I have often see Elliott wave enthusiasts to go back centuries to well before the inception of the Dow-Jones industrial average to try to piece together a historical account of the markets. I think that this methodology has proven wrong, so I am going to limit my analysis to the S&P500 as we know it now. It is clear than companies rotate in and out of the Index, so that is not perfect either. In fact, the index as we know it today is different to the original S&P index of 233 stocks created in 1923. The S&P 500 starts in March 4th, 1957. This is the starting point for the and what I will be using for my analysis. Based on that starting point, the S&P500 has recently concluded a primary wave 4 and is currently in primary wave 5. This is an impulse wave that should take the market to new highs in the next few years, possibly a decade. In fact, we already have an indication of what type of market this might be. For those who understand Elliott Wave, Primary wave 5 is developing as an ending diagonal. My rational for this assertion follows here:
An impulse series is composed of 5 waves. This pattern repeats in different periods of time, whether in an hourly chart or a quarterly chart, as shown above for the S&P 500 index. There are three possible accelerated patterns that cover a great deal of territory: the impulse, the zigzag and the double zigzag, so a strong market may not necessarily be characterized by impulse series along. In fact it is very important for the Elliott wave analyst to consider that the three patterns may occur and in fact they have occurred in different time frames in the chart of the S&P 500 alone.
The main characteristic that differentiates impulse waves from zigzags and double zigzags as they are in progress is the characteristic “extension” of one of the trending waves (1, 3 and 5). It is usually wave 5 the one that extends, but I have also seen extended waves 1 and 5. take for example the bullish trend between 1982 and 2000, which I have labelled primary wave 3. This trend is significantly larger than the previous primary wave 1 seen between 1957 and 1968. I said that typically is the third wave the one that extends. However, within that trend, it is intermediate wave 5 the one that extends, lasting from 1991 and 2000. In fact, a similar extension occurred in the Dow-Jones industrial average who took Robert Prechter by surprise as he wrote in his book “At the Crest of the Tidal Wave” that the end of the bull market was at hand in 1995. Little did he know that the intermediate 5th wave would extend as the internet bubble developed. From the Elliott wave perspective it was a bubble too!
Impulses are relatively easy to identify once they are in progress, however, corrections are much more ambiguous and for long periods we might not know what to expect. In fact, since early 2003, I had been expecting a “second shoe to drop” as they say and I remained in fear of the markets between 2003 and 2008. The ambiguity has given way to clarity as the correction of primary wave 4 has completed a “Flat” pattern. Corrective patterns can be confusing an include flats, zigzags, double threes, double zigzags, and triangles both contracting and expanding. There are other less common corrective patterns, but understanding these would suffice for most situations. Primary wave 4 is a text-book, classic Flat which lasted almost exactly 9 years from March 24, 2000 to March 6, 2009. The idealized flat chart is included here for your convenience. Note that in this diagram, wave B can exceed the beginning of wave A and wave C can exceed the end of wave A but not by much. This is exactly what happened in the S&P 500 high of 2007 and the low of 2009.

The waves A, B and C are three of the most trending movements we have seen in the markets, yet they are corrective because they form part of a larger pattern which is a corrective FLAT. Trending patterns, as I said before can be impulses, zigzags and double zigzags. In the S&P500 Flat of 2000-2009, I described A as a double zigzag, B as zigzag, and wave C as an impulse. The most characteristic aspect of the FLAT that differentiates it from a double three, is the 5 wave impulse that concludes wave C.
The completed impulse intermediate have C that took from October 2007 to March 2009 is shown below. This is a characteristic impulse pattern with 5 Minor waves. Minor waves 1 and 3 are composed of 5 Minute waves, however, Minor wave 5 did not developed typically. As it is often the case, wave 5 was an ending diagonal, which complicated my analysis... Until now!!!

I have been holding to two alternative patterns. The ambiguity has ended. Let me explain why by showing you the two alternative counts. By the way, the two horizontal lines in the chart match the high of 2000 and the low of 2003, respectively. This gives you a good idea of the proximity of the extremes during the range that wave the FLAT that conformed Primary wave 4.
Ok, here is how I have arrived to the conclusion that the bear market (flat correction of 2000-2009 has concluded). I present you with two alternative counts. First the one I had eliminated. The proposed count suggested that the bottom of March was merely Minute wave A of a flat which would be Minor wave 4 that appeared to have been forming a top at the highs of June. If this count had been the correct one, the market would have quickly move down to reach a new low at the bottom of Minor wave 5 of Intermediate wave C. The movement of the markets over the last 2 weeks to a new high, I believe, has ruled out this count, as the market exceeds the top of the proposed Minute wave A of Minor wave 4. It is very unlikely that Minor wave 4 is still in progress. It is more likely that Intermediate wave C, and thus Primary wave 4, concluded at the bottom of the market back in March.
Having ruled this count out, then we are left with the most likely scenario, we are now in a double zigzag up, the first leg of what would most certainly develop as an ending diagonal and a new historical high, in a few years.
First, Minor wave 5 of the downtrend completed as an ending diagonal at the bottom of March near 666. Since then a strong trending pattern has formed. Remember, trending patterns can be: impulses, zigzags and double zigzags. The rally between March and June is unlikely to be an impulse because, as I have said before, the most important characteristic of an impulse it that one of its trending waves (1, 3 and 5) must extend. This is usually so evident (as we have seen in larger patterns), that it would be hard to miss.
So having ruled out the impulse, then we should have a series of zigzags. All we can do here is to label every wave and hope that at the end, a series completes and the pattern becomes evident. At the top of June’s high, a zigzag has been completed. I am proposing now that the zigzag is only the first of a series, that is, the index is currently in at the early stages of another zigzag, having completed a corrective wave between June and July. The aggressive movement since then, indicates to me that the wave Y is in progress already, and that it should emulate the rally of March-June. When completed, it should be Intermediate wave 1 of an ending diagonal which will be primary wave 5. Below is a characteristic ending diagonal and the location where I believe the market is right now.
The market is likely to make new highs, but we will have some steep corrections along the way, so keep on focusing on the PCCRC’s which offer the best risk management strategy I know of.
Juan I. Sarmiento.
No comments:
Post a Comment