Cycle Wave V
In the excellent “Market Wizards: Interviews with Top Traders,” one famous investor summarized his success this way: “Listen to the market: It will tell you everything you need to know."
What an excellent piece of advice. If you refuse to let things that are outside the market – like economic data – confuse you and focus
instead on the market's internals, things become much clearer.
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Excerpt from the Weekly Update, February 17,2007:
Tautological Rationality
Perhaps the nth degree of dependence upon the rationality model has just been published in an article in the Financial Analysts Journal. It argues that buying because prices are rising is rational, so "rational behavior by individual investors can cause a market bubble," which is defined as "some self-reinforcing, self-perpetuating mechanism that prevents successive security prices from being random." This stance essentially defines nonrationality out of existence. If this theory is correct, then market crashes are rational, too, and so is selling when they occur. Would anyone like to take a affirmative side of that one? The fact is that buying only because prices have been rising is not rational because rising prices mean that the market is that much closer to a top. For the same reason, selling only because prices have been falling is not rational, either. In the next few days the media will try to rationalize the "surprising decline"
around the world on February 27,2007.
The Media as a Reflector of Social Mood
A Classic Example
Danger ahead? Stocks' early warning signal
A choppy start to 2007 could mean tough times ahead, according to some historic trends, but don't start worrying just yet. CNNMoney.com ,January 10 2007
NEW YORK (CNNMoney.com) -- Well, so much for starting the year off on a positive note.
10 stocks to buy now
Five sessions into what is seasonally a strong time of year, stocks have slipped. Granted, they've only slipped very modestly. But, according to the Stock Trader's Almanac, that may be a bad sign for the rest of the year.
According to what the Almanac calls the "early warning system," how the S&P 500 performs in the first five sessions of the year can be an indicator of how it will perform for the full year.
How'd we do in the first five sessions of 2007? The S&P 500 lost 0.4 percent.
A decline of 0.4 percent is not exactly cause for alarm. But a gain in this period would have been better, historically speaking.
Since 1950, when the S&P 500 posted a gain during the first five sessions of a year, the market ended higher 85 percent of the time. When it posted a loss, the results were less notable - the market closed higher half the time and lower about half the time.
Beyond the first week
There are many market indicators that suggest 2007 will be a strong year. For one, 2007 is a year before a presidential election. People who think the stock market follows the four-year cycle of the presidency consider that a good thing.
The Dow Jones industrial average hasn't fallen in a pre-election year since 1939, amid World War II, according to the Almanac. That's because in the year before and the year of
a presidential election, the party in power does what it can to stay in power and not alienate voters, including keeping the economy strong and money in the hands of consumers.
Plus, there are plenty of reasons to suggest that 2007 will be an upbeat year regardless of the seasonal factors: the economy appears to be slowing, but not heading for recession; the Federal Reserve could start cutting interest rates later this year; commodity prices are moderating; and earnings are still growing faster than the historical trend (although at a slower pace than in recent quarters).
And for market indicator geeks, there is the January test that investors still have time to ace: the so-called "January Barometer." The barometer, according to the Almanac, says that as the S&P 500 goes in January, so goes the year.
This has been accurate 75 percent of the time since 1950. In pre-election years it's been accurate in 13 of the last 14. CNN money, Jan 10, 2007
The first sentence from the article above, tells it all:
don't worry, be happy.
This is complacency at the highest degree!
Market Psychology
Those are familiar with Socionomics will have an idea what the main arguments against any further decline not to speak of an end of the "great rally" from March 2003 will be. Speculative environments come along at most only once in a generation, as a horde of new, inexperienced players is then available to descend upon the stock market scene. Members
of the general public are always latecomers to the market's party, and because of skepticism and rationality at the door. Today, the public because of its naivete has adopted the same chutzpah as the professionals. Television commentators, newspaper columnists and university professors, who are nonprofessional members of the public, have been presenting themselves as market advisors. After all, it is easy to say, "buy and hold", why shouldn't they?Ond of our subscribing money managers who recently adopted a bearish stance on the market heard from a client who called to say, " A short position is so foolish that my 12-year old boy could trade better." That may be a true statement, but when it is a true statement, the market's long-established trend is near a reversal. I label this attitude with the oxymoron "aggressive complacencey," which I feel describes the arrogance and even vehemence with which some people express their disdain for caution.
