A Potential Dow Theory/ Elliott Wave Map

In studying Dow Theory, one will find that bear markets consist of 3 phases. A Phase I decline, followed by a rally separating Phase I from Phase II. What follows is the Phase II decline, worse than Phase I. The market then stages another rally that serves to separate Phase II from Phase III. Then, the final portion of the bear market, Phase III, unfolds. I need to make clear that Elliott Wave and Dow Theory have absolutely nothing to do with each other. However, I believe they can be used to complement each other. The following chart has both Elliott Wave and Dow Theory Labeling on it. Each 4-year cycle low is marked with a Green "4", along with the appropriate Dow Theory phasing. Being that the last 4-year cycle low was 2009, the next one should ideally be sometime in 2013, and should carry price below the March 2009 low. Such a decline would likely find support at the lower trend line to mark the Phase II Low. A rally would then ensue, which I label Primary wave 2 up. I believe an extremely left-translated 4-year cycle rally will then follow. What is meant by "left-translated" is that the market peaks prior to the center of the cycle. This holds greater bearish potential as it leaves more time and thus greater downside price damage potential in the cycle, from low to low, for the market to decline. I believe the Phase III decline will consist of the worst portion of the bear market, and in Elliott Wave terms Primary waves 3 down, 4 up, and 5 down to complete cycle wave c and the bear market. The cycle wave c and supercycle bottom should be accompanied by  good valuations typically found at true bear market lows.

This will be the buying opportunity of a life time. This mapping is not to scale in time or necessarily price, purely speculative, and is only a guess. Either way, I do not think the worst is over and the remainder of the bear market will be much worse than the 2007-2009 decline. Safety is the key during this vicious bear market. Those who remain prudent will have the capital to invest when the bear market is finally over.



Note: For more complete Elliott Wave Labeling, please see my October 8, 2012 post.

Note: Please visit www.cyclesman.net for Tim Wood's cycles and Dow Theory analysis. He is among the best and most objective technical analysts out there.

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Potential Long Term Wave Counts

The market is in a similar position as late 2007. With October 11, 2012 being a Fibonacci (5) years away from October 11, 2007, the day the stock market registered its all-time high, many divergences are present, such as the Dow Theory non-confirmation ("major" flashing red signal) yet the market keeps on crawling higher. Since the Dow Jones Industrial Average, the bellwether index, has retraced over 90% of the 2007-2009 decline, it can now be labeled as a flat. No matter what waves the market creates going forward, it is quite obvious the structure from 2009 is corrective. However, corrective Elliott Waves can take on many different forms, a flat being one and an expanded flat another. In the flat scenario, wave b must retrace over 90% of wave a, and that level was 13,425 on the Dow. Since the high so far is 13,661, the market now qualifies for a flat. Should the market be tracing out an  expanded flat cycle wave b scenario, the market would make another all-time high, likely be completing an expanding wedge, and then crash in a cycle wave c down. Below is an illustration of such a scenario.

 

This would be under the expanded flat scenario with the market making new all-time highs. The market does not have to make new all-time highs in what could also be a regular flat, which does not require a new high. Either way, the upside seems very limited and the downside risk extremely high in what could be a Grand Supercycle Bear market.

As a side note, R.N. Elliott ,the original Pioneer of the Elliott Wave Principal, projected the Grand Supercycle degree top in...you guessed it...2012. While the market has really been in a bear market in every other denomination but nominal terms since 2000, 2012 may be of great significance as the final peak in the decade-plus long topping process is completed.