A Look at the Longer-Term Wave Structure

Upstart asked a question about whether the 2002-07 period was a wave 5 or a B wave.  EWI has also been asked similar questions, including whether the 2000-2009 period could be considered a wave 4 flat that is almost over.  Wave 5 to come!!  New highs!!

This month's EWT takes a stab at this question.  They note that the flat structure looks best in the S&P, but less so in other indexes, including the Dow.  Further, the whole formation looks long and huge for a wave 4 of the bull run since 1974 (nominal) or 1982 (real), especially compared with wave 2 (76-82 nominal, 87-91 real).  Also, the bull had such a disproportionate run up in time (26 years from 74 to 00 compared with 5 years in the last wave 5 from 1925-29), for this to be still in that wave 5 seems low odds.  An the killer is that the exigent circumstances are the worst economic debacle since the Great Depression; hardily the set up for a minor degree wave 4 and a continuation of a bull market.  So, no.

To me a more interesting question is whether the 2002-07 move was wave B or a final wave 5.  It is more reasonable in time and structure to make the 2000-2002 drop a minor wave 4 of the bull, and 2002-07 the final wave 5, then for the whole move from 2000-09 to be a minor wave 4.  One way to distinguish a B from a 5 is sentiment.  Fifth waves (unless they extend) are not as strong across the board as third waves, whereas B waves tend to have more extreme sentiment.  On that score, this seems much more like a B fake-out than a 5th wave whimper.  

In the short run, it doesn't matter; the wave down off 2007 has more to go whether it is wave C of a large bear market or wave A of the beginning of a bear market in 2007.  In the middle term, it could matter, as to how long until this secular bear ends & how low it could go.  More on that below the fold. 

I was asked by several readers last year what the longer term wave structure looked like.  Let me lay out my thinking at that time and update for the recent market action.

The specific question asked was: 

It seems to me that the Target Dow numbers provided in the Elliot Wave Financial Forecast for Supercycle and Cycle waves to not make sense. 

The Target number on the Dow for a C wave decline should be in the "area of the previous fourth wave".  This is taken from page 2 of the current Financial forecast.  The Nov Financial Forecast (and previous months) is “Below 400” on the Supercycle for the current (a).  Page 2 of this month's Financial Forecast indicates that the (c) wave would end approximately at below 1,000 on the Dow and reaching down to about 500, if we use the “area of the previous fourth wave”.  If this is the (c) Supercycle wave, then the (a) Supercycle wave must end at a much higher number.  This compares with the target in the Financial Forecast of "Below 400". 

Likewise, the "c" Cycle wave must  end at somewhere between 2,800 and 1,800 if we use the ”area of the previous 4th wave”. (I am looking at the log scale numbers on page 2 of this month's Financial Forecast).  This compares with "Below 400" in the Financial Forecast. 

Something does not seem right, or probably there is something very basic I do not understand.  In your opinion, is there a mistake in the numbers or simply the understanding of them.  There must be either a lot of confused people out there or a lot of people simply not looking at the numbers.

These targets relate to one of the open issues in Prechter’s counting.  Let's accept the EWI methodology which says the low is likely in the area of the prior fourth wave. Since the market is a fractal - looks the same at all time periods (minutes, hours, days , decades) - it matters a lot what degree of wave is being discussed.  To understand Prechter's targets, we must first understand his longer term count. 

