which states that often, wave 4’s will retrace to the area of the wave 4 of one lesser degree.  But, upon careful examination of Prechter’s 500-year wave count, his GS2 lasted 64 years (from 1729 to 1784).  If his count is correct, the real GS4 really should, according the what is most typical in Elliott, last longer than wave 2 did, and evolve as a sideways affair, most typically featuring something from the sideways family of corrective structures, like a flat, triangle, or a “double three” or “triple three” sideways combination.  

If one continues to attempt to force a GS3 label onto the January 2000 high, upon further examination of the expected duration of GS4, some real problems surface.   So far, we would need to label the 9-year flat (2000-2009) as a Supercycle wave W, and the following 2-year bull (2009-2011) as a Supercycle degree X-wave.  Therefore, even if we predict the longest lasting combination correction possible within the Wave Principle, a “triple three”, and the upcoming Y, X, and Z waves were each to last a similar duration to their already completed sister waves W and X (as is considered typical in Elliott), the final W-X-Y-X-Z correction would last only 31 years:  (9+2+9+2+9=31).  

Therefore, the  problems with predicting that a Grand Supercycle Wave 4 commenced in the year 2000 are:

  1. Duration.  Based on the durations of the completed W (2000-2009) and X (2009-2011) waves, if the GS4 did end up forming the longest lasting combination correction possible in the Wave Principle, (the “triple three”), the entirety of GS4 wouldn’t last even last half as long as the GS2 did, and wave 4’s are typically the longer lasting of waves 2 and 4.  Also worth noting is that the only allowable W-X-Y-X-Z structure in Elliott that starts with a flat in the W position is a “triple flat”. 
  2. Rarity.  Even if we did end up seeing the longest possible “triple three” combination for GS4,  the triple-three is very rare structure.  Calling for a very rare structure makes for a very low probability prediction.
  3. Depth.  When finally complete, the GS4 would almost certainly be a sideways affair, because it already revealed its nature by starting with a flat.  Therefore, if we are in the middle of a GS4, and I don’t think we are, the stock market would most likely continue to bob up and down in the same upper half range (7000-14000) that we’ve been experiencing since the 2000 high for about two more decades, and would never even come close to correcting all the way down to Prechter’s target of under 400.

It is therefore my opinion that the Y2K top was, in fact, a Supercyle degree wave 3 top.  And just because it was unlikely to have been a Grand Supercyle top doesn’t mean it wasn’t a very significant top, as supported by the the accompanying “panic buying” during its final stages.  If  my new wave count is correct, the Supercycle wave 3 lasted 68 years (1932-2000), certainly making it the top of lifetime, but not quite one for the ages. 

So, the 9-year-long (3-3-5) expanded flat that followed the January 2000 Supercycle degree Wave-3 top is providing us with the biggest technical clue we have as to what is likely to happen next, primarily because of the agreeable durations of my proposed Supercycle waves 2 (1929-1932) and 4 (2000-2009), as well as how nicely their differing structures not only fulfill the guideline of alternation, but match what one would most normally expect in Elliott:  a deep zigzag for wave 2, and a shallower flat (lasting a bit longer) for wave 4.  Therefore, my main wave count moving forward for the Dow and S&P is that the Supercycle Wave 4 ended in March of 2009, and the upward wave through May 2011 was a bullish Cycle-degree Wave One, and was therefore the kick-off to Supercycle Wave Five.  For the sake of completeness, I think the best alternate count is that we are still inside an extending sideways supercycle wave 4, and the 2009-2011 bull market we just saw was an X wave, to now be followed by a Y wave. Period. Those two are by far the most likely scenarios. Either way, the next thing we are likely to see in the US stock market is a fib-zone retracement of the 2009-2011 bull market, likely lasting over a year, before a resumption of the centuries-long upward trend experienced by a long lineage of generations before us. 

As for my target for the end of the bear market, using the major European indices (DAX & FTSE) as a guide, five waves down to below their respective March 2009 lows are required to complete a (5-3-5) ABC zigzag in those indices, to therefore complete wave 4 at Supercycle degree in each.  Zigzags are one of the more predictable patterns in Elliott, as wave C is often equal to wave A in distance traveled and duration.  If  Cycle wave C of the zigzag in each of those indices reaches duration equality with Cycle wave A, (derived by measuring the number of weeks wave A lasted (from the 2007 high through the 2009 low), and expecting wave C to be be equal in duration, the new bear market is likely to end in October 2012.   By the way, my wave counts for the Asian, Brazilian, and US indices do not require movement below their March 2009 lows, but the bear markets in virtually all of the world equity markets are likely to bottom at about the same time, just as they did in March 2009.