The public has felt safe in throwing billions of dollars of its discretionary investment capital and pension fund money at stock fund managers under the presumption that professionals know what they are doing and will handle the money correctly. the managers have simply put all the money into stocks, because in the narrow field of stock picking, they may know what they are doing, but in the market analysis field, they do not. In the aggregate, professionals experience is exactly that of the stock market. Fund managers are people too, and in the aggregate they become optimistic at market tops and pessimistic at bottoms. Long time technicians remember the famous Barron's headline of January 1973, "Not a Bear Among Them," which summed up institutional investor's optimism at the onset of the biggest stock market drop in 36 years. Today the situation is repeated.
Special Report
Dow Jones Industrial
Average
Primary Wave [5]
The Dow at 5 Degrees of Trend
© ELLIOTT today, October 25,2006
Figure 1
As shown in figure 1, the boundary lines of the expanding wedge have numerous "touch" points, and clearly govern the advance since October 2004, when Minor wave 4 bottomed at 9708. The lower trend line connecting the March 2003 low and the July 2006 low perfectly contains the rest of the price action right up to today.
Intermediate wave (3) ended on December 27, 2004 at 10,868 with a gain of 1160 points which is in classic Fibonacci proportion to the length of wave (1): 7197-9054= 1857. 1160/1857= 0.6246. Until that time the wave count seemed crystal clear since under the rules and guidelines of the Wave Principle a five-wave advance from the low of October 2002 could be counted as complete. However, after a slight decline the Dow registered a new high at 10,984 exceeding the supposed 0.786 Fibonacci retracement level measured from 11,908 to 7,197. The clear three-wave advance from the low of October 2004 raised some questions about the future trend of the market. Finally, the Dow held above the important psychological level at 10,000 and again started up. As you can see, Intermediate wave (4) slightly penetrated the dotted trend line drawn from the Minor wave 2 low but held comfortable above the lower trend line drawn from the Intermediate wave (2) low of March 2003. At the recent low of 10,683 the Dow touched that line to the minute and started its powerful advance in wave 5 of (5).At the high of May 10, 2006 at 11,670, the Dow again reached a Fibonacci wave length relationship which led to the conclusion that the top was in. At that high, the Dow gained 1670 points (10,000 to 11,670) or 16.7% which is 0.647 the length of the first wave (7197-9054). The clear three-wave decline however eliminated that count soon. As I said in my special report Dow Jones Industrial Average - Cycle Wave V posted on October 13, 2006, "The upper trend line of the diagonal triangle comes in at approximately DJIA 12066-12200 depending upon when it is reached." I should add, several target levels depending on which date one set the begin of Primary wave [5]: 1705, 1726 or 1747.
Wave degree: (v) Minute wave , 5 Minor wave, (5) Intermediate wave, Primary wave [5],
Cycle wave V
DJIA - Alternate Count
Figure 2
The single biggest mistake that Elliotticians make with regard to a developing triangle is calling
an end to it too soon. In a typical plot of market prices, the boundary lines of a triangle rarely
contract at a rapid rate. When price boundaries do appear to be contracting rapidly, the triangle
is usually only in mid-formation, not at its end. Elliott Wave Principle explains:Many analysts are fooled into labeling a completed triangle way too early.
Triangles take time and go sideways.Now look at the triangle in wave position 4 from April 2005 to July 2006:
The orthodox low of the triangle occurred at the April low at Dow 10,000 but wave (a) ended
at 10,186, the point that marks the emotionally low of the decline from 10,984 and exactly
matched the 0.618 Fibonacci retracement of the preceding advance from 9,708 to 10,984.
Upon real time observation, triangles often end at a 0.618 wave length subdivision of preceding
waves, though its not a rule, but a guideline. In this case, wave (e) of the triangle together with
wave 4 both ended at a 0.66 retracement, (2:3) on July 18, 2006 and since then a powerful
"thrust out of the triangle" fits the description of the recent surge to new all-time highs perfectly.
