Outlook 2006
© ELLIOTT today, December 3, 2005,As the long term chart of the DJIA reveals, a decline of much larger proportion is imminent. The 1x1 Gann line, one of the most important tools the famous market technicians W.D. Gann offers, points to below 10.000, most likely much further down, depending on the timeframe, one is likely to use.
Fact is, the 4-year cycle low is due in the year 2006, most likely in the third quarter of that year and in 2007/2008 the famous 5 ½ year Kitchen Cycle, too. The 1x2 Gannline drawn from the low of 2002 points to below 9.000 and the low of October 2002 was 7197. These numbers count for a decline of roundabout 3.800 points in the Dow, a whopping 34.5 %, measured from 11.000.
C-waves are third waves, though the decline may be greater since the market trades in a Super Cycle degree environment. Most important to you and me as individuals is that the Wave Principle indicates in advance the relative magnitude of the next period of social progress or regress. Living in harmony with those trends can make the difference between a happy, successful life and one in which time is spent fighting the underlying tide. Failing to prepare for the next major trend, in fact, can be ruinous, and not only financially.
As the Easternes say, “Follow the Way.” As the Westerners say, “Don’t fight the tape.” In order to heed these nuggets of advice, however, it is necessary to know what is the Way, and which way the tape. There is no better method for answering that question than the Wave Principle. The outlook for the S&P 500 and the Nasdaq Composite remains the same as outlined last week: Both indexes are close to complete an ending diagonal triangle!
Figure 1
The 2x1 Gannline points to higher prices most likely in the low 11.000s. Since the fourth wave of the preceeding decline has been taken out to the upside the Intermediate wave (2) high dating back to September 2000 may be a possible stopping point. The largest distance within the contracting triangle measures 1276 points and when added to the end of the triangle at 10.156 a reasonable target will be 11.432. That is just less than 500 points below the all-time high in the Dow and from an Elliott point of view, that is what B-waves are all about. B-Waves are phonies. They are sucker plays, bull traps, speculators paradise, orgies of odd-lotter mentality or expressions of dumb institutional complacency. (* Contracting Triangle, EWP, p. 41, Frost & Prechter, 1990).
The worst case scenario is still that from October 2002 Primary wave (2) in the Dow and S&P 500 (SPX) is underway. The Dow topped on May 10, 2006 at 11,670 after the completion of an expanding wedge pattern for wave 5 of (c) of [2]. Like textbook fashion the market fell sharply into the area of the previous fourth wave and found natural support at 10,698 and 10,683. At first glance, the decline seemed to trace out only a "three-wave" structure, which is corrective in character and not the start of a more pronounced decline. However, the possibility of a "five-wave" decline from the top cannot ruled out and as I said shortly after the top has been reached, the structure of the ensuing (correction) wave form will tell us what to expect for the next 3 to 6 months. The easterners say, "a picture is worth a thousand words" and the picture, i.e., wave form since May 2006 has an uncanny copy of the wave form the Dow traced out from August to September 1987. At that time the second wave retraced almost exactly 0.618 of the first decline indicating the probability the recovery high has been reached. This time the Dow retraced 89% using the extreme readings and the length of wave (c) of the expanded flat (same form as 1987) is 1.618 times the length of wave (a) in percentage terms, a common wave relationship. Wave v of (c) formed what looks like an expanded diagonal triangle (wedge) which is the most bearish pattern the EWP has to offer. As you can see on the chart this pattern is the same pattern as the one from January to May 2006 on a much smaller degree.
There is another aspect of sentiment worth discussing. There was a sudden widespread acceptance lately that the Dow would not "slump into the 4-year cycle low", due in 2006 because it did not so in 1986. Second, there was another "rationalization" for further rising prices ("this time is different") with the argument, the 4-year-cycle low has already occurred and is now behind us.
DJIA, May 20, 2006
© ELLIOTT today
Figure 2
The forecast of May 12, 2006 (DJIA below) came to pass like pinpoint accuracy. Because the stock market is patterned according to the Wave Principle, the forecast wasn't a one day wonder.It's a pattern you can understand and learn how to recognize, which in turn allows you to anticipate a range of probabilities for what's ahead. As the position of the ML-2 reveals, the market so far held above that ML-2 and highly likely will bounce upward Monday.
