Elliott Wave Insights, Part I
The Completion of a Two Century Wave
Would you like to peer into the future of the stock market? Will the stock market start to rise dramatically this year or will it crash? Or will it do something in between? How can you know in advance without supernatural knowledge? Well, you don't have to be a prophet nor a fortune teller if you have a good working knowledge of Elliott Waves.
This essay is the first part of a five part series. This first essay will help the reader to understand what the wave pattern indicates up through its peak in the year 2000, i.e. that at least a 200 year wave has been completed. Part II will discuss what the wave pattern indicates for the near future. Part III will deal with what to expect in the gold and silver markets. Part IV will be a discussion concerning what the historical evidence reveals about the very long term wave patterns. And Part V will be about the conclusions that can be drawn from the first four parts of Elliott Wave Insights.
The study of Elliott Waves within market charts is a form of technical analysis that is in many ways superior to most other kinds. Elliott Waves, along with their associated tools, if interpreted correctly, can be genuinely predictive as to which direction a market will go rather than merely following a trend, i.e. they can also predict major market turning points. Although there are variations on the pattern, Elliott Waves generally follow a basic five wave pattern followed by a three wave correction (labeled A-B-C) such as in Graph A below. Graph B shows some important variations in the five wave pattern.
Graph C illustrates another very important variation in which the fifth wave becomes abnormal, due to the overly excited condition of the market. The result is that the fifth wave breaks out of the longer term trend lines leading to the "Orthodox Top" (completing the five wave count), an "Irregular Top", and finally a market crash. After an Irregular Top, the A wave of the correction will take place much faster than would ordinarily be expected.
Practical Application of ElliotWaves: Has the Market Really Peaked?
With the recent new lows of the Dow Jones Industrial Average and the S&P 500 stock indexes, many people are holding their breaths hoping that the worst is over and that from this time forward, the economy and the stock markets will improve. Others, more pessimistic, think that the bear market is far from over. Which is correct? Are 'happy days here again', or are we facing 'The Greater Depression'? Elliott Waves give us answers to these questions. Just what do they tell us? Is it possible to say, with a relative degree of certainty, that the ultimate stock market peak for the Dow Jones Industrial Average and the S&P 500 has taken place? Yes. The Elliott Wave patterns verify with an extremely high degree of probability that the stock market peak of 2000 will never be exceeded within a normal human lifetime. How can we be certain of this? The complete explanation of these points will be given in Elliott Wave Insights Parts I, II and IV. But verifying that a long term wave has been completed should be almost as simple as counting to five. Five waves that is. You can easily see from the graph below that the entire five wave sequence has been completed since the post-1929 market bottom in 1932. Note also the pivotal point in late 1994 as the extended fourth wave went into another extension by changing the angle of the trend line and by rising at a much more rapid rate. As illustrated in Graph C above, this is characteristic of a market in the final period before a stock market crash.
For a closer look at the period from 1987 to 2000, let's examine another chart. Again, the PIVOT is clearly indicated, as well as the ORTHODOX TOP and the IRREGULAR TOP. An interesting phenomenon of markets just before the post-pivotal extension begins to occur is another kind of extension in which the waves seem to telescope outward while remaining within the trend lines. On the following chart for the period from the crash of 1987 to 1994, each of the "telescoped sections" is identified by a different color number series. Actually, the extension to the orthodox top is the final fifth wave that finishes all of the uncompleted waves in the much larger wave pattern. Please note that the lavender colored trend-line touches the top of the first wave before the PIVOT and the third and fifth waves after the PIVOT verifying that the ORTHODOX TOP has indeed been completed. (This is a modified chart from the excellent website called The Privateer .)
In addition to the above evidence, a great deal can be learned from comparing the stock market charts from the period leading up to the crash of 1929 with the more recent charts through the year 2000. The Dow Jones Industrial Average of the 1920's followed the pattern of a fifth wave extension (with a change in the angle of incidence), then an irregular top, and finally a crash. The crash, as you can see, was merely the A wave, but it was the time period with the most rapid decline of the entire corrective period. In the 1990's through the year 2000, the same pattern has been followed with the exception of the crash, though a serious market decline has already occurred. Note in the chart below the pivotal point so characteristic of a market when it begins to become overly excited and fundamentals are left behind as the herd instinct takes over and greater and greater numbers of less sophisticated investors enter the market. (This is also a modified chart. The original appears at Lowrisk.com.)
To get more of a bird's eye view of the same time period, consider the stock market chart for the entire five waves leading up to 1920's. A five wave sequence of Elliott Waves took place in the period from 1842 to 1929. The fifth wave of the five wave sequence from 1842 to 1929 began in about 1896, and in 1921 the fifth sub-wave of that fifth wave began. This chart is a section of a larger chart that appears further on in this essay. The similarity between this chart and the 1932-2000 chart should be obvious. (Keep in mind that the Dow Jones Industrial Average was only formulated in the late 1800's, so the original chart going back to the late 1700's is based on research in which, by nature, a certain amount of estimating was done, as companies' stock market data thought to be roughly equivalent to the DJIA was apparently used.)
It should be very apparent at this point that two large periods of five waves each have occurred since 1842 and they were separated by the market correction of 1929 to 1932. But how do these two large five-wave formations fit into the larger overall pattern of Elliott Waves? What other information can be gleaned by this comparison in greater depth? Is there additional proof that a major market decline still lies in our near future?
