Sunday, March 15, 2009

Ride The Elliott Wave

Elliott Wave Theory is a technical analysis concept going back to the 1930s developed by Ralph Elliott that proposes that market prices unfold in specific patterns, or Elliott Waves. The overall pattern consists of a 5 wave dominant trend and a 3 wave corrective trend. Within the dominant trend waves 1, 3, and 5 go in the direction of the trend, while waves 2 and 4 correct waves 1 and 3. For a more detailed explanation of this concept please click on the links provided.

I wanted to take a look at the current wave structure to see where we are in the bear market. Corey Rosenberg had an excellent article regarding this topic over at The Disciplined Investor last week and it really caught my eye.

A Large-Scale Wave Count on the S&P 500 Monthly Chart places us in Wave C of a very large three-wave correction that began in 2000. The Peak in 2000 represented a final 5th Wave most likely of a larger 3rd Wave, which puts the whole Bear Market from 2000-2009 into context as an ABC Three-Wave Correction of a larger 4th Wave.

Wave A formed at the 2000 peak down to the 2002/2003 lows, while Wave B was a rally back up to retrace just over 100% of Wave A which lasted from 2003 until 2007, and we are currently in the third corrective Wave “C”.

The market peak occurred in October 2007 which began the C-Wave Correction Down which has just broken to new lows beneath the A-Wave (2002 Bear Market) lows as expected. Reference the “Ideal” Elliott Wave Count diagram - C Waves almost always break to new lows beneath Wave A in a correction.

Noting the Wave Structure from 2007, we see that a 5-wave formation is very near completion, and as of this writing, it would seem that a fractal fourth (4) wave up followed by a fractal fifth (5) wave down would complete the 5-Wave major decline from the 2007 peak and suggest that a large-scale Three Wave Correction to the Upside - which could last months or longer - is expected next according to Elliott Wave Theory.

So this can make the claim that the worst is over as we are in the final stages of the 5th wave down in the bear market that began almost 18 months ago now. Of course the other side to this argument is that we are only in a very extended wave 3 down in the bear market and still have a retracement higher to come before the final wave of selling makes new lows.

So which one is it? I honestly am not an expert in Elliott Wave Theory, and only a student. But I would think at the very least what began last week was the 4th minor wave within the primary 5th wave down in the bear market. Assuming this, that would mean we retrace a bit more this week before eventually falling back to retest the 666 lows on the SPX and completing the 5th minor wave within the 5th overall primary wave.

Whatever it may be, it is worth paying attention to, and like everything regarding technical analysis, not one single tool or method is always right.

1 comment:

Mike said...

I think we are in an Irregular Correction.