🔸8.1 Elliot Speaks
Last updated
Last updated
While it may be quite dangerous to attempt the “impossible,” a long-term prediction for the stock market, we have decided to run the risk, if only to demonstrate the methods we use to analyze the position of the market in terms of the Wave Principle. The risk lies in the problem that if our thinking changes course during the next few years along with the stock market, this book will remain unaltered in its presentation of our analysis, which is based on our knowledge as of early July, 1978. We can only hope that our readers will not reject outright the theory of the Wave Principle because one rather daring prediction happens not to work out. With our reservations stated at the outset, we proceed directly to our analysis.
In Elliott terms, the Supercycle bull move that began in 1932 has nearly run its course. Currently, the market is within a bull phase of Cycle degree, which in turn will be composed of five waves of Primary degree, two of which have likely been completed. Several conclusions can already be drawn from the long term picture. First, stock prices should not develop a bear market downswing similar to 1969-70 or 1973-74 for several years to come, most likely not until the early or middle eighties, at least. Next, “secondary” stocks should be leaders during the entire Cycle Wave V, [but to a lesser degree than they were in Cycle Wave III]. Finally, and perhaps most important, this Cycle wave should not develop into a steady, prolonged 1942-66 type of bull market since within a wave structure of any degree, generally, only one wave develops an extension. Therefore, since 1942 to 1966 was the extended wave, the current Cycle bull market should resemble a simpler structure and a shorter time period such as the 1932-37 and 1921-29 markets.
With the DJIA in a persistent downtrend until just recently, pervasive pessimism has worked to produce several distorted “Elliott” interpretations that call for a calamitous decline to emerge from what is only a Primary second wave correction. Targets below 200 DJIA have been forecast for the near future by taking Elliott’s principles and twisting them into pretzels. To such analyses, we can only quote Hamilton Bolton from page 12 of the 1958 Elliott Wave Supplement to the Bank Credit Analyst, in which he states:
Whenever the market gets into a bear phase, we find correspondents who think that “Elliott” can be interpreted to justify much lower prices. While “Elliott” can be interpreted with considerable latitude, it still cannot be twisted entirely out of context. In other words, as in amateur vs. professional hockey, you can change some of the rules, but basically, you must stick to the ground rules, or else you are in danger of creating a new game.
The most bearish allowable interpretation, as we see it, is that Cycle wave IV is not yet over, and that the final wave down is still in progress. Even given this case, the maximum expected low is 520 DJIA, the low of wave ④ in 1962. Based on the trend channel we have constructed in Figure 5-5 however; we have assigned this scenario a very low probability.
Basically, two plausible interpretations present themselves at the current time. Some evidence suggests the formation of a large diagonal (see Figure 8-1) that could be constructed entirely by stampede-type swings and persistent intervening declines. Since October 1975 low at 784.16 was broken in January 1978, leaving behind what could be a three-wave Primary advance, the diagonal seems quite a plausible Cycle bull market scenario, since in a diagonal each of the actionary waves is composed of three waves rather than five. Only because this Cycle wave beginning in December 1974 is a fifth in the Supercycle is it possible that a large diagonal is being formed. Since a diagonal is essentially a weak structure, our ultimate upside target may have to be reduced to the 1700 area if this case indeed develops. To date, the drastic underperformance of the DJIA relative to the rest of the market seems to support this thesis.
Figure 8-1
The most convincing alternative to the diagonal scenario is that all of the action from July 1975 to March 1978 is a large A-B-C expanded flat correction similar to the 1959-62 market pattern. This interpretation is illustrated in Figure 8-2 and suggests a very strong upward thrust to follow. Our target should be easily met if this interpretation turns out to be correct.
Our price projection for the Dow comes from the tenet that two of the impulse waves in a five-wave sequence, especially when the third is the extended wave, tend toward equality in length. For the current Cycle wave, semilogarithmic (percentage) equality to wave I from 1932 to 1937 puts the orthodox high of the market close to 2860 [2724 using an exactly equivalent 371.6% gain], which is quite a reasonable target since trendline projections suggest highs in the 2500 to 3000 area. For those who think these numbers are ridiculously high, a check of history will verify that such percentage moves in the market are not uncommon.
Figure 8-2
It is a fascinating comparison that like the nine years of “work” under the 100 level prior to the bull market of the 1920s, the last fifth Cycle wave, the Dow has currently concluded thirteen years of work under the 1000 level. And, as the Dow’s orthodox peak in 1928 occurred at 296 according to Elliott’s interpretation, the next peak is estimated at about the same relative level, although an expanded flat correction could carry the averages into even higher ground temporarily. We expect the terminal point to be close to the upper Supercycle channel line. If there is a throw-over, the ensuing reaction could be breathtakingly fast.
If the interpretation of the current market status presented in Figure 8-2 is correct, a reasonable picture of the 1974-87 market progression could be constructed by attaching a reverse inverted image of the 1929-37 period onto the recent March 1978 low at 740, as we have done in Figure 8-3. This picture is only a suggestion of the profile, but it does provide five Primary waves with the fifth extending. The rule of alternation is satisfied, as wave ② is a flat and wave ④ is a zigzag. Remarkably, the rally that would be scheduled for 1986 would halt exactly on the dotted line at 740, a level whose importance already has been established (see Chapter 4). Since the 1932-37 Cycle bull market lasted five years, its addition to the current level after three years of bull market gives a length of eight years (1.618 times the length of wave I) for the current Cycle wave.
