Thursday, December 4, 2014

An in-depth Elliott Wave Analysis

With the recent move to new all-time highs above the September 19 high, I thought it appropriate to examine the Elliott Wave Picture. First let me preface this by saying the rally from the March 2009 lows is a bear market rally, not a continuation of the old bull market that began at the 1974 low, and certainly not a new bull market. This is evidenced by the absence of a value low that appears both at the price low as well as the inflationary/deflationary cycle low of every secular bear market bottom, as well as the fact that the rally from 2009 has occurred not only on low volume, but on declining volume the entire time. True secular bull markets exhibit, from an Elliott Wave perspective, impulsive rallies, and from a traditional technical analysis perspective, expanding volume. Neither of these characteristics have been present since March 2009. Consequently, there are two strong indications that this is not a bull market: The absence of a value low in March 2009, as well as the rally from that low failing to exhibit bull market characteristics. If either one of these factors was not true, I would reconsider, but rather it appears they are complementing each other in pointing to the same conclusion: This has simply been the longest bear market rally in history. Below please find an in-depth look at two different Elliott Wave Count possibilities of the Dow Jones Industrial Average from the March 2009 low:

Favored Count: Double Zig-Zag from March 2009 low:

This count has all but disappeared from the radar of Elliott Wave Analysts, but I still think it is valid, for a very important, yet perhaps by this point in time, vastly overlooked factor by the Elliott Wave Community: The clear lack of a five wave impulse from March 2009-May 2011. Instead, the market traced out a Three-Wave advance from the March 2009 up into the February 2011 high, and a Three-Wave advance from the March 2011 low up into the May 2011 high. Simply put, if this were an A-B-C zigzag, the wave structure from March 2011-May 2011 should have been five waves, but instead consisted of only three, indicating the orthodox top of the first leg of the rally from March 2009 was February 2011, not May 2011. Rather, what this wave pattern indicates, is that the market traced out a simple 5-3-5- zigzag up into February 2011, and then traced out a 3-3-5 expanded flat correction, From February 2011- October 2011. Also supporting this conclusion is the clear 5 waves down from the May 2011 high to the October 2011 low. If it were wave B (Circle), it should have only been three waves, but instead was an impulsive five.This would fit in nicely with the three wave advance from March 2011-May 2011, as wave (B) of X (circle). Remaining objective, what is less than ideal about this count, is the disproportionately large wave (C) of Y (Circle) relative to wave (A) of Y (Circle). Assuming this is correct, and the advance from March 2011-May 2011 was in fact three waves and not five, the aforementioned evidence rules out a 5-3-5 zigzag from March 2009- December 2014.

Alternate Count: Zigzag from March 2009 low:

While the preponderance of the evidence clearly argues against a zigzag from March 2009, it cannot be ruled out completely. An option that would allow for this count is a fifth wave truncation, ending in July 2011. However, this particular count denotes wave (4) as a failed flat, meaning wave c of (4) did not move below wave a of (4). Normally, when a flat correction truncates, it indicates a position of strength for the market. It would not therefore make sense, given the position of strength, for the subsequent wave (5) to truncate as well and fail to move above the high of wave (3). While this count is not favored for the aforementioned reasons, it cannot be ruled out nonetheless and therefore must be considered as a possibility. 

Below please find a chart of the Dow Jones Industrial Average from 2011 that clearly illustrates the three wave advance from March-May, and the five wave decline from May until October.

In summary, there are two working counts I am considering at the moment, both of which are presented above. There are others, both long-term and very long term, but as alluded to above the preponderance of the evidence does not favor them at the moment. Nonetheless, they will be considered should the market so dictate.