🔸April 6, 1983
A Rising Tide The Case For Wave V In The Dow Jone Industrial Average
In 1978, A.J. Frost and I wrote a book called Elliott Wave Principle, which was published in November of that year. In the forecast chapter of that book, we made the following assessments:
That wave V, a tremendous bull market advance, was required in order to complete the wave structure that began in 1932 for the Dow Industrial Average.
That there would be no “crash of ’79” and in fact no ’69-’70 or ’73-’74 type decline until wave V had been completed.
That the 740 low in March 1978 marked the end of Primary wave ② and would not be broken.
That the bull market in progress would take a simple form, unlike the extended advance from 1942 to 1966.
That the Dow Industrial Average would rise to the upper channel line and hit a target based on a 5x multiple of the wave IV low at 572, then calculated to be 2860.
if our conclusion that 1974 marked the end of wave IV was correct, the fifth-wave peak would occur in the 1982-1984 time period, with 1983 being the most likely year for the actual top [and 1987 the next most likely].
That “secondary” stocks would provide a leadership role throughout the advance.
After wave V was completed, the ensuing crash would be the worst in U.S. history.
One thing that continuously surprised us since we made those arguments was how long it took the Dow Jones Industrial Average finally to lift off. The broad market averages continued to rise persistently from 1978, but the Dow, which appeared to mirror more accurately the fears of inflation, depression and international banking collapse, didn’t end its corrective pattern, dating from 1966, until 1982. (For a detailed breakdown of that wave, see The Elliott Wave Theorist, September 1982 issue.) Despite this long wait, it fell only briefly beneath its long-term trendline, and the explosive liftoff finally began when that downside break failed to precipitate any significant further selling.
If our overall assessment is correct, the forecasts Frost and I made based on the Wave Principle back in 1978 will still occur, with one major exception: the time target. As we explained in our book, R.N. Elliott said very little about time, and in fact our estimate for the time top was not something that the Wave Principle required, but simply an educated guess based on the conclusion that Wave IV in the Dow ended in 1974. When it finally became clear that the long sideways wave IV correction hadn’t ended until 1982, the time element had to be shifted ahead to compensate for that change in the assessment. At no time was there a doubt that wave V would occur; it was only a matter of when, and after what.
I would like to take this space to answer these important questions:
Has the sideways correction in the Dow that began in 1966 actually ended?
If so, how big a bull market can we expect?
What will be its characteristics?
What will happen afterwards?
1) In 1982, the DJIA finished a correction of a very large degree. The evidence for this conclusion is overwhelming.
First, as those who take the Wave Principle seriously have argued all along, the pattern from 1932 [see Figure A-8] is still incomplete and requires one final rise to finish a five-wave Elliott pattern. Since a Supercycle crash was not in the cards, what has occurred since 1966 is more than adequate for a correction of Cycle degree (the same degree as the 1932-1937, 1937-1942 and 1942-1966 waves).
Figure A-8
Figure A-9
Second, the sideways pattern from 1966 (or arguably 1964 or 1965, if you enjoy talking theory) pushed to the absolute limit the long-term parallel trend channel from 1932. As you can see in the illustration from Elliott’s own Nature’s Law [see Figure A-9], it is an occasional trait of fourth waves that they will break beneath the lower boundary of the uptrend channel just prior to the onset of wave five. The price action in 1982 simply leaves no more room for the correction to continue.
Third, the pattern between the mid-’60s and 1982 is another wonderful real-life example of standard corrective formations outlined by Elliott over forty years ago. The official name for this structure is a “double three” correction, which is two basic corrective patterns back-to-back. In this case, the market traced out a “flat” (or by another count, a[n unorthodox] triangle [from 1965]) in the first position and an “ascending [barrier] triangle” in the second, with an intervening simple three-wave advance, labelled “X,” which serves to separate the two-component patterns. Elliott also recognized and illustrated the occasional propensity for the final wave of a triangle to falling out of the lower boundary line, as occurred in 1982. The doubling of a correction is moderately rare, and since the 1974 low had already touched the long term uptrend line, Frost and I weren’t expecting it. Moreover, a “double three” with a triangle in the second position is so rare that in my own experience it is unprecedented.
Fourth, the pattern has some interesting properties if treated as a single formation, that is, one correction. For instance, the first wave of the formation (996 to 740) covers almost exactly the same distance as the last wave (1024 to 777). The advancing portion, moreover, takes the same time as the declining portion, 8 years. The symmetry of the pattern prompted Frost and me to come up with the label “Packet Wave” in 1979, to describe a single pattern starting at “rest,” going through wider, then narrower swings, and returning to the point from which it began. (This concept is detailed in the December 1982 issue of The Elliott Wave Theorist.) Using the alternate count of two triangles, it happens that the middle wave (wave C) of each triangle covers the same territory, from the 1000 level to 740. Numerous Fibonacci relationships occur within the pattern, many of which were detailed in a Special Report of The Elliott Wave Theorist dated July 1982. Far more important, however, is the Fibonacci relationship of its starting and ending points to part of the preceding bull market. Hamilton Bolton made this famous observation in 1960:
Elliott pointed out a number of other coincidences. For instance, the number of points from 1921 to 1926 were 61.8% of the points of the last wave from 1926 to 1928 (the orthodox top). Likewise in the five waves up from 1932 to 1937. Again the wave from the top in 1930 (297 DJIA) to the bottom in 1932 (40 DJIA) is 1.618 times the wave from 40 to 195 (1932 to 1937). Also, the decline from 1937 to 1938 was 61.8% of the advance from 1932 to 1937. Should the 1949 market to date adhere to this formula, then the advance from 1949 to 1956 (361 points DJIA) should be complete when 583 points (161.8% of the 361 points) have been added to the 1957 low of 416, or a total of 999 DJIA.