Figure 8-3
To bolster our conclusions with regard to the time element, let us first examine Fibonacci time sequences from some of the major turning points in the market, starting with 1928-29.
The reverse Fibonacci timetable in Chapter 4 points to the same years as turning point years.
The above formulas relate only to time and considered alone pose the question of whether 1982-84 will be a top or a bottom and whether 1987 will be a top or a bottom. From the context of the previous market structure, however, one would expect the 1982-84 period to be a major top area and 1987 a major low. Since the third wave constituted an extension, the first and fifth waves will be the shortest in this Supercycle. Since wave, I was five years long, a Fibonacci number, wave V could well be eight years long, the next Fibonacci number, and last through the end of 1982. A certain symmetry, often evident in wave structures, will be created if waves IV and V are each eight years long, since waves I and II were each five years long. Furthermore, the total time length of waves I, II, IV and V will then be approximately equal to the entire period of the extended wave III.
Another ground for concluding that the 1982-84 zone is the probable terminal area of the current Supercycle V is purely arithmetical. An advance within the trend channel containing the price action of the current Supercycle should reach the upper parallel line at our price objective near 2860 in about 1983.
Some additional perspective may be gained from the Benner-Fibonacci Cycle chart shown in Figure 4-17 which, as we demonstrated, was used quite successfully in forecasting broad stock market movements from 1964 to 1974. At least for the time being, Benner’s theory seems to substantiate our conclusions about the future, since at this time it clearly calls for a high in 1983 and a deep low in 1987. However, while we expect the projections to hold for the next decade, like all other cycle formulas, it could very well fade in the next down Supercycle.
Even the fifty-four-year economic cycle discovered by Nikolai Kondratieff, which we discussed in Chapter 7, suggests that 1987, being fifty-four years from the depression depths of 1933, would be well within a reasonable time period for some kind of stock market bottom, especially if the current plateau period generates enough optimism to allow for a strong stock market prior to that time. One of our objections to the “killer wave” occurring now or in 1979, as most cycle theorists suggest, is that the psychological state of the average investor does not seem poised for a shock of disappointment. Most important stock market collapses have come out of optimistic, high-valuation periods. Such conditions definitely do not prevail at this time, as eight years of a raging bear market have taught today’s investor to be cautious, conservative and cynical. Defensiveness is not in evidence at tops.
O.K., what next? Are we in for another 1929 to 1932 period of chaos?
In 1929, as bids were withdrawn, “air pockets” developed in the market structure, and prices tumbled precipitously. The best efforts of the leaders of the financial community could not stem the panic once the tides of emotion took control. Situations of this nature that have happened over the last two hundred years usually have been followed by three or four years of chaotic conditions in the economy and the markets. We have not seen a 1929 situation in fifty years and, while it is to be hoped that it never recurs, history suggests otherwise.
In fact, four fundamental changes in market conditions may be part of the basis for a real panic sometime in the future. First is the increasing institutional dominance of the market, greatly magnifying the impact of one man’s emotions on the behaviour of the market, since millions or even billions of dollars may be under the control of one man or a small committee. Second, is the birth of the options market, where many “little guys” will have their stake as the market approaches its peak. In that situation, billions of dollars worth of paper assets could disappear in a day’s trading on the NYSE. Third, the change in the holding period from six months to one year for declaration of long term gains could exacerbate the “can’t sell” syndrome of those who insist upon logging only long-term gains for tax purposes. Finally, the SEC-mandated abolition of the specialists’ role on the NYSE, which will force the securities industry to operate a dealer’s market, could necessitate some brokerage firms to assume very high equity positions in order to maintain a liquid market, thus leaving them quite vulnerable in a precipitous decline.
A panic is an emotional problem, not an Elliott problem. The Wave Principle simply warns the investor of impending changes in the trend of the market for better or for worse. Deciding what to look for in the next ten years is more important than trying to predict what definitely to expect. No matter how we struggle with long term future probabilities, our interpretations must remain tentative until the fifth Minor wave of the fifth Intermediate of the fifth Primary is under way from the 1974 low. As the “fifth of the fifth” nears its terminal point, the Elliott wave analyst should be able to recognize the end of the Cycle bull market in stocks. In analyzing market movements under the tenets of the Wave Principle, remember that it is always the count that is most significant. Our advice is to count correctly and never, never proceed blindly on the assumptions of a preconceived scenario. Despite the evidence presented here, we will be the first to discard our predictions if the waves tell us we must.
If our scenario proves correct, however, a new Grand Supercycle will get under way once the current Supercycle V has terminated. The first phase could end about 1987 and bring the market down from its peak to about the 1000 level again. Eventually, the Grand Supercycle bear should carry to its expected target within the range of the previous Supercycle fourth wave, between 41 and 381 on the Dow. However, we certainly do not make any definite forecast, despite our suspicions, with respect to a panic occurring directly after the peak. The market often does move impulsively during A waves, but precipitous action more assuredly develops in C waves of A-B-C formations. Charles J. Collins, however, fears the worst when he states,
My thought is that the end of Supercycle V will probably also witness a crisis in all the world’s monetary hijinks and Keynesian tomfoolery of the past four and one-half decades and, since wave V ends a Grand Supercycle, we then had better take to the hurricane shelters until the storm blows over.