A Look at the Dow !!
Weekly update, DJIA
© ELLIOTT today, , May 12,2006
Figure 3
This is the chart of the Dow taking from my weekly update. On May 4, 2006, I said, "With respect to the wave count, the preferred count is a five-wave advance from the low of 2002, whether the Dow will reach a new all-time high remains to be seen." On April 28, 2006, I said, "The Elliott Wave structure displays an expanding wedge (expanding diagonal triangle with wave v an ending diagonal triangle. The Dow also reached the ML-1 (red dotted-line)." As you can see on the updated chart, the market respected the upper boundary line drawn from wave i of the expanding wedge. Together with the 1x1 FiboFan-line, the market reached that point exactly.
Special Report: Dow Jones Industrial Average
© ELLIOTT today, May 10, 2006DOW - Gigantic Double Top !!
Figure 4
The description of a "thrust out of the triangle", as Elliott put it, supports the idea of that labeling. The thrust so far brought the Dow near its high of March 2005 and as I see it, the probability is high that this former high will be taken out, soon. (ELLtoday, January 6, 2006)
Dow Jones "Triangle Count"
The "triangle count" has been posted here about months ago and many Elliotter took it over, especially in the S&P namely as a running triangle. Internal subdivisions fit the requirements for a triangle, but I personally don't like it, because of the steep decline in wave c, which can be counted as a five, either. A triangle IS possible and the relatively strong advance after the triangle fits the description of a "thrust out of the triangle", which in this case counts as wave (c) or (v) of 5. Five waves up can be counted as complete, waves one and four sport alternation, but the slight overlapping of waves i and iv in wave 5 raises some questions. Nevertheless, the market failed to reach the ML-1 drawn from the low of October 2004 and dropped below 11,200 on Thursday.On the other hand, the advance since October 2002 CAN be counted as a five-wave structure, with probably only wave 1 complete at the recent high and wave 2 now in progress. A correction of (say) 38.2% would point to 10,885, right into the area of the previous fourth wave of one lesser degree. With the market now only 4.5% close to the all-time high, many analysts claim that a new high is only a matter of time. Under the bullish count, wave 5 at 11906 (all-time high on January 14, 2000 was 11908) would be in Fibonacci proportion to the length of waves 1 through 3: 7197-10,754 = +3,557. Multiplied by 0.618 the result is 2,198.22 and when added to the low of October 2004 at 9708, gives 11,906.
Weekly update, DJIA, May 6, 2006
© ELLIOTT today
Revisiting the ALL-Time High
Figure 5
ELLIOTT today, April 28, 2006:
"The Dow registered a high for the year 2006 on January 11, 2006. The high of March 21, 2006 would be in perfect Fibonacci relationship on May 4, 2006: 70 days x 0.618 = 43." The Elliott Wave structure displays an expanding wedge (expanding diagonal triangle with wave v an ending diagonal triangle. The Dow also reached the ML-1 (red dotted-line).
ELLIOTT today, May 6, 2006:
With respect to the wave count, the preferred count is a five-wave advance from the low of 2002, whether the Dow will reach a new all-time high remains to be seen. Interestingly enough, the length of wave (1) and wave (5) are about the same, as wave (1) gained +1857 points and wave (5), measured from the low of 9,708 traveled 1,878 points. Taken the first advance from 7,197 to 10,754 (+3,557 points) and multiply the advance with 0.618 the result is 2,198 and when added to the 9,708 [the orthodox low of wave (4)] gives 11,906 matching the high of January 14, 2000 by 2 points! Elliott channel lines, Median Line and the 1x1 GL all point to that high.
Weekly Update
DJIA
© ELLIOTT today, April 14, 2006
Figure
5Despite the fact, the swings in the DJIA since the high of March 2004 seems random rather than orderly (in view
of the uninformed), the DJIA travels within a parallel channel. A parallel trend line connecting the lows of April
and October 2005 set on the high of February 2006 touches the recent high of March 21, 2006 quite exactly.