It is easy to get lost, so for convenience I will use a convention I first saw Zoran Gayer use.  I will label waves YYwX where YY is the year the wave started and X is the count (waves 1 2 3 4 5 or a b c)

Prechter counts the prior wave 4's as follows:

1784w4 was 1929-1932 and got to a low in the 40s
1932w4 was 1966-1974 and got to a low in the 400s
1974w4 was 1987-1989 and got to a low around 1700

The EWI target for the C wave of Supercycle Degree (the current wave) is the range of the prior 4th wave, which means the 1987 correction, and hence between Dow2722 where it started and 1700 where it ended – EWI is rounding up to the range 1800-2800.  But this 'area of the prior fourth' is just a guideline, not the end of the analysis.  It could go all the way down to the start of the wave itself, which Prechter takes back to 1974 – hence to below Dow500.  What EWI is saying is that 1800-2800 is more likely, but 400 is possible

At the next higher degree, the prior fourth wave (32w4) was between 1966 when the Dow was near 1000 and 1974 when to went below 500.  Hence EWI gives the range as 500-1000, again rounding up. But the wave could go all the way back to the 1949 start of w3, or below 400, or I suppose back to 1932, but Prechter does not expect that absent a complete meltdown of the world economy, as from a nuclear conflagration.  Hence just the 400 level.  Whew!

My opinion is that neither the 1800 nor the 400 will happen.  And certainly not 40.  Prechter’s count is the nominal Dow, and ignores inflation and deflation.  These targets are not adjusted for inflation, and we have had a horrific inflation since 1932 (or 1966 for that matter).  After inflation, all these older targets have to be increased by at least 10x, so 40 becomes 400 and 400 becomes 4000.  

When adjusted for inflation, the wave counts shift.  Here is how they count in real terms:

1784w4 was 1929-1949, not 1932
1949w4 is what we are in now!
1982w4 is either 1987-91 or 1987-94 or 1997-98  (see below)

The inflation -adjusted count of big bull run after the Depression is as follows:

1949w1 was 1949-1966
1949w2 was 1966-1982
1949w3 was 1982-2000
1949w4 is 2000-20??
1949w5 remains ahead  

Note that the periods of each wave is around 17 years (+/- 1).  If this persists, the end of 1949w4 should be around 2017, and the subsequent 1949w5 around 2034.  Cannot say this will continue, although some pundits out there make hay around cycles of this duration or some multiple (32-34 years, 64 years, etc.) 

In an inflation-adjusted view, we are in 1949w4 right now, and probably half-way through it.  Likely to end between 2014-2017.  (2014 represents the four-year cycle low; 2017 represents the end of this 17-year pattern.)  Any fall in wave c should now be compared to the fourth wave of the prior third, which is inside 1982-2000.  This new count also likely shifts out wave 4 from 1987 – it is no longer wave 4 but wave 2. More on that below.  

That inflation-adjusted 1949w3 counts as:

82w1 goes to 1987
82w2 goes to 1991
82w3 goes to 1997 with w2 at 1994 and w3 from 1994 to 1997
82w4 goes to 1998
And the final fifth wave goes to 2000

This count would peg the bottom in the 1997-1998 level.  And a year ago that looked plausible, especially if the whole period from 2000-2014 or so breaks as a triangle.  

The Dow in 1997 had the Asian flu, and then in 1998 had a sharp drop to around 7200.  Indeed, the period 1997-2003 looks like a head and shoulders on the S&P, with the 1998 low and the 2002 low at the same level.  That level, Dow7200 and SP800, has been the strongest resistance level for a decade.  And as wave C fell to its Nov21 low, it again bounced off that support level.

This led me to conclude last year that the likely range for wave c is either 7200, or if it were to break it, the 1997-1998 range, which could take us down to the 6000s.  And that is indeed what has happened so far.  So this scenario is still plausible.  It means the next drop will come down around the Mar6 levels (SP666, Dow6400).  

But it may be a less likely outcome right now. 

Let's go back to the wave from 1982-2000.  An alternative count is that 82w4 was 1987 and the great bull run of the 90s was an extended fifth wave. Before he died, Zoran Gayer had this count, and he pegged wave 4 as a running triangle from 1987 - 1994.  