Interestingly enough, a measured move projects a target objective at around 12,353, based
on R.N.Elliott's observation that the wave following a triangle often travels the "widest part of
the triangle," which in this case is 1670. Measured from 10,186, a reasonable target is 12,167,
right in the forecasted target zone, outlined and updated before. Please see Special Report
Dow - Cylce Wave V, below.Related article: Dow 36,000 Dow 100,000
Special Report
Dow Jones Industrial Average - Cycle Wave V
© ELLIOTT today, October 13,2006
Even after 20 years of dealing with markets, strong messages from reliable analytical tools still have the power to thrill me. The current technical position of the DJIA is very exciting, with the evidence indicating that some important turning points are being registered and the final advance directly ahead. As can be seen in figure 2, the FiboFan lines have done a great job to identify important turning points on the way down as the Dow topped in January 2000. Intermediate wave (3) of the upmove from October 2002 per example exceded the 1x1 by a small margin but failed at the falling 1x2 fromt the top. Why? The answer to those who understand the mechanism of The Wave Principle know: the wave structure wasn't complete at that line because The Wave Principle is the pattern of progress and regress characteristic of social (and apparently other) phenomena in which progress occurs in specific patterns of five waves and reaction occurs in specific patterns of three waves or combinations thereof. A formological system is neither linear nor nonlinear in terms of event causality because the cause of its processes is not events. A formological system is formological causal, meaning that the form of the system determines the shape of its process.
The idea of an expanding wedge or expanding diagonal triangle for wave 5 or C was first introduced on June 24, 2006. On July 22, 2006 ELLtoday presented the following chart to subscribers:
Elliott today, weekly update, July 22, 2006:
Counting the upmove from the low of October 2002 as a five-wave advance requires another upwave, i.e., Minor wave 5 of Intermediate wave (5) of Primary wave [5]. The wave structure from the low of October 2002 to the high of Intermediate wave (3) and (4) is crystal clear, whether it is an impulse labeled (1), (2), (3) and (4) or alternately, (a), (b), (c), (x). The form of the structure since the low of October 2004 however allows for several different counts, with the most bearish that the top already has been seen on May 10, 2006.
However, the start of a Primary wave [3] in my opinion should have been more dramatically like the first wave down from the January 2000 top. As you can see on the chart, the Dow needs another wave down to reach the lower trend line drawn below the lows of April and October 2005. Under this interpretation the Dow would finish wave 4 of an ongoing expanding diagonal triangle for Intermediate wave (5). This count is still valid as long as the trend line holds. A break of wave 4 (on the chart) before the market manages a new high will eliminate that count. Fibonacci Fan-lines show that Intermediate wave (3) slightly stopped above the falling 1x2 drawn from the top of January 2000 AND held above that line when Minor wave 2 of the expanding triangle was completed. The market rallied along the 1x1 from the low of October 2002 and finally shot up vertically above that line to finish up wave 3. It's hard to believe that the stock market is where it was in 1999. Hamilton Bolton once said that the hardest thing to learn when using Elliott was to believe what he saw.
The prefered count for the Dow indicates that a high of major importance has been achieved on May 10, 2006 but I won't let the "impossible" ruled out, so we are prepared for what could happen. The majority believes a downward wave into October of 2006, but what will they say if the market holds up and rallies till the end of the year? A famous example back in 1990 was the Nikkey, when it topped on the first day of that year.
Needless to say, I was wrong with respect to the Dow Jones Industrial Average. On October 12, 2006 the DJIA registered a new all time high and climbed above the intra day high of January 14, 2000. While the DJIA managed a new all time high, the S&P 500 (SPX) remains well below its March 2000 high (1553) and the Nasdaq Composite retraced only 31% of the preceding decline from March 2000 to October 2002. While the S&P 500 is at a new recovery high, the a-d line is lagging badly; so even within the blue-chips indexes, investors are focusing on a very narrow group of stocks. The last time the stock market split leadership to this degree was at the January -March 2000 all time highs. The DJIA topped on January 14, 2000 and declined 17% to a near-term low by March 8 while the Nasdaq surged to a spike peak nearly two full months later, on March 10. The devastating bear market of 2000-2002 followed, wiping out 50% of the S&Ps value and nearly 80% of the Nasdaq's.