The primary degree count displays the bigger picture: an a-b-c x a-b-c ultimately labeled (w)-(x)-(y), a double three correction. Alternation is satisfied since the first a-b-c traced out an upward zigzag for wave (w) and the second a-b-c formed what is best counted as a 3-3-5 flat. Internal wave relationship strongly suggest, that the market reached an important top. In percentage terms, wave w of (y) equals wave y of (y), a common relationship.
A decline to at least the lower trend line is expected in the coming months, but a target depends on the time frame the market uses to do so."Taking into account, Zoran's count of a "Iraqi War" triangle is correct, the advance counted from the end of that triangle at 8285 on April 2, 2003 fits a perfect Fibo relationship at the recent high. Multiplying the length from the top of 2000 at 11,723 (closing price) to the end of the triangle at 8,285 (-3438 points) with 0.885 (Sierpinski Gasket Number, Scientific American, August 1999) gives 3,042.63 and when added to 8,285 the result is 11,327.63, a mere 10 points from the recent high. Additionally, the two upswings 2003-2004 and 2004-2006 are in classic Fibonacci proportion, since the first upmove gained +2,469 points (8285-10754) and the second gained +1,626.80 points (9,708-11,334.80)." ELLtoday, March 25, 2006. Actually, the closing high on March 21, 2006
was 11,325.80 a hairs breath from 11,327.63 (+/-1.83 pts)."
TOP!
Special Report, March 10, 2006
updated April 13, 2006Weekly update, SPX, April 9, 2006, © ELLIOTT today
Figure
6
The Fourth of the Third Wave
Within most five-wave declines, there is one point that repeatedly provides, in the ensuing upward correction, both a magnet for rising prices and a ceiling of resistance for further advance. That point
is the (usually small) fourth-wave rally within the third wave down. The level of the "fourth of the third" wave is a reliable target for a rally when wave four peaks lower than wave four of three and when the third wave is fairly long relative to the first wave. This is actually the most common development, so the target is often applicable. This target is less often valid when wave five is extended , in which case the ensuing rally generally tops between peak levels of wave two of five and wave four.
This target is almost never valid when the first wave is extended because by the rules of wave construction, wave three is then shorter than wave one, and wave five is even shorter than wave
three. In these cases, the ensuing rally typically carries to around the peak of the preceding wave
two or even wave four of one. (The Elliott Wave Theorist, July 2002)
Figure 7
The internal wave count is acceptable, as you can see on the chart. Moreover, Fibonacci calculation has been satisfied. Page 57 of the Elliott Wave Principle explains, that when third waves are extended, the first and fifth are usually equal
in length or related by the Fibonacci ratio. The "top" was "catched" in real-time:
"ML-2 points to about 1314-1315 while the lower ML-2 channel line provides
support at 1307." (SP500TradDESK>>>)
The Louder They Come, The Harder They Fall
Zoran Gayer first introduced the idea of an "Iraqi War Triangle", meaning the up and down zigzaging of the Dow
and the S&P 500 between July 2002 and March 2003. The Elliott Wave Principle (Frost & Prechter, 1990) states with respect to triangles, "triangles as a general rule occur only in positions prior to the final movement in the direction of the larger trend, i.e., as wave four or B." (EWP, p.42). Triangles are drawn by connecting the termination points of wave a and c, and b and d. Wave e can undershoot or overshoot the triangle boundary…"With respect to form, EWP states, "triangles are overlapping five-wave affairs which in turn subdivide 3-3-3-3-3." They appear to reflect a balance of forces which results in a sideways movement that is usually associated with decreasing volume and volatility. As you will notice, most of the subwaves in a triangle are zigzags, but sometimes one of the subwaves (usually wave c) is more complex than the others, and can take the shape of a regular or expanded flat. In the case of the S&P 500 (cash) wave c within the triangle is best counted as a double zigzag labelled a-b-c x a-b-c.
