Most market analysts didn’t expect the stock market to recover so fast, but if you knew how Elliott Wave works, you could have anticipated the current move.
This week, I will be looking at the S&P 500 from the perspective of 20-years 1999- 2019.
The basic premise behind the Elliott Wave Theory is that markets move up in 5 waves and down in 3 waves, completing a perfect octave (like music). R.N. Elliott (ca. 1920’s-40’s) was able to see the Fibonacci sequences that are found in nature (e.g. the spiral of galaxies, seashells and the inner ear) and apply them to waves of mass greed and fear in collective human buying and selling activity.
The top in late January 2018 to the bottom in December 2018 was a three wave buying pattern I call X-Y-Z (an a-b-c or 3 wave pattern). Elliott noted that these patterns are very bullish once completed and launch markets to higher highs. This is where we are now.
True bull waves always move in 5 waves (1 up, 2 down, 3 up, 4 down, 5 up). The last such bull wave lasted from 1974-99, which I have labeled (in the chart below) as Super Cycle Wave III. After 1999, the S&P 500 completed an XYZ wave in March 2009, which I labeled as a larger Wave X.
What is surprising (given the magnitude of the launch), is that the wave up from the 2009 low to now (April 2019) does not have any true 5 wave sequences in the impulse waves. It is a double 3 wave affair (ABC X A now B with C to come or a Double Three Pattern). This can happen only if Wave Y is an irregular topping wave. For this wave to have gone this far up (and looking to go higher in the next 2-3 years) means to me that it is likely what Elliott termed a “rare” Running Correction pattern since 1999.
A Running Correction basically exceeds the previous top (SPX 1552 Wave III-1575 Wave Y of [X]) by the same percentage amount it fell below the top (Wave Z of [X] 2009) completing Wave [Y] and then falls back to test that area in Wave [Z]. Wave [Z] then completes Super Cycle Wave IV, launching the final Super Cycle Wave V.
One of Elliott’s Rules was called the “Rule of Alternation”, that is if Wave 2 was simple, Wave 4 would be complex and vice versa. Wave 2 and 4 could never be the same pattern, no matter what. Wave 2 (1966-74) was a simple expanding flat (x-y-z [X], a-b-c [Y] and a-b-c [Z]) lasting some 8-9 years (same as [X] of SC Wave IV 1999/2000-2009).
The problem is: the sideways x-y-z pattern of 1999-2009 was too similar to the “1966-74 wave pattern”. This makes Wave IV the complex wave pattern in the sequence. The fact that Wave Y of IV has gone this high and looks to be going higher in the years to come, goes beyond the scope of a normal irregular top (like the one we are now since December 2018, Wave Y of “B”, see chart below).
Normally, in past 80-90 year cycles, we have seen huge sell-offs (e.g., 1929-32 down 89%, the deflationary bear market of the 1840-1850’s, and the British Panic of 1772). Each one of these depression sell-offs have occurred right before major wars (e.g., American Revolution, American Civil War, WWII).
There are a lot of forecasters that are forecasting doom and gloom in the next few years. In fact, there are too many of them. As a contrarian, this concerns me, as I used to be in that camp. Based on Elliot Wave and my cycle work, I think the worst we see is a repeat of 2007-09 by 2024. I see a lot of market pundits touting silver and gold as hedge against the coming calamity. My methods tell me different: we are in a continuing bear market in precious metals like gold and silver until 2023 (more on this sector at another time).
Getting back to the stock market, I see a nice pull back in May called Wave “b” of Y associated with the 20 week cycle before we go much higher into July of this year (S&P 500 3170?). As I write this article (April 26, 2019), I see at least one more move higher into April 29th, probably above 2960, before the market corrects in Wave “b”.
Next week, I’ll be writing about the wave structure from Dec 26- April 29 and what we might see in May on the downside before the market resumes higher into July.
(Every 83-84 years, Uranus enters into Taurus for 8-9 years. These periods have been marked in history by social revolutions, economic depressions, technological innovations; currency, banking and agricultural changes. Our current period 2018-26 is one such period.)