Hence we then have three possibilities for the fourth of the prior wave:

82w4 from 1987-91 (Prechter) or the 1800-2800 level
82w4 from 1987-94 (Zoran) or the 1800-4000 level
82w4 from 1997-98 or the 6000-7200 level

The fourth of the prior wave is but one guideline.  Another that is useful is that any mania retraces to its start.  This has led to some debate as to when the mania started.  

Three starting points for the mania have been posited:

2003, with the housing bubble
1998, with the Y2K bubble
1994, when the Repubs won Congress and the fifth wave extended

The first starting point no longer works.  The start in Mar03 was around Dow7400, and we have already breached that level.  BTW this also adds another strong argument to add to those above why this isn't a flat within a continuing bull market.  We are correcting much more than the 2002-2007 wave.

The second starting point also no longer works. since the big move off Oct98 also started around 7200-7500.

Hence this guideline strongly points to 1994, the start of the extended 5th wave, which makes the target level Dow3600-4000.  

The big test will probably come this Fall, when the Mar6 lows will be retested.  If the markets breach those levels (Dow6400, SP666), there really isn’t any support until the 1994 levels.  The Dow on the way up made a few pauses at Dow4000, 5440, and 6000, but they were brief.  If we break through, we likely head closer to Dow4k.

I believe analysis this is also how Neely gets his prediction that the next drop will go down to SP400, the 1994 level equivalent to Dow3600-4000.  

If this is what happens, we should then have a pretty powerful rally off the Dow4K lows, counted as an X wave with a final corrective pattern out in the 2014-2017 period.  

If instead we hold the recent lows, we may be in a large triangle.  After 2000, Prechter first expected the period of 2000-2014 to break as a triangle, and after we bottomed in 2002/2003 he reiterated this view.  If we retest the Mar6 lows around Oct 2009 and have a strong bounce - the final Hope Rally into the summer of 2010 - then expect another retrace of that level in late 2010.   This should mark the end of leg C of the triangle.  An expected model is as follows:

1949w4a from 2000-2002 - hits Dow7200
1949w4b from 2003-2007 - hits Dow14K
1949w4c from 2007-2010 - hits Dow 6K
1949w4d from 2011-2013 (the re-election rally) - hits Dow10K
1949w4e from 2013-2014 - hits Dow4K

... and it very possibly could take longer, with leg C ending in 2014 and leg e in 2017/18.  

Comments

[barood]

EWT thanks for this thorough analysis. Indeed great analysis. I would like to bring in some scenario that's been coming to my mind so often lately and it is derived from Neely's discoveries but I don't think he would agree on it because I don't think he counts the rally from 1982 to 2000 as impulsive.

Below is my scenario:

If we go with the assumption that the rally from 1982 - 2000 is an extended wave 5 of some degree and I am not concerned what degree it is as I am more concerned with the structure relativity. If this wave 5 is ending some impulse of higher order (as Prechter suggests) that means wave 5 will have to be retraced more than 68% (Neely's rules) and the S&P will have to drop below the 666 level which is close to the 68%. Now some possible pattern (From Neely's discoveries) that would accomplish that is the elongated flat where the C wave (2007-Now) will be a fib extension of the A (2000-2002). This will bring the S&P close to 275 as final target.

Based on Neely's discovery, this C wave will be the A wave of a higher order contracting triangle that will develop in the coming years.

If we use the MA(50) weekly as the linear regression for price behavior in this C wave of the elongated flat, it is sitting at 971 S&P right now. It is very close right now. Someone on this site on another thread mentioned that another 6 days and it will be 89 weeks since the top in 2007. this is becoming very interesting from price and time perspective to end this upleg. I hope my analysis make any sense here for the gurus...

[john walker]

Outstanding summary, Yelnick; thank you !

[Hank Wernicki]

Excellent Analysis

[DG]

barood,

I think that Neely would warn against having an Elongated Flat with a B-wave that exceeds the top of the A-wave, as it did with the S&P making a new all-time high in 2007.

