Friday, September 21, 2018

The Bull Market Continues

It's been 8 months since the January high in equities. With the historically slow summer season over, the market is now trading at all-time highs, ending the corrective period that has persisted virtually all year. While the high in January may have appeared to mark a blow-off top and end to the bull market than began in March 2009, it was stated here that probabilities suggested a long-term top was not approaching. The initial move down was sharp and swift, in line with the forecast given in January. While the timing of the correction was correct, the degree of a top that the market registered was larger than expected, and therefore a minor alteration to the Elliott Wave Count is necessary. It appears the January high marked Minor Wave 1 of Intermediate wave (5). The DOW has caught up with the other major indexes and has made a new all-time high, and Minor wave 3 appears to be in force. Minor waves 3, 4 and 5 still need to complete before the bull market ends. Because Minor Wave 2 was drawn out in time and took a sideways form, Minor wave 4 is expected to be simple, sharp and short in duration before Minor wave 5 commences to end the bull market. Currently, expectations are that minor wave 4 will occur in 2020. If our timing is on track, Minor wave 5 should then take the market to new all-time highs once again until 2022. After that, the biggest bear market in 300 years will commence.

While at first glance of the major indexes it may seem that price action since January through May was a classic fourth wave triangle, upon closer examination of the Dow Jones Industrial Average, the benchmark index for long-term U.S. investor sentiment, made a new low in Late March on a closing basis, and early April on an intraday basis.

 As per Ellliott Wave Principle, in a corrective wave that takes the form of a contracting triangle, "Wave C never moves beyond the end of wave A, wave D never moves beyond the end of wave B, and wave E never moves beyond the end of wave C (EWP, p. 90)." In this case, wave C moves beyond the end of wave A. Therefore, a triangle can be ruled out. Instead, it is far more likely that the Minor wave 2 correction took the form of a triple zigzag, with a truncated low in May for the third and final zigzag in the sequence. While this may not appear the correct way to label the correction, truncated ends to corrections do occur. Additionally, the move from early to mid April is not impulsive, suggesting it is still a part of an ongoing correction. The third zig-zag, labeled wave Z, then takes the market down in the form of three wave into early May to end  the Minor wave 2 correction. As per EWP, "Sometimes a pattern's end differs from the associated price Figure 1-47, the end of wave Y is the orthodox bottom of the bear market even though the price low occurs at the end of wave W (EWP, p.55)." The Dow was the only major index that did not trade higher than their respective February peak for wave X. An argument could be made for wave X ending in March rather than February for this reason. However, wave Y has a proper form of 3 waves when the rally in early March is counted as wave (b) of Y, and the Dow is benchmark index for the U.S. Stock Market, so this labeling appears to be acceptable. 

Now that the Dow Jones Industrial Average has made a new all-time high, greatly increasing the probability that the Minor wave 2 correction is over, we can make some projections for Minor wave 3. Currently, the expectation is that Minor wave 3 will not be as robust as Minor wave 1. Looking forward, Minor wave 5 should be even weaker in both participation, price advance and slope than Minor wave 3. Minor wave 5 will be tracked in real-time as it unfolds, but for now, Minor wave 3 appears to be impulsing. Minuette wave (i) progressed in a simple 5 waves into a May high of 25,086. Minuette wave (ii) then took the form of an expanded flat into late June, terminating at 23,997. Minuette wave (iii) is projected to travel 2.618 times the length of wave (i), yielding a target of 28,068 before Minuette wave (iv) unfolds. Minuette wave (v) should then carry the market to new highs once again to end Minute wave i of Minor wave 3. In the near-term, taking 1.618 times the length of Subminnuette wave i yields a target of for Subminuette wave iii of 27,538. 

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