Stock Market Elliott Wave Analysis, Bear Rally?

By: Dr_John_Trapp

That is the question. Is this a Wave 2 or Wave B or a deeper or much deeper correction, or is this the beginning of a Wave 5 that will take us to new heights. My bottom line position is that this is the beginning of Wave 5 that will take us to a new high. I base this in part on looking at other indices, but will show you both sides of the argument.

The first chart I want to show y'all is the Dow Transportation Average. This index is traditionally considered a leading indicator. The chart is a bit of a dilemma in that it could be read two ways. First you will notice that it is making a long-term double top and second, it has barely reached new highs as it peeks above the old high of 2008. It could still be considered in the resistance zone of the old high, IMO, and another substantial move above its present level will be telling.

So, what does the ES Weekly chart look like? And what scenarios can we anticipate? On this chart, I did something a little different with the GET software. I localized the Elliott count to the beginning of Wave 5. You will notice that at this time frame it is calling for our more Bullish count (Black numbers) where we make one more high. I have as a primary scenario, W4 of W5 completed and a new high our next objective. Note how close ES came to my typical minimum retracement of W3 (38.2% - the red Fib level). As a secondary scenario, I have depicted with the dashed arrows, W4 of W5 not yet completed, but in Wave B of W4. I see the second scenario as a possibility if the double top on the Dow Transportation Average provides resistance and a short-term pullback.

Here is a shorter term view of this scenario and the beginning of W5. This demonstrates the completed W4 (Black). In support of this count is the fact that W3 (purple) has gone beyond the 162% projection of W1. That is the typical maximum projection for a Wave C in a corrective pattern. Therefore, it is safest to regard this as a change in trend with the initiation of an impulsive move which typically are in the direction of the major trend.

Now we will look at the more Bearish scenario. Even with the long-term settings for the Elliott count turned on for the GET software, it counts W5 (the whole wave) of the rally from 6March2009 as complete. You will notice that it is counting the rally ending Friday as Wave B of the countertrend move after a completed impulsive wave. But this isn't just the end of this W5 impulsive wave, it is the end of the entire impulsive rally from 6Mar2009. That means that typically this correction should minimally correct to the beginning of this whole impulsive wave (1002.75) or from 50%-62% of the entire rally from 6Mar2009. Why does the GET software count the Daily data as a completed wave and the Weekly data as just beginning W5? It has to do with the way that the counts are calculated by the software. The software uses an Elliott Oscillator to arrive at its count. Fewer bars will change the histogram of the oscillator. When I want to tweak the counts on the data to agree with my count, I will alter the time interval that is being calculated. That's why you need to know more than the software. The software is great for speeding up analysis, but it isn't the Holy Grail!

What does this scenario look like on a Weekly chart? This is our Sky-is-Falling scenario. The red-dashed arrow is for the end-of-the-world scenario where we go into a double dip recession and make new lows. That scenario is low on my list.

I hope this hasn't been confusing, but I couldn't think of any more simplified way of presenting it. This is a study that is worth going over until you understand it, because it should be useful in days to come. Have a Happy 4th and good luck next week.

If you like what you see here, wait to see how MortiES's analysis can assist you in your everyday investing or trading strategy! Go ahead, check out my track record and Click on "Subscribe to MortiES Premium" and give it a try! I am offering a 30 day free trial period.

Dr. John Trapp a.k.a. Mortie for Value of Perfect Information who offer stock market commentary, fundamental & technical analyses on the financial markets. Try MortiES' 30 day free trial.

© 2011 Copyright Dr. John Trapp - All Rights Reserved Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.

© 2005-2022 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.