Chart: stockcharts.com
Five waves form a complete bull market structure. The chart of the DJIA illustrates that from the
major low in December 1974 five waves of Primary degree can be counted. The chart also shows
that from the low of Intermediate wave (4) of October 2002 five Minor waves that form this
particular bull market appear nearly complete. There is still a good chance that the DJIA is
nearing the peak of a fifth wave of three degrees of trend: Intermediate wave (5), Primary wave [5] and Cycle wave V, rather than only a small degree fifth wave that would lead to a correction, then still more new highs. This possibility has been featured several times with the (expanding) diagonal triangle count from the October 2004 resp. April 2005 lows. If this is the case, the bull market peak is imminent, and a severe collapse will occur upon its completion. The upper trend line of the diagonal triangle comes in at approximately DJIA 12066-12200 depending upon when it is reached. There is little doubt that if this count is in force, the market will peak soon, during the current rally phase that is completing the advance from August 2004 or April 2005. If it is in force, a very rapid change in sentiment would likely occur, bringing the majority to extreme bullishness. Additionally, the catalyst for the end would likely be a sharp decline in bond prices, which has not yet occurred but would likely under the abrupt-end scenario. This would be a very dangerous pattern since the Elliott diagonal triangle is the most bearish of all patterns when it occurs in the fifth wave position after an advance. The DJIA would then collapse back to the level at which the triangle began either at 9,708 or 10,000.
DJIA 1957 - 2006
Open chart: DJIA, May 12, 2006
Here is my Special Report of May 13, 2006:
Special Report: Gigantic Double Top In The Dow !
Mathematical Price Relationships in Cycle Wave V
The main purpose of this paper is to demonstrate the market' s penchant or displaying Fibonacci mathematics. Identifying stock market's pattern, or "waves" by their form is sometimes critical to a discussion of price and time relationships, but as I pointed out in the last issue, "The S&P 500 finally made it to the 1,323 area, predicted several times before and in fact, exceeded that level by 3 points. (Friday's close: 1,326). May 7 (Saturday) is 377 Fibonacci days from the low of April 20, 2005, and May 5, 2006 was 622 days from the low of 1,060 on August 13, 2004. (622 days = 20.7 months) so these time lengths are in Fibonacci proportion on a monthly basis. There is an old adage on Wall Street, "Sell in May and go away." Will it come truth in 2006?
The following Monday, May 8, 2006, the S&P 500 (SPX) registered a slight new high at 1326.86 and reversed. The Dow registered a new high on Wednesday, May 10, 2006 with a print high of 11,670 and completed an Elliott wave pattern, called "expanding diagonal triangle." It is suggested that you take your time reading this paper in a quiet environment. The information presented is densely packed, and will require some reflection along the way.
In the last issue, I presented two long-term charts displaying the Dow's path from 1974 to the present and the second chart demonstrated the behavior of the Dow since the low of 1932. Under Elliott Wave terms, the rise from 1974 to 2000 (2006) is classified as Cycle Wave V, the rise from 1932 is classified as SuperCycle Wave V. Cycle Wave IV had finished its pattern at the price low in December 1974. Starting at the 1974 low, Cycle Wave V over the ensuing 32 years has traced out a classic Elliott Wave pattern. Primary Wave [4] holds well above Primary Wave [1]. Primary Waves [2] and [4] sport alternation, since Primary Wave [2] traced out a double three correction (slightly sideways) and Primary Wave [4] cut sharply against the trend, typically for zigzags. Within Primary Wave 3 from 1980 to 1987 Intermediate Waves (2) and (4) do alternate, too, since Intermediate Wave (2) formed a double three correction into the low of 1982 and Intermediate Wave (4) formed a sideways movement from March to May 1987, which can be counted as a triangle. Within Primary Wave [5], Intermediate Wave (2) from 1989 to 1990/1991 traced out an expanded flat and Intermediate Wave (4) formed a double zigzag. Alternation is also given by one degree lower, in Minor degree as Minor Wave 2 formed a flat (3980 to 3550) and Minor Wave 4 cut sharply against the major trend producing a zigzag (9337 to 7200).
The current Intermediate Wave (5) sports alternation, since Minor Wave 1 produced an expanded flat from October 2002 to March 2003 and Minor Wave 4 is best counted as a contracting triangle. Primary Wave [2] from 1976 to 1980 counts as a double three which corrected exactly 61.8% of the preceding advance from 1974 to 1976. This labeling conforms with classic channeling technique, which ideally connects the orthodox ends of each wave. Note how perfect Intermediate Wave (2) in 1982, Primary Wave 4 in 1987, Intermediate Wave (2) of Primary Wave [3] in 1990, Minor Wave 2 in 1995 touched that line, reversed and surged higher.