A comparison of the wave patterns from 1842-1929 and 1932-2000
As we examine the time frames and percentage changes in the market in those critical years leading up to the crash in the 1920's with the corresponding Elliott Waves in the years leading up to the peak of 2000 some really amazing similarities are apparent.
Four lines of reasoning will be used to compare the wave formations of these two time periods. Taken together, as the reader will see, the evidence is quite convincing that the market moves in regular patterns and that the topping out formation has, beyond reasonable doubt, been completed.
Wave for wave, the two five wave periods plus their Irregular Tops are compared below in terms of the time taken to complete them:
There is an interesting symmetry involved in the last two rows of the table above:
In the 1920's: 8 months from the pre-pivot low to the Orthodox Top
8 months from the Orthodox Top to the Irregular Top
In the 1990's: about 2 1/2 years from the pre-pivot low to the Orthodox Top
about 2 1/2 years from Orthodox Top to the Irregular Top
Since the two wave formations are so similar, it seems evident that the top formation was complete and that another higher peak, exceeding the highs of the year 2000, is not to be expected anytime in the near future.
Evidence of a Two Century (or more) Wave
Another interesting point concerning the data in the table above is that for the earlier period (1842-1929) the impulse waves (Waves I, III, and V) and the overall time period are all longer than their corresponding waves in the later five wave sequence (1932-2000). Yet, for the periods starting from the lows just before the Pivots to the Irregular Tops, those from the latter time frame are all much longer than those from the earlier. What can explain this apparent anomaly? Since the waves from just before the pivot of 1994-95 are relatively longer than the corresponding waves in 1928-29, this suggests that the entire top formation is an extension not merely of the 1932-1994 time period, but of a much longer period. Usually the third wave is the longest of the three impulse waves. The wave from 1842-1929 was 87 years long, but the wave from 1932-2000 was only 68 years long. Could it be that the entire time period of 1842-1929 is a third wave and the period of 1932-2000 is the fifth wave of a multi-century wave? The evidence strongly suggests that this is a very viable interpretation.
The degree of an A-B-C correction, both in time and extent of the move will be related to the largest five wave sequence that has just been completed. From a technical viewpoint, the Orthodox Top is the finale of all of the uncompleted five wave sequences and begins the correction of the previous five waves (even though the market is still trending upward until the Irregular Top is reached). Reasonably then, the length of time involved from the Orthodox Top to the Irregular Top will be a function of the entire five wave period that was completed with the Orthodox Top.
The five wave sequence from 1842 to the Orthodox Top in February 1929 was about 130 times as long as the eight month period from Orthodox to Irregular Tops in 1929. If the assumption is made that the corresponding interim period of the recent stock market bull (between the Tops in 1997 and 2000) has the same ratio to its entire five wave sequence (i.e. 130 X 30 months), then the five waves that were completed must have been more than 300 years long! This is most interesting because counting back 300 years from 1997 takes us back to the lowest point in the oldest stock market records available. The London Stock Exchange has records going back to 1693, and the lowest point occurred in 1696.
If this conclusion is true, the entire economic period beginning with the Industrial Revolution has reached its climax! Obviously, the worst is yet to come in the world's economy. And since precious metals are generally countercyclical to those of the stock market, the precious metals bull market has only just begun.
The American stock market chart for the last two hundred years provides further proof that a five wave sequence has seen its ultimate high. The earlier part of the first wave is not complete so it is not possible, based on this chart alone, to identify when the five waves began. But it does supply yet another major piece of evidence that the year 2000 marked the end of a long term major wave of at least two centuries. (The original chart appears in black and white and was only through 1993. The portion that was added and updated by this author appears in color.)
Finally, let us now compare the percentage changes in certain waves in three five wave sequences. The first two are the same as in the table above. The third five wave sequence is based upon the wave count in the chart just above. This comparison is based on the percentage change from the bottom of each wave to the top and the ratio of these percentages to each other. (The starting and finishing points of the waves are based on intraday lows and highs respectively. Some are estimated from market charts)
The first and second ratios, when compared, are not even close. However, the first and third ratios are reasonably close to each other. This shows that the fifth wave extension to the irregular top (1994 to 1997) when compared to the same pattern of the 1920's only makes sense as a part of a much greater five wave pattern than that of 1932-1997, i.e. that the topping out formation of 1994- 1997 was part of the completion of a two century wave. If the fifth waves to the next lower degree (the fifth sub-wave of the ones compared in the table above) are compared in the same fashion, the results are even closer:
Obviously, there is a close mathematical relationship between the pre-pivot and post-pivot periods and between the 1920's market and the 1990's market. There are many other parallels and fairly precise mathematical relationships between these same periods. But, space does not permit more elaboration. Enough evidence has been presented, however, to show that there are undeniable similarities in the wave patterns between the two periods and that the 1994-2000 extension and irregular top marked the completion of a multi-century wave.
The question remains, though, why has not the stock market crashed? After the peak of September 1929, the bottom of the A wave (the crash) was essentially completed a mere eight weeks later. But since the year 2000 peak, two years and eight months have passed. Even considering the ratio of , say, a 220 year wave to an 87 year wave, the crash should have occurred less than six months after the peak. Is a crash in the future for the American stock market? This question will be considered in detail in Elliott Wave Insights, Part II, which should be completed within about three weeks.
Denis Paul Bouchard
Taiwan
14 August 2002
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