The most important is the wave pattern. The biggest signal that the bear market is underway, was the five wave decline in the S&P500 and the NASDAQ index from March 2000 to September 2001. Those patterns are unmistakable. They say in no uncertain terms that the major trend is now down.Labeling the low of September 22, 2001 as Primary 1 of the new bear market, the upward correction to March 2002 counts as Intermediate wave (a). The single most important rule that can be gleaned from a study of the various corrective patterns is that corrections can never be fives. Only impulse waves can be fives. In other words, an initial five-wave movement against the larger trend is never the end of a correction, only part of it.
Following the top of March 2002, the S&P 500 declined relentlessly for nearly two months and smashing through the neckline of its head-and shoulders pattern, violating its neckline. The low of July 2002 marks wave W on the chart above, which itself is part of an a-b-c decline. Since a flat correction (expanded flat) differs from a zigzag in that the subwave sequence is a 3-3-5 affair, the first two of such a sequence had been established. The strong up move into the last week of August 2002 formed a clear-cut three-wave advance labelled wave X on the chart. Now we know, a single "three" is any zigzag or flat. A double three or triple three is a less common type of corrective pattern which is essentially a combination of simpler types of corrections, including zigzags, flats and triangles. Their occurrence appears to be a flat correction's way of extending sideways action. A double three is composed
of seven legs and a triple three of eleven (except when one of the "threes" takes the shape of a triangle, which adds two waves).
Combinations of threes were labeled differently by Elliott at different times, although the illustrative pattern always took the shape of two or three juxtaposed flats, to reflect their usual character. Within a double or triple three formation, the waves in the direction of the previous trend, being "B" or "X" waves, always subdivide into threes
(or triangles), while those in the direction of the corrective wave can subdivide into threes or fives, depending upon what simpler types of corrective patterns are forming within the structure.
More commonly, however, the component patterns alternate in form. For example, a flat followed by a triangle is
a more typical type of double three. The formation from the high of March 2002 can be counted as an a-b-c X triangle, a double three correction, as outlined before. If so, the strong upward move since March/April 2003 must be counted as a five-wave structure, which in case, completes the 3-3-5 structure, required for an expanded flat (EWP, p. 37-38.)
Flats can be what we call "expanded", and contain a price extreme beyond that of the preceding impulse wave. Elliott called this variation an "irregular flat", although the word is inappropriate as they are actually more common than "regular" flats. The preceding formation of the crash of 1987 was an "expanded flat", though on a lesser degree. The formation in the DJIA from August to November 1973 was an expanded flat correction of this type in
a bear market. The DJIA lost roundabout 20% of its value following the completion of the expanded flat.
No market approach other than Elliott gives as satisfactory an answer to the question, "How far down can a bear market expected to go?"As in the case of a bear market correction: How high can a bear market correction go? The guideline is that corrections tend to register their maximum retracement within the span of travel of the previous fourth wave correction of one lesser degree, most commonly near the level of its terminus. As you can clearly see on the chart, that level is situated at about 1320 in the S&P 500. Now consider the following Fibonacci relationships: Primary wave 1 down declined -608 points (itself a Fibonacci number) and the ensuing Intermediate wave (a) gained +231 points. (231 = 0.382 of 608). A 0.618 retracement of the decline of -608 points gives 375.74 points and when added to 945 a reasonable target is 1320 (945+375). The length of Intermediate wave (c) then would have travelled +481 points (839 - wave e of the triangle) to 1320) which means, wave (c) would retrace exactly 0.6135, which is phi of the whole decline from 1553 to 769 (extremes), which is -784 points. (481/784= 0.61352= phi). EWP describes, "after a triangle is complete, the final impulse wave is generally swift and travels approximately the distance of the widest part of the triangle." Adding a 2.618 multiple of +185 (the widest part of the triangle) a reasonable target would be 1323 (839+484), since 185x 2.618 = 484.
Alan Newman shows charts of Dollar Trading Volume vs. GDP on a historic scale. And he writes further, "judging by other sentiment measures, such as the Investors Intelligence survey of newsletter writers, the mutual fund cash-to-assets ratio, and the Rydex fund ratios, there is every reason to believe that participants are caught up in
a frenzy - again. But since prices still remain far below their all-time highs, the common wisdom is that the bull market has a lot of room on the upside. Furthermore, three years of higher prices uncompanied by any substantial price correction are sufficient to convine participants that no price correction will be forthcoming.The circumstances have again enabled rampant speculation, albeit certainly not on the same scale as fateful manic peak.Nevertheless, current valuations have only been exceeded four times in market history; 1929, 1973, 1987 and 2000. Each of those occasions were followed by rapid and momentous declines in stock prices.