Figure A-10
So in projecting a Fibonacci relationship, Bolton forecast a peak that turned out to be just three points from the exact hourly reading at the top in 1966. But what was largely forgotten (in the wake of A.J. Frost’s successful forecast for the wave IV low at 572, which was borne out in 1974 at the hourly low of 572.20) was Bolton’s very next sentence:
Alternately, 361 points over 416 would call for 777 in the DJIA.
Needless to say, 777 was nowhere to be found. That is, until August 1982. The exact orthodox low on the hourly readings was 776.92 on August 12. In other words, Bolton’s calculations [see Figure A-10] defined the exact beginning and end of wave IV in advance, based on their relationships to the previous price structure. In price points, 1966-1982 is .618 of 1957-1982 and of 1949-1956, each of which, being equal, is .618 of 1957-1966, all within 1% error! When weekly and monthly patterns work out time after time to Fibonacci multiples, the typical response from Wall Street observers is, “Another coincidence.” When patterns of this size continue to do it, it becomes a matter of faith to continue to believe that Fibonacci multiples are not characteristic of the stock market. As far as I know, Bolton is the only dead man whose forecasts continue to fit the reality of Wall Street.
From these observations, I hope to have established that Cycle Wave IV in the DJIA, which the “constant dollar Dow” clearly supports as a single bear phase, ended in August 1982.
2) The advance following this correction will be a much bigger bull market than anything seen in the last two decades. Numerous guidelines dealing with normal wave behaviour support this contention.
First, as Frost and I have steadfastly maintained, the Elliott wave structure from 1932 is unfinished and requires a fifth wave advance to complete the pattern. At the time we wrote our book, there was simply no responsible wave interpretation that would allow for the rise beginning in 1932 already to have ended. The fifth wave will be of the same degree and should be in relative proportion to the wave patterns of 1932-1937, 1937- 1942, 1942-1966, and 1966-1982.
Second, a normal fifth wave will carry, based on Elliott’s channelling methods, to the upper channel line, which in this case cuts through the price action in the 3500-4000 range in the latter half of the 1980s. Elliott noted that when a fourth wave breaks the trend channel, the fifth will often have a throw-over, or a brief penetration through the same trend channel on the other side.
Third, an important guideline within the Wave Principle is that when the third wave is extended, as was the wave from 1942 to 1966, the first and fifth waves tend toward equality in time and magnitude. This is a tendency, not a necessity, but it does indicate that the advance from 1982 should resemble the first wave up, which took place from 1932 to 1937. Thus, this fifth wave should travel approximately the same percentage distance as wave I, which moved in nearly a 5x multiple from an estimated (the exact figures are not available) hourly low of 41 to an hourly peak of 194.50. Since the orthodox beginning of wave V was 777 in 1982, an equivalent multiple of 4.744 projects a target of 3686. If the exact hourly low for 1932 were known, one could project a precise number, Bolton style, with some confidence. As it stands, the “3686” number should be taken as probably falling within 100 points of the ideal projection (whether it comes true is another question).
Fourth, as far as time goes, the 1932-1937 bull market lasted five years. Therefore, one point to be watching for a possible market peak is 5 years from 1982, or 1987. Coincidentally, as we pointed out in our book, 1987 happens to be a Fibonacci 13 years from the correction’s low point in 1974, 21 years from the peak of Wave III in 1966, and 55 years from the start of wave I in 1932. To complete the picture, 1987 is a perfect date for the Dow to hit its 3686 targets since, to reach it, the Dow would have to burst briefly through its upper channel line in a “throw-over,” which is typical of exhaustion moves (such as the 1929 peak). Based on a 1.618-time multiple of the time of wave I and on equality to the 1920s fifth Cycle wave, an 8-year wave V would point to 1990 as the next most likely year for a peak. It would be particularly likely if the Dow is still substantially below the price target by 1987. Keep in mind that in wave forecasting, time is a consideration that is entirely secondary to both waveform, which is of primary importance, and price level.
Fifth, while the Dow Industrial Average is only in its first Primary wave advance within Cycle Wave V, the broader indexes began Wave V in 1974 and are already well into their third Primary wave [see Figure A-12]. These indexes, such as the Value Line Average, the Indicator Digest Average and the Fosback Total Return Index, are tracing out a traditional extended third, or middle wave, and have just entered the most powerful portion. Estimating conservatively, 60% of five-wave sequences have extended third waves, so this interpretation is along the lines of a textbook pattern, whereas attempts to interpret the broader indexes as being in their fifth and final wave are not. With a third wave extension under way in the broad indexes, a good deal of time will be necessary to complete the third wave, and then trace out the fourth and fifth waves. With all that ahead of us, the size of the current bull market will have to be substantial.
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