🔸April 6, 1983 (Continued)

3) Now that the likelihood of wave V occurring has been established and its size and shape estimated, it might be helpful to assess its probable characteristics.

First, the advance should be very selective, and rotation from one group to another should be pronounced. Breadth during wave V should be unexceptional, if not outright poor relative to the spectacular breadth performance in the monolithic markets of the 1940s and ’50s, during wave III. Since it’s an impulse wave, however, it will certainly be broader than anything we saw within wave IV from 1966 to 1982.b

*A moment’s thought explains the reason why the wave V advance will be thin in relationship to waves I and III. In a fifth wave, the prolonged “bull” move is coming to its conclusion, and relative to the corrections within that bull phase, major damage is due to follow. In long term waves, fundamental background conditions have by then deteriorated to the point that fewer and fewer companies will increase their prosperity in the environment of the upswing. (It seems clear to me that these conditions exist today on a Supercycle basis.) Thus the bull market, while providing huge opportunities for profit, becomes observably more selective, as reflected by an underperforming advance-decline line and fewer days of abundant “new highs” in stocks. Have you noticed how, since the 1974 low, stocks have rarely gone up all at once, but prefer to advance selectively, a few groups at a time?

* The next two paragraphs are from the April 11, 1983 issue of The Elliott Wave Theorist, published five days later. The sentences before and after the asterisk include wording from the December 1982 issue.

Figure A-11

All degrees of non-extended (and even most extended) fifth waves act this way, which is exactly what causes standard “sell signals” based on divergence. The problem is that most analysts apply this concept only to the near or intermediate term swings. However, it is just as true of Supercycle swings as the smaller ones. In effect, the flat a-d line of the 1920s [see Figure A-11] was a “sell signal” for the entire advance from 1857. Similarly, the flat a-d line in the mid-’60s was a “sell signal” for the 1942-1966 bull market. A relatively poorly performing a-d line from 1982 to (I expect) 1987 will be a “sell signal” for the entire Supercycle from 1932. The lesson for now is, don’t use that underperformance as a reason to sell too early and miss out on what promises to be one of the most profitable uplegs in the history of the stock market.

Figure A-12

Second, this bull market should be a simple structure, more akin to 1932-1937 than to 1942-1966. In other words, expect a swift and persistent advance, with short corrections, as opposed to long rolling advances with evenly spaced corrective phases. Large institutions will probably do best by avoiding a market timing strategy and concentrating on stock selection, remaining heavily invested until a full five Primary waves can be counted.

Third, the wave structure of the Dow and that of the broader indexes should fit together. If the count based on our 1978 interpretation [see Figure A-12] is still the correct one, then it is the same as that for the broad indexes, and their waves will coincide. If the preferred count is the correct one, then I would expect the third wave in the broad indexes to end when the Dow finishes its first wave, and the fifth wave in the broad indexes to end when the Dow finishes its third wave. That would mean that during the Dow’s fifth wave, it would be virtually alone in making new highs, as market breadth begins to thin out more obviously. At the ultimate top, then, I would not be surprised to see the Dow Industrials in new high ground, unconfirmed by both the broad indexes and the advance-decline line, creating a classic technical divergence.

Finally, given the technical situation, what might we conclude about the psychological aspects of wave V? The 1920s bull market was a fifth wave of a third Supercycle wave, while Cycle wave V is the fifth wave of a fifth Supercycle wave. Thus, as the last hurrah, it should be characterized, at its end, by an almost unbelievable institutional mania for stocks and a public mania for stock index futures, stock options, and options on futures. In my opinion, the long term sentiment gauges will give off major trend sell signals two or three years before the final top, and the market will just keep on going. In order for the Dow to reach the heights expected by the year 1987 or 1990, and in order to set up the U.S. stock market to experience the greatest crash in its history, which, according to the Wave Principle, is due to follow wave V, investor mass psychology should reach manic proportions, with elements of 1929, 1968 and 1973 all operating together and, at the end, to an even greater extreme.

4) If all goes according to expectations, the last remaining question is, “what happens after wave V tops out?”

The Wave Principle would recognize the 3686 top as the end of wave V of (V), the peak of a Grand Supercycle. A Grand Supercycle bear market would then “correct” all the progress dating from the late 1700s. The downside target zone would be the price area (ideally near the low*) of the previous fourth wave of lesser degree, wave (IV), which fell from 381 to 41 on the Dow. Worldwide banking failures, government bankruptcy, and eventual destruction of the paper money system might be plausible explanations** for a bear phase of this magnitude. Since armed conflicts often occur after severe financial crises, one would have to consider the possibility that the collapse in value of financial assets of this magnitude would presage war between the superpowers. Regarding time, either wave (A) or wave (C) of the Grand Supercycle correction should bottom in 1999, + or - 1 year, based on several observations. From a 1987 top, a decline matching the 13 years up from 1974 would point to the year 2000. From a 1990 top, a decline matching the 8 years up from 1982 would point to 1998. It also happens that the very regular recurrence of turning points at 16.6-16.9-year intervals [see Figure A-8, bottom] projects 1999 for the next turning point. Finally, with the Kondratieff economic cycle due to bottom in 2003 (+ or - 5 years), a stock market low a few years prior to that time would fit the historical pattern.

* More likely near the high; see At the Crest of the Tidal Wave. (The daily closing high was 381.17; the intraday high was 383.00.)

** Results, actually.

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