[vipul garg]

thats a lot of heavy analysis given here.

if i could only understand whats happening from october lows of 2008, or even march lows of 2009, i ll be really happy.

barood, in any case , two things:
one as DG says you cannot have an elogated flat wehere B wave exceeds A wave s high ..
secondly the current C wave going on is a corrective structure , so cannot be a part of flat of whatsoever type .

so what neely is saying is that this C wave is corrective , is a C leg of a neutral triangle , and is still half done .
and thats the only way his short term and long term forecast will make sense as somebody had pointed out that it cannot drop below 450 levels on sp500 .

[Rob]

I take it that the significance of the 89 week figure is that it is a Fibonacci number. Given all the statutory holidays in that time frame, I question how much faith could be put on it. Fibonacci trading days might be a more meaningful number.

[Upstart]

Great detailed post, yelnick. You obviously have thought long and hard about that for some time, not just since I asked the question. Thank you. And I will re-read when I don't have a headache. DOW 4000-ish, where it went parabolic seems necessary, eventually. But let me point out that the Nikkei revisited its equivalent point in 2003 or before then rallied, and yet continued in 2008 to progress toward where Prechter says all manias end: Below where they started. All that inflation...but if it really got going in reverse with the deflationary process...Actually, Prechter covered that issue too, one or two Theorists prior.

[Forkoholic Serge]

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[Rob]

Perhaps someone could weigh in on the current wave count. A couple of months ago there was disagreementn in the EW community as to whether we were in wave 4 of [1] or if wave 5 of [1] had concluded and we were now in wave [2]. Did this disagreement go away and the wave 4 camp throw in the towel. I am under the impression that the A up move of wave 2 of [2] is about to conclude and we should have a B down move, followed by a C up move to conclude wave [2].

Feedback please.

[Tom]

Great Analysis, Yelnick.

You are well above Nearly and Prechter in my opinion in terms of doing a thoughtful analysis of market trends....and best of all, you don't charge people like those salesmen for their flip flop analysis.

Well done.

[Eventhorizon]

Wow. Outstanding analysis Y-Man. I am going to print it out - it's a keeper.

[Upstart]

I have reason to believe that the people looking for a simple a-b-c wave 2 (or a combination that looks the same) and an end to it in a few months are wrong (including Prechter). I think the wave 4 people are pseudo-right because we will make a new low, or at least challenge it, and the decline will be wave B of a flat. I think we ended wave 5 of [1] and have been in the A-wave rally of a flat. Bulls think we've bottomed for good. Most bears think we're headed higher for now "after a pullback". This psychology seems to allow for more pullback than most are expecting. I have another reason too that I will guard for now. But that's my two cents, Rob.

[usdollar]

http://www.financialsense.com/fsu/editorials/russo/2009/0112.html
This is the what I see best long term wave count out there Russo.

[Forkoholic Serge]

Rob, still in Wave 4 camp as we did not exceed EWforkology guidelines for W4
and I like Yves count too
http://forkoholic.com/images/spxstillw40609.jpg

[yelnick]

Rob, the wave 4 is still alive, just lower probability. Some difference as to whether it started on Nov21 or Mar6. The Nov21 date lends itself to a really good flat with a B wave lower than the start.

[yelnick]

Upstart, your wish may come true IF we turn out to be in a triangle from 2000-2014 rather than a flat with an X wave to a second corrective structure. The period from now to a high sometime in summer 2010 will look like a long trading range - essentially from Nov21 (the end of the big move down) to the beginning of the next move down. Curiously, the "wave 4" concept matches with this, but in a different way than a wave 4: if a triangle, leg C needs to break as a "3" not a "5". It has already had its first three waves down, to Nov 21. What we may be in is an X wave which is breaking as a flat from Nov21, and sometime this summer we will enter the second ABC of leg C.

The 'tell' between the two counts is whether we break the Mar6 lows at the next retest.

