Arşiv: 26 Mayıs 2009

DJI/S&P500 and EDPTuncer Şengöz - 26 Mayıs 2009

Ralph Nelson Elliott’s “The Wave Principle” was published, in 1938. The editors announced his work as “new developments in the art of interpretation of stock market movements”. But in his work, Elliott has been claiming that he discovered much from just an interpretation method; he introduced his principle as the nature’s law.

This is what R.N. Elliott writes in “The Wave Principle” :

Since the beginning of time, rhythmic regularity has been the law of creation. Gradually man has acquired knowledge and power from studying the various manifestations of this law. The effects of the law are discernible in the behavior of the tides, the heavenly bodies, cyclones, day and night, even life and death. This rhytmic regularity is called a cycle.

The trade cycle and the bull and bear movements of the stock market are also governed by the same natural law.

Gradually the wild, senseless and apparently uncontrollable changes in prices from year to year, from month to month, or from day to day, linked themselves into a law-abiding rhythmic pattern of waves. This pattern seems to repeat itself over and over again. With knowledge of this law or phenomenon (that I have called the Wave Principle), it is possible to measure and forecast the various trends and corrections that go to complete a great cycle.

So, where are we in the great cycle of Dow Jones Industrail Average?

In order to forecast where the index headed in the coming months and years, we must understand in what degree a wave was completed when Dow Jones Industrial index hit the final top on October 2007.

The great bull cycle started after the final bottom was hit in 1932, following the great stock market crash in 1929-1932 period. Market recovered gradually from the intra-day low of 40.56 in July 8,1932 and rose to 194 from 1932 to 1937. This 5 year bull market is marked as the wave [1] in primary degree. Then came a 5 year correction and DJI hit the low of  1942 under 100. This wave is marked as [2]. From 1942 to the orthodox top of 1966, index rose to the famous “magic 1,000” resistance in five sub-waves and this 24 year bull market is marked as wave [3].

dji_hist04091.jpg

Total gain from 1932 low to 1966 top was 2280% and duration of this wave was a total of 34 years. From 1966 to 1974, index fluctuated around 750 level. When the final low was hit in 1974, the correction was completed in an expanding triangle pattern. Then came the recovery and the market formed an extension wave. This extended wave overthrew the upper band of historical rising channel and hit 14,198 on October 2007.

The upper band of a rising channel is overthrown only in investment manias, and there is no doubt that from 1995 to 2007, the markets stayed in an investment mania phase of the great bull cycle. This statement is true from a fundamental point of view, too, since all of the fundamental ratios were signaling extremely expensive levels, in historical proportions.

Dow Jones Industrial Average held a total of 13 years above the upper band of rising channel, even in the 2000-2003 intermediate bear market, upper channel worked well as a technical support. Then came the 2008 crash, and DJI finally broke the upper band and fell down to the rising channel area. So the end of the historical investment-mania era is confirmed.

Studying the bull and bear market mini-cycles, it is easy to find that, all uptrend and correction periods were completed in Fibonacci numbers. Besides, waves from 1932 to 1966, which lasted 34 years was almost equal to the wave from 1974 to 2007 both in magnitude and duration. Rather than thinking this is just a random phenomenon, it will be wise to think that Elliott Wave Principle worked perfectly, within this 75 years period and the market formed an ideal five wave pattern in almost three generations lifetime.

So, what’s next?

dji_hist04092.jpg

Since we concluded that the wave pattern from 1932 to 2007 is completed, we must expect a correction proportional to this wave, in both magnitude and time.
It’s amazing to discover that, even if the index falls down to 4,000-5,000 range within 2 to 5 years, [2]-[4] trendline will be kept unbroken. So, the first statement we must make is that: Trendline from 1942 to 1974-1982 lows must be broken ultimately. Technically the end of this mega-trend wil be confirmed after the break of the trendline. Then from the Elliott Wave perspective, we must wait for the index to fall all the way down to the sub-wave 4 level of the previous wave number (3). Thus we come to the conclusion that 1,600-2,750 range is the “minimum” price target of the correction.

Then comes the question: In which pattern the correction must unfold and what is the time target of the final bottom?

dji_hist04093.jpg

Since the final stage of the 1932-2007 bull cycle, namely 1974-2007 wave is an extended sub-wave of this mega-trend, the correction will probably be completed in a double-zigzag form, which is another guideline of the Elliott Wave Principle.
Let’s take a look at our quarterly DJI chart: After the break of 7,200-7,500 support range, a head and shoulders top formation is now equivocal. There is still a chance for the index to rise above this resistance range and hold above. But if another leg of the crash occurs in the short term and DJI falls down to 4,000-5,000 range and thereby wave [A] will be completed somewhere over there, after a bearish rally (which will be labeled as wave [B]) 1942-1974 trendline will be broken. This will be marked as wave [C].

Such a price action will complete the first zigzag of the correction. The size of the first [A] wave of the correction will signal that the next leg may go all the way down to the 1,600-2,750 range, which we predicted to be the minimum price target of the correction.

[X] waves are defined as the corrections which seperate two legs of double zigzags. [X] waves are either shorter or longer than both of the zigzags. So, after the completion of the first zigzag, DJI will either form a huge primary degree sideways pattern, or a brief sharp upward zigzag correction. This huge correction will probably be followed by another zigzag pattern, which may drift the index to 500-1,000 range. According to my prediction, the final bottom will be hit in this range.

What about the time element of the correction? Since the correction will be in proportion to 1932-2007 bull market, minimum time needed for the correction to end is 18-21 years, which leads me to think that this correction should end in 2028-2030 period. This period as a time target sounds reasonable, since a perfect symmetry will occur on the historical chart: 1974 bottom will divide the line from 1932 to the final bottom in Golden section in the time axis. Likewise, 2007 top will divide the line from 1974 to the final bottom, in Golden section.

This prediction may sound weird, but one must ask himself/herself, if it wasn’t weird to predict 14,000’s in 1980’s when DJI was just breaking the magic 1,000 resistance.

(Quotations are from the book R.N. Elliott’s Masterworks, Edited by Robert R. Prechter, New Classics Library)

Yasal Uyarı
Burada yer alan yatırım bilgi, yorum ve tavsiyeleri yatırım danışmanlığı kapsamında değildir. Yatırım danışmanlığı hizmeti; aracı kurumlar, portföy yönetim şirketleri, mevduat kabul etmeyen bankalar ile müşteri arasında imzalanacak yatırım danışmanlığı sözleşmesi çerçevesinde sunulmaktadır. Burada yer alan yorum ve tavsiyeler, yorum ve tavsiyede bulunanların kişisel görüşlerine dayanmaktadır. Bu görüşler mali durumunuz ile risk ve getiri tercihlerinize uygun olmayabilir. Bu nedenle, sadece burada yer alan bilgilere dayanılarak yatırım kararı verilmesi beklentilerinize uygun sonuçlar doğurmayabilir.