In July 2002, the Dow broke to the long-term channel support line but stopped right in the area of the preceding fourth wave of one lesser degree, which is the low of 1998. From a Socionomic point of view, each corrective wave of Intermediate degree within Primary wave 5 within Cycle Wave V saw the start of a military action (war) in this case Iraqi War I started in January 1991 and Iraqi War II started in March 2003.
Why not in 1987?The pattern from 1987 to 1991 CAN be counted as a contracting triangle (not a perfect one, either way) but the Value Line Index produced a clear triangle at that time, so the possibility remains open. Later we will see, that the low of January 1991 at 2457 plays out a perfect Fibonacci wave relationship with the top of 2000. The fact that there are two or three lows for wave IV and Primary Wave [4] and two highs for 1987 and 2000 to consider complicates the following discussion of mathematical relationships somewhat, but does not detract from the market's precision. The Cycle degree advance reveals virtually perfect Fibonacci relationships among its components. Examining all the percentage gains of Primary Waves [1],[ ]3 and [5] using extreme low and high reading, I immediately observed the following:
As the insert on the chart shows, a number of wave lengths ended when the advance gained 62% or in case of the third of the third, the advance produced a Fibonacci relationship to 62%, since 163% is 2.618 times 62%. The print high on May 10, 2006 was 11,670, which means, the Dow has arrived at the percentage gain of a wave, which more often than not, occurred at an important turning point.
At the May high of 2006 of 11,670, then, Primary Wave [5] creates a 1.618 multiple of the gains of Primary [1] through Primary [2], a common measure. In 1987, the market had created one percentage rise from the low of 1974 of +376%, which produced equality with the rise from 1932 to 1937 of Supercycle degree (41-195 = +154 = 375.60%). Primary Wave [5] measured from the print low of October 20, 1987, 1705 the market advanced +584 % to Wednesday's high of 11,670. The advance from 572 in 1974 to 2723 in 1987 gained +376% and the ratio between these numbers displays the "Golden Section", which is 0.618 or 1.618. Nearly perfect, since 584 divided by 376 gives 1.55319 or invers, 376 divided by 584 gives 0.6438. But there is more. The length of Primary Wave [3] is 3.236 (keep in mind that 1.618 x 2 = 3.236 as 1.618 + 1.618 = 3.236) the length of Primary Wave [1], when measured from the high emotionally secondary high of October 2, 1987, at 2640, shortly before the crash. Within Intermediate wave (3) from 1987 to 2000, Minor wave 1 equals Minor wave 5 and Minor wave 3 is 2.618 times the length of Minor wave 1. The percentage gain of Intermediate wave (3) measured from the low of January 1991 at 2457 to the closing price of January 2000 is 377%, not only a Fibonacci number itself, but it is the same length as of 572 to 2723, i.e., 1974 to 1987. Take into account that in time, there are 180 months from January 1991 to January 2006, the time the indexes registered a high but continued climbing higher. The NASDAQ 100 for example topped at that time.These relationships do not merely produce striking after-fact formulations, but confirm to formulations long ago recognized. As a result of years of observation at smaller scales, it was stated in Elliott Wave Principle regarding times when wave three is extended that if waves one and five are not equal, "a Fibonacci multiple is the next most likely relationship." At the May 10, 2006 high of 11,970 the Dow most likely made its final high of a five-wave up move from 1932, 1974, 1990 and 2002/2003.
If you will recall, the advance from 1705 to 11,670 gained +584% and when divided to the
length of Primary waves [1] to [3] the ratio is 1.553, or invers 0.6438. Not an ideal phimation.
At 12,105 however, Primary wave [5] will have climbed 609.97% and when divided by 376%
the ratio is 1.6222 which is 5:8.An observation by R.N.Elliott in his Financial World articles of 1939 pertains both to wave 5
and to wave V."Sometimes a fifth wave of large degree becomes extended by the development of five waves of the next smaller degree, and five more of a still smaller degree. The fifth wave, instead of proceeding in the normal one-wave pattern, simply stretches. This is a characteristic of markets that are unusually strong, such as the 1921-1929 upswing."