[yelnick]

usdollar, Joe Russo's long count is intriguing. Prechter has mused that maybe the run from 1784 to 1929 was wave I, not waves I II and III. Russo's count is a bit different in that he has wave I to 1837 and II to 1857, then begins wave III; but he doesn't end wave III in 1929. Instead, we are still in it.

Both have the same underlying logic which is that the whole run from 1784 to 1914 feels like a singular period - the rise of European Civilization due to the Industrial Revolution. Then comes WWI and it all falls apart. What I like about Russo's thinking is he ends the 1857-1929 period in 1916, right smack dab amidst WWI and the self-destruction of European Civilization. Also, he expects the Information Age (which we are in) to run much farther to future glory, which feels right, vs. Prechter's uber pessimism that the whole run of Industrial Civilization is beginning a 100 year correction.

[barood]

DG & Vipul,

thanks for pointing out the fact an Elongated flat should not be considered when B makes a new high. I really did not know that. is this mentioned anywhere in MEW? I don't think I can miss a fact like this. thx barood.

[DG]

barood,

That is not a part of the NeoWave rules, but it is implied that an Elongated Flat with a strong B-wave should be considered very rare by the statement that Irregular Flats should be considered "abnormal and infrequent" on MEW page 10-5. The state of "self contradiction" for an Irregular Flat would be even more severe for an Elongated Flat with a strong B-wave.

I also think vipul is correct that the C-wave of that formation is not Impulsive.

[vipul garg]

barood,
its in behaviour logic .at this degree an elongated flat where b exceeds a 's high will be totally circumspect.
even if one does consider , c has to be impulsive which in this case , is not.

[Mista B]

It was a Wave 5, imo. Here's my reasoning.

Tech clearly bubbled in 2000, and to astronomical levels. While most of the other major sectors (transports, healthcare, consumer goods, etc.) all had very good runs in the 1990s, tech went up the most by far, thus having a huge impact on the S&P 500. If you look at every other major sector outside of tech, especially energy and basic materials, they ALL went to significantly higher highs. So did foreign developed markets. So did emerging markets (much, much higher highs).

It was a classic blowoff top to higher highs around the world. I think it's a mistake to look just at the S&P, which was heavily weighed upon by tech. The NYSE Composite also reached clearly higher highs. Thus if one focuses ONLY on the Nasdaq and S&P could one conclude that higher highs were not reached and that 2002-2007 consisted of a B wave. Psychologically, though, that doesn't hold water to me. People were euphoric. That's fifth wave pschology. Now we're seen classic B-wave psychology: pure unadulterated HOPE.

Imo, we're in the typical B-wave bounceback rally similar to the one in 1930 that followed the great crash. It should top right about now if I'm correct. We may get a five-year type of rally like 1932-1937 if we go down low enough, but I have my doubts. I just don't think we'll see that level of liquidation (90% loss in S&P). If we don't, then I think the most likely scenario is a very, very long trading range like the Nikkei is still in.

[Thor's Hammer]

Hope you bought some calls today, folks. This was a wonderful gift and shame on you if you didn't put it to good use. Back to the ol' upswing.

[Thor's Hammer]

hate to say I told you so...

;)

and now that I have a little credibility, let me say that the next rise will be STEEP and RELENTLESS. You will see the Dow up hundreds of points a day for days on end.

[Will there be unicorns? I love unicorns!]

and now that I have a little credibility, let me say that the next rise will be STEEP and RELENTLESS. You will see the Dow up hundreds of points a day for days on end.

Posted by: Thor's Hammer | Monday, June 15, 2009 at 12:41 PM

All you do is show up and say "the market will go up" with no reasoning behind it other than you're saying so. How do you translate that into "credibility"? That's just a guy with an opinion using the internet to spread it.

[Mamma Boom Boom]

Another day like today, will pretty much tip my 'in-dick-ators'.

[Thor's Hammer]

unicorn--

I called the bottom when the Dow was down 220. That adds to my reputation.