Exactly how much additional evidence do we need to claim that investors are in a similar position of risk, as they were at the four prior peaks? Recommendation: Frenzy & Churn! The Greatest Stock Market Mania of all Time, a special report by Alan M. Newman, www.crosscurrents
The radical thesis of The Wave Principle of Human Social Behavior and the New Science of Socionomics (New Classics Library, 1999) was unmistakable manifest in the raucous social comedy of the 1990s, and now it is playing out in the first act of a developing worldwide social tragedy that will last years. The primary thesis of this book is that changes in social mood cause and therefore precede changes in the character of social events. In contrast to this idea, most people erroneously try to divine the implications of events in attempts to forecast financial markets and people's collective feelings. Their approach cannot work because markets are driven by natural trends in mass psychology, and events resulting from those psychological trends come afterward. It is
the changes in such trends, as indicated by turns in the stock market, that signal a coming change in the tenor
of social events.
Socionomics explained why global atrocities followed the 1929-1932 crash and continued during most of the rest
of the bear marrket pattern, which ended in 1949. (Inflation adjusted DJIA). It also explained why the worldwide peace initiatives and unprecedented acts of reconciliation of the 1990s followed nearly half a century of social
mood uptrend. The dramatic, historic pictures shown in Socionomics to convey the power of these moods were
not placed there simply for academic purposes. this is real life we're talking about. (The Elliott Wave Theorist, September 11, 2001.)
Weekly Update, Dow Jones Industrial Average
© ELLIOTT today, July 8,2005One day after London was attacked from a series of terrorist attacks the question arrives:
"Do dramatic events (like terrorism) throw Elliott wave pattern off?"
The premise of the Wave Principle in brief:
Mass social mood unfolds in clear and predictable wave patterns. The stock market is the primary measure of trend changes in social mood. The character of social events can be anticipated by tracking these patterns (13 in all) as they unfold in the price charts of major financial markets. Shifts in mass social mood are not random, but unfold in recognizable patterns. These patterns also appear in the price trends of major stock markets, and coincidentally with trends in popular culture. When mass psychology is trending “up,” there is a collective increase in concord, inclusion, and optimism -- to name a few. When mood is trending “down,” discord, exclusion and pessimism throughout society will follow.
The London attack occurred exactly on day number 987 (Fibonacci number) from the low of October 10,2002 in the Dow, that date itself was day number 986 (987) from the all time high of January 14,2000. Coincidence? Yesterday, the S&P 500 slumped to a low of 1183.55 and that is only 1 point off a 50% division of the entire decline from 1229 to 1136.
Elltoday said on June 30,2005: “The recent low in the Dow occurred exactly at a 0.618 Fibonacci mark: 10.000 to 10.656 = +656. 656 x 0.618 = 405. 10.656-405= 10.251 (+/-2). A break of that level suggest much lower prices ahead probably into the 10.150 area where the lower channel line of ML-1 comes in.”
Yesterday, July 7,2005 the Dow registered an intra day low of 10175, which marked the bottom of the day and the market reversed upward. As you can see on the chart, it was the second time the Dow touched and slightly penetrated the down sloping 1x1 Gann line (45°) and each time the market quickly turned around and surged in the opposite direction. From an Elliott wave point of view, the recent low can be counted as wave b of an irregular flat (expanded flat) with wave c of ii now in progress. A reasonable target is 10472 (0.618 of 10656-10175.) and the upper channel line of ML-1 (red) points to that target, too. The 1x2 Gann line from the top provides major resistance for the count to be valid. Given my long standing possibility count of a massive diagonal triangle to be in force (even in the Dow) the recent low should not be violated to the downside. The next 90 day-cycle low will be due July 29,2005, though we'll watch the path of the market closely.
