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business newsThe Big Picture: SPX Long-Term Count and Projections
By
Jason Haver
Oct 03, 2011 3:10 pm
Here, how Elliot Wave Theory can help predict the market's next move.
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R.N. Elliott originally discovered the theory through his detailed study of decades of price charts. What he found was that the market advances its position forward (note: "forward," not "up" -- advancement is relative to what the market is trying to accomplish, either up or down) in five-wave moves: wave one forward, wave two back, wave three forward, wave four back, wave five forward. It then corrects that advance in three-wave moves in the opposite direction: A forward, B back, C forward. The moves that advance the market's larger trend are called "motive" waves, and the moves against the larger trend are "corrective" waves. What is most interesting is that these fractals apply across all time frames; so each advancing wave within a motive wave (waves one, three, and five) is composed of an even smaller five-wave sequence. And each correction in a motive wave (waves two and four) is formed by an even smaller three wave correction. Further, each advancing wave inside the corrective wave (waves A and C) is formed by a five wave motive wave; but wave B is of course formed by -- you guessed it -- a smaller three-wave correction... and so on, ad infinitum.
Got it?
No? Alright, fair enough, it's easier to understand when you see it on a diagram:
As a result of the fractal nature of the market, R.N. Elliott was also able to determine certain rules that govern price movements. For example, wave 4 never crosses into the territory of wave 1 (except during special patterns, which I won't be getting into here since this isn't intended to be a book). There are other rules that govern the length of waves, and so on. Having concrete rules that govern price movement means that the market in essence "locks" itself into certain future behavior; once part of the fractal is formed, it must be completed. This often affords a high degree of predictive value.
To glimpse the predictive value here, let's use the current SPX chart as an example. The market made its all-time-high in 2007. To understand where that fits in, we first had to chart various markets backward a couple centuries... but in the interest of brevity, we're skipping the backstory. Anyway, in 2007, it was my view that the market had completed a very large five-wave sequence, called a Supercycle. A Supercycle is a five-wave sequence spanning decades, so that meant the market was also due for a very large correction. Indeed, this is what happened; you can see the market collapsed in five distinct waves from 2007 to 2009. This formed the A wave of (what I believe is) Supercycle Wave IV.
From there, the market trended up until May '11. This bull move formed a clear 3-wave pattern, labeled on the chart as blue (a) and (b) to complete the larger red B wave. I should mention for the benefit of initiates that wave (c) of that move is not labeled; if it were to be labeled, (c) would be placed where the red B label is. The placement of the B label already indicates where (c) completed, which makes it redundant to label (c).
Based on the very long-term charts, I expected and anticipated this Wave B rally even back in September '08 as the crash was underway and "the world was ending," while Wave A was still unfolding. This anticipatory power is another benefit of Elliott Wave Theory. In my view, May '11 marks the top to complete Wave B of Supercycle Wave IV, which means that I am anticipating that Wave C down is in the beginning stages now.
No positions in stocks mentioned.
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