Look at the chart to see that is an accurate description of what happened to Cycle wave V after 1987.
The peak that year, which from the 1974 low had reached a percentage equality to wave I, might have
market wave V's end had the form up to that point been proper. After the market's sharp reaction, however,
it continued higher, producing ever smaller corrections along the way.The main argument that a peak of historically proportion at 12,000+ will be achieved is the observation that by far the most common multiple for the extended wave is 1.618 times the net price advance of the other impulse waves. Thus, when wave 5 is extended, the most common mulitple for its length is 1.618 times the length of wave 1 through wave 3. In percentage, this is going to happen at 12,105 since 377% times 1.618 gives 609.98 and 1705 multiplied with 609.98 is 10,400. When added to the bottom of 1987 at 1705 gives 12,105. There are several Fibonacci time length relationships but one amazing should be posted here: From December 9, 1974 to October 13, 2006 there are 11,464 days (I count a month 30 days, one year 360 days). 11,464 when added to the low of 572 (A.J. Frost's) the result is 12,036.
Wave Structure (for wave students)
[Note: The following is an excerpt from the February 1991 issue of Global Market Strategist, Daniel L. Ascani]
Although it has been very clear that the bull market in the broader stock averages began in 1974, there has been much debate among market technicians over the years about whether the bull market in the blue chips began at the 1974 low or at the 1982 low. Until 1987, and even until now, the debate was considered academic. However, it is no longer a question of academics, but one that is very relevant to what is occurring now. Market action since mid January and the bottoming of the 4-year cycle have revealed the long awaited answer. It is now clear that orthodox Cycle Wave IV low in the Dow Industrial Average occurred in 1974 at 577.60 on a closing basis. It is also clear that the thrust that is occurring at this time is kicking off Primary Wave 5 which carries a likely upside target in the Dow 4044.88 to 4155.26 zone on a closing basis.Present market action carries a very important message regarding the overall position of the bull market, and places the blue chip averages in concert with the overall structure of the broad market and other world stock markets which bottomed in 1974. The chart of the World Stock Index, courtesy Pring Market Review (P.O. Box 329, Washington depot, CT 06794) illustrates the long term wave labeling of the compilation of key world stock markets, supporting the case that Cycle wave IV bottomed worldwide in 1974, and that the 1990 peak formed only Primary wave 3, not the completion of the entire Cycle wave IV bull market. Although the advance in the world stock markets will be powerful and will very likely see the Dow rise of about 70% from its closing wave 4 lows reached in 1990, it will mark the fifth and final wave up of the now 16-year long bull market from 1974.
As discussed earlier, an unequivocal five wave advance occurred in DJIA from the 1982 low into the 1987 peak, but even the worst crash in stock market history did not put an ultimate end to the bull market. It is now apparent that the 1987 stock market crash formed the deepest fourth wave decline in stock market history. Record highs in the averages this soon after a crash of that magnitude is simply unprecedented, but has nevertheless occurred. In retrospect, the bull phase of 1982-1987 did not end with the blaze of speculative orgy that typically accompanies fifth waves of Primary degree (i.e.1929), a situation that the marketplace will now be able to remedy with another attempt to drag in excess speculation. Regardless of the lack of precedent, record highs in the averages are imminent, and players should look for the Dow to rocket to its most likely upside target for the entire 16-year bull market.
Take a look at the 75-year chart of the Dow Industrial Average, courtesy Ned Davis Research
(5600 Glenridge Drive, Ste.210, Atlanta, GA,30342). The 1929 peak marked the top of Super Cycle Wave (III), the 1932 bear market low the bottom of wave (IV). The entire advance from 1932 forms Super Cycle Wave (V), which is composed of five waves of Cycle degree.The first three of those waves were completed in 1966. A clear (but rare) expanding triangle occurred in the wave IV position from 1966 to 1974, after which the present Cycle Wave V began (this is also supported by the wave structure of the London market.)