When DJIA are up 250 tomorrow, that will boost my reputation more.

When we are at Dow 15,000 in December you will beg me my method!

[Will there be unicorns? I love unicorns!]

First off, you didn't say, "this is the bottom", you made some generic statement about buying calls.

Secondly, 33 points of short-covering at the end of the day, over the span of over an hour of trading, hardly qualifies as any sort of reversal on anything but the most short-term chart.

I applaud you for putting yourself on the line and making a specific forecast for tomorrow, though.

[Upstart]

Yes, DOW up tomorrow, on its way to next week's multi-month top.

[EN]

I don't know about you bulls getting all bulled up for some new monthly highs tomorrow but today's weak close was a daily sell signal on my simple as a moron dressed up like an idiot for Halloween model.

[mttoolkit]

Hey EN!!

email me at [email protected]

As a student of Neely River Theory, id like to talk to you about your experience with it.

[Hank Wernicki]

Went Long at the close for the $COMPQ with a tight Stop for tomorrow

[Thor's Hammer]

You won't get stopped out, Hank. We are going up. Relentlessly. Bears will be basted, baked, and boiled.

[Upstart]

TODAY CLEARED IT UP!

The rally in the DOW from March has looked corrective in structure, but been a bit puzzling to me as to the best count. The rally up to early April where the triangle began doesn't count as a five like in a zigzag. No, instead, the straight shot up to late March was A (and can count more convincingly as a 5), the "big" pullback there was B, and everything from late March has been an ending diagonal. Wave 1 ended early May, 2 was the flat in May, 3 ended the other day at 8877.93, a simple zigzag 4 ended today or will tomorrow (note it overlaps 1). The corrections exhibit alternation. Wave 5 should end next week "on schedule" in week 89 from the all-time high. This count even correlates better with the diagonal I mentioned in the XAU. Being corrective, the rally has not been wave C of a 4th wave flat. 5 waves down ended in March, as EWI labels it. Thus, being corrective, the rally has been A of a flat wave 2. Wave B down will retest or exceed the low, and C will scream upward, maybe into early 2010. That's why I disagree with EWI's timing for the end of wave 2.

I agree with Prechter that the clearest waves are usually in the DOW. Think about this huge example: Early 2004 to late 2005 was a mammoth triangle, only in the DOW. The S&P was a mess to attempt to count.

Yelnick, has the STU mentioned a couple of turning patterns ending next week, both involving several hundred days? If not, I may share it if it continues up into next week.

[EN]

Come on boyz. Even a tiny infant can see that we started a new daily downtrend today.

If this thing can rally hard tomorrow, I will eat my words . . . and you bulls will earn my money but it won't . . .

[anon_aka_TERA BAAP]

THOR is exactly correct..tomorrow will be a bear Slaughter..i almost cannot handle watching..i warned you bears, this market is going much much higher!!

today they couldnt even close it on the lows..i am adding to calls BIG time..WFC, GS, XOM, SPY

Today's move was a fakeout because during the TRIPLE witching, they need to close out their short hedges so they bring it down..and lure more shorts inside!!

After a THREE HUNDRED point move higher, they will reset their positions on the way to ALL-TIME highs

with VERY FEW on board!!

[Reality Check]

For those crowing about "not closing on the lows", today's last hour move in the SPX was only about 60% as strong as the other positive last hour moves over the past two and a half months and that was after a much larger intraday drop than we've had on most of those positive days. The idea that some sort of solid bottom was put in this afternoon is definitely premature.

[Wavist]

Wavespeak counts this decline as the fourth wave within C of 4 down from the high in 07, anticipating a relatively shallow pullback over the next couple of weeks before a final push higher in 5 of 4.

[barood]

DG & Vipul,

Your answers are so much appreciated. thanks a lot.

[Thor's Hammer]

I am not Thor. I'm his Hammer.

And I told you so.