The big debate in my view will be, did we just see a 5 wave impulse from March 2009, or an ABC zigzag? I’ll explain in a moment why it really doesn’t make much difference moving forward (at least in the US indices), but of those two scenarios, as required for a wave 1, I think it was a 5-wave impulse in the Dow & S&P, as depicted in the weekly chart above. This would support my fresh, long-term DJIA count that we just saw a cycle degree wave 1, and are now embarking in a cycle wave 2 which could retrace all the way back to the March 2009 low, but is more likely to retrace to the .382-.618 fib zone of 8917 though 10429.  A .618 retracement is most likely in a wave 2.  I know I’ve been expecting the up move from March ’09 to be an ABC zigzag X-wave for a long time, but upon final review, the highly ambiguous internal wave structure during the price action from February 18 through July 21 makes more sense as the topping process of a weak 5-wave impulse in the Dow, especially when viewed on the weekly chart (attached), as supported by the MACD line extreme (pointing out the wave 3 top), followed by divergence at the end of wave 5.   ( As many who have viewed my method video know, I try to give more weight to the MACD peaks and divergences on the weekly charts than on any other timeframe.)  Also, remember that the underlying “character” of about half of wave 1’s is to provide an “unobtrusive basing process”.  This explains the low volume and committment of the March ’09 through May ’11 run, and supports my interpretation of it as a weak impulse, featuring a relatively weak wave 3 that was only about .618 as long as wave 1, and an even more puny wave 5, essentially creating a double top.

That being said, my alternate count, which is less defensible for several reasons that I’ll explain (in much easier to understand terms than in this diatrabe, by the way) in my weekly Sunday morning LIVE “Counts and Predictions” webinar, is that the GS3 top did in-fact occur in Y2K, and since then, Grand Supercycle wave 4 is far from over, and the movement from Jan 2000 through March 2009 was a wave W, and the wave up from March 2009 through May 2011 was an ABC X-Wave, and we are now expecting a bearish ABC for a wave Y, which may, but more likely not complete Grand Supercycle wave 4.  If this alternate count is correct, Wave Y is not held to any restictions as it relates to the March 2009 low.  It can fall short of moving as low as wave W did, or it can move lower.  As a side note, at the theoretical eqivalent point to now within the 70’s fractal, which by the way, is less likely to be repeating itself verbatim after the huge down move this week, the ’76-’78 bearish wave fell well short of equaling the 1974 wave low, retracing right at .618 of the ’74-’76 bull.  Finally, yet another, even less likely alternate exists, which would have the Supercycle (not grand) wave 4 ending in March 2009, and the move up from there consisting of a “3”, and completing a bullish wave 1 of an eventual ending diagonal for supercycle wave 5.  Most importantly, a key similarity exists between all of the three wave counts I just presented:  they expect this new bear market to move down in 3 waves, most likely eventually retracing .618 of the entire move up from March 2009.  This gives us a primary downside target in the Dow of 8917, and 930 in the S&P.

Note to self . . I should have trusted my own method more the last 2 weeks, and therefore had my “The Top is Already “In”” wave count classified as the main count instead of the alternate, although I did give a perfectly timed bear call in my latest post on the Dow, the July 26 post, which is currently 1200 points to the good.  Importantly, that call was based on MACD divergence showing on the daily chart of the DJIA e-mini (YM contract).  As revealed in my recorded 2-hour class: “Early Detection of Trend Changes Using a Combination of Elliott Wave, MACD, and Japanese Candlesticks”, when there are too many short-term wave count alternatives (and I presented five during the July 31 weekly LIVE “Counts” webinar), using multi-timeframe MACD divergence as an early indicator of imminent trend change is a great backup plan.

Finally, here’s one last point supporting the idea that we just saw a wave 1 top instead of some sort of “top for the ages”. Major tops are always accompanied by extreme sentiment. The entire rise to the top we just saw never reached the mass extreme bullish glee that some perma-bears are claiming that it did. I have no idea where that stat would be coming from from those guys, because many pre-2000/2009 investors didn’t even participate at any time during the March 2009 thru May 2011 bull.  They were too scared.  Also worth noting . . if this Elliott Wave count is correct, and the Industrials are entering into a Cycle-degree wave 2, sentiment will get worse during this wave than it was at any point during the 2007-09 bear, even though a new low below the March ’09 will not occur.

The predicted path shown on the weekly chart above does continue to depict future price movement as if it would generally follow the 60’s/70’s fractal, but it’s not the fractal that will be guiding me moving forward.  As this correction evolves, I intend to be guided by a combination of 1) the MACD having supported an impulse wave count for the recently ended 26-month bull market, 2) the subsequent typical .382-.618 retracement target zone for wave two, with .618 the most likely target, 3) continued scrutiny of the the evolving internal wave stucture as revealed by intraday charts, 4) the resulting fib targets, trend lines, & MACD peaks and divergences on 120, 180, 240, and & 360 minute  charts, and 5) my yet to be “conquered” understanding that the great corporations of the world are fully prepared (with record breaking amounts of cash on hand) to survive anything up to the most horrific downturn, and are much more likely to continue to produce solid, if not spectacular profits through thick and thin.  We are definitely in for a substantial bear market for a while, and I intend to continue to provide actionable, lower timeframe Elliott Wave counts and predictions all along the way.  But, when this correction is complete, I believe there will be a fantastic “buy and hold” opportunity as we will most likely be entering the highly bullish Cycle Wave 3 within Supercycle Wave 5.

Sid
http://elliottwavepre.wpengine.com