Given the evidence at hand, Cycle Wave IV completed at the 1974 low, not in 1982. This is in part supported by the following
1) The structure of Cycle Wave IV appears as a clear expanding triangle pattern with the price low occurring simultaneously with other markets such as the London Financial Times and World Stock Index. Stretching the Wave IV label out to 1982, however, as most Elliotticians have done, requires that an exception to the most fundamental tenets of the Wave Principle be made since 9 waves can be counted from 1966 until 1982. Nine waves signify impulse action (a five wave advance with one of the waves extended). Market corrections encompass 3,7 or 11 waves, such as a simple a/b/c, a double a/b/c with an intervening "X" (a double zigzag)
or a triple zigzag. The only exception to this is a triangle pattern which contains five waves (a-b-c-d-e), each of which subdivide into "threes" of their own. In any case, market corrections occur as combinations of three wave structures, not as nine as occurred between 1966 and 1982. R.N. Elliott told of these three wave combination affairs, but did not suggest that the five waves of a triangle should be followed by four more waves for a total of nine and still be counted as the same correction. He suggested that a three wave correction can be followed by an intervening three (wave X) separating yet another "three". The entire pattern is sounded mentally as "a-b-c" and "a-b-c". However, to count the nine waves from 1966 until 1982 as one long corrective wave distorts the guidelines dictated by the Wave Principle, as well the nature of subsequent market action. The consequent is felt when the count falls one wave short at the top of the next advance, a situation that is occurring now. Fundamental tenets of the Wave Principle, therefore, strongly argue the wave IV ended at the1974 low of 577.60.
2) If the wave V label is placed at Dow 2999.75 last July, as is necessary if the wave IV label is placed at the 1980 low rather than the 1974 low, a situation results in which the present advance from last October must be counted as a wave 5 extension. While this does not violate any rules or guidelines and is an acceptable interpretation from the 1987 low, it does indirectly force a violation of a basic rule in counting the Cycle wave IV pattern. On an intra day basis, the decline into the 1980 low dropped below the intra day of the decline into early 1978, indicating that entire sideways pattern from 1966 to 1982 can not be counted as an a-b-c x a-b-c-d-e pattern ending in 1980 without violating the basic rule that states that "e" waves within triangles cannot exceed the price low, or price high in an inverse pattern, of the "c" wave. Thus, the 1976 to 1980 decline must be counted as part of the same corrective wave, not as three separate waves of equal waves of equal degree. Although the fifth wave extension interpretation would result in in a move to Dow 4065 if waves (3) through (5) are equal in length wave (1) from 1987 to 1990, it still leaves a distorted labeling within Cycle wave IV, especially with the rule of distortion cited above. Although this will remain an Alternate Count, its projected upside target remains identical to that of the preferred Count.
3) Close scrutiny of the 1974 to 1976 wave 1 advance yields a five wave structure, suggesting that it be treated as an impulse wave rather than a corrective wave.
4) Back to expanding triangle count - many stocks lost 80% of their value from the 1966 peak to the 1974 low, suggesting that it be treated as an impulse wave rather than a corrective wave.
5) The breath/volume thrust analysis presented earlier suggests that an impulse five wave advance began directly after the 1974 low, rather than another leg of a long and drawn out correction. For example, recall that rallies accompanied by huge advance/decline ratios and up/down volume ratios occurred at the commencement, or kickoff, of each of the impulse wave advances from 1980. On January 2, 1975 directly after the December 1974 wave IV low, the explosive rally was accompanied by a 9/1 advance decline ratio and was followed by several days that month of advance decline ratios greater than 7/1 and up/down volume ratios greater than 10/1. These advance/decline statistics are consistent with the commencement of the impulse waves of 1980 (9/1), 1982 (10/1), 1984 (5.6/1), January 1987 (back to back 9/1) and
October 21,1987 (8.4/1). They are also consistent with the nearly 6/1 ratio of January 17. However, note that the present wave 5 kickoff is appropriately less powerful than the kickoffs to waves 1 and 3 years earlier., a typical occurrence for fifth waves, which are typically accompanied by market internals somewhat less dynamic than third waves, and sometimes first waves.
In conclusion, it is increasingly evident that the bull market in the blue chip averages began in 1974 along with the broader averages, a premise that will greatly supported if the market does, in fact, move back above 3000 toward its ultimate target.
Key To Stock Market Profits by Frost & Prechter
(Expanded Edition1990)
