The Stock Market Quantified Elliott Wave Theory: OEW

By: Tony_Caldaro

In the coming months, and for some it has already started, many market pundits will be calling for a monumental crash. Some will proclaim it to be the largest crash in our lifetime. There will be various reasons. Extremely high debt levels, high market valuations, leverage in managed funds, prolonged low growth without a recession, rising interest rates, Quantitative Tightening, and even Elliott Wave patterns. The latter is the reason for this report.

The Elliott Wave Theory has been circulating in technical market analysis circles for 80-years. On the surface, it is easy to understand. There are five waves up during bull markets representing growth, and three waves down during bear markets representing contraction. Since the economy moves from growth to contraction it makes sense. Historically, one can even look at a chart of the DOW, over an 80-year period, and actually see the five waves with three advances and two intervening declines. From the 1932 crash low: 1937-1942-1973-1974-2007. Simple, right? In theory, yes. In real time practice no.

Any experience in life that offers an opportunity for a decision is always perfect in hindsight. Let’s face it. We all make wrong choices. Some may be because of insufficient information, and others because of emotional/intellectual bias. The same applies to the Elliott Wave Theory. If one bases their current decisions on an incorrect view of the past, their future expectations will have a low probability outcome. As one improves their accuracy of past events, the probability of an expected future outcome increases. How does one do this with the Elliott Wave Theory? Mathematics.

Without quantifying long-term and medium-term waves, mathematically, the Elliott Wave Theory is nothing more than one’s interpretation of the past. Much like when art experts attempt to interpret the intent of an artist’s painting. You see it, and you think you understand what it is displaying. But unless you can ask the artist it is only one of many interpretations with varying degrees of probability. Let’s review some examples starting with the present.

From the SPX 667 low in 2009, two of the longest and nearly two of the deepest corrections occurred in 2011 and 2015/2016. An interpretation of this market activity would be, and nearly all Elliott Wavers are using it, Primary waves I and II ended in 2011, Primary III ended in 2015, Primary IV ended in 2016, and Primary V (to end the bull market since 2009) is currently underway. This interpretation would imply, when Primary V ends, a bear market declining to at least the Primary IV low at SPX 1810, or even to the Primary II low at SPX 1075, will follow. Some interpretations, based on longer term charts, call for an even greater decline.

Some Elliott Wavers are counting five Primary waves up from the 1974 low at SPX 61. Primary I ended in 1980, Primary II in 1982, Primary III in 2000, Primary IV in 2009, and Primary V is about to conclude to end a 40+ year bull market. This interpretation would imply, when Primary V ends, a bear market declining to at least the Primary IV low in 2009 at SPX 667, or even to the Primary II low in 1982 at SPX 101. A bear market decline to the 1982 low would be the greatest market crash in history. As outrageous as it might sound, some Elliott Wavers and others, are, and have been, calling for this type of event for years. A chart, like a painting, can be interpreted in many different ways. Do either of these two interpretations have a high probability? Quantitatively speaking, no. They are merely interpretations of what the charts look like in Elliott Wave terms. Not in mathematical, quantitative, Elliott Wave terms.

After dealing with this interpretation problem some 35-years ago, I set out to prove, or disprove, the Theory using mathematics. Using all the DOW data available at the time, 1885-1982, I attempted to quantify the waves in mathematical terms. If the waves are easily seen on the charts, I thought, there must be a mathematical method to determine the beginning and end of every single wave. And, anyone knowing this method should be able to duplicate the same exact interpretation. It only took a few months to solve. And, I have been using this quantitative method, quite successfully, ever since.

Let’s look at the first chart presented: DOW 1900-2017. After the 1929-1932 crash, when the market lost 89.2% of its value, the market advanced with 5 quantified waves to a 1937 high, then had a quantified 3-wave decline until 1942. After that the market rose for three decades with 13 quantified waves until 1973. This was followed by a simple, quantified, decline into 1974. Then another three-decade advance with 9 quantified waves into a 2007 high. At that point we had three advances, separated by two declines, to complete five large quantified waves.

To confirm this quantified count was correct, the market should then have had its largest percentage decline since 1932. And, it did! Five quantified waves up from 1932-2007 and then the Great Recession. Fortunately, not another Great Depression, which is what occurred the last time the market completed five very long-term quantified waves. At the 2009 low the market started another very long-term bull market, which should be similar in length to 1932-2007. This doesn’t just look correct on the chart. It is also confirmed mathematically. Therefore, with a new multi-decade bull market underway there is a very low probability the market will return to the 1982 SPX 101 low, or even, the 2009 low at SPX 667.

The quantified, and most probable, interpretation of market activity since 1980 is as follows. Primary II did end in 1982, as many suspect, after several years of choppy sideways activity in the DOW. Which was the dominant US index at the time. Primary III topped with the dotcom bubble in 2000, and Primary IV was a result of the dotcom bust into 2002. Primary V then topped in 2007, with five quantified Major waves, reaching an all-time high of SPX 1576. This completed the very long-term multi-decade bull market from 1932-2007 and is labeled Super Cycle 1. A Super Cycle 2 bear market then followed along with the Great Recession. When the Great depression bear market ended, (1929-1932), Super Cycle 1 began, (1932-2007). When the Great recession bear market ended, (2007-2009), Super Cycle 3 began, (2009-xxxx).

After the 2009 Super Cycle 2 low the market progressed in five Major waves to a bull market high of SPX 2135 in 2015. Major waves 1 and 2 occurred in 2011, Major waves 3 and 4 occurred in 2014, and Major wave 5 ended in 2015. This completed a Primary I bull market from 2009-2015. A Primary II bear market followed into early-2016 bottoming at SPX 1810. Primary I (2009-2015) was one long-term trend, so it cannot quantitatively be counted as three waves of any degree. It may look like three waves, but mathematically it is not.

After the 2016 Primary II low, Primary III began. Historically, Primary III waves are quite long in duration. The previous two Primary III waves took 17-years, (1949-1966) and 18-years, (1982-2000). You can view the last two on the monthly chart above. When they unfold it is the best time to own equities. Certainly, they do not rise without some bear markets along the way. Each of the last two Primary III’s had five bull markets with four intervening bear markets. The general market gains over the nearly two-decade advances were both outstanding. As noted on the chart.

Is this the only possible outcome? Not at all. It is the most probable outcome based on quantified market patterns covering over 130-years of verified market data. The future is not set in stone with some pre-ordained outcome. The future is created by the multitude of choices we make collectively. Certainly, there are somewhat predictable secular cycles that impact this decision making process. These cycles are separated by the green vertical lines on the above chart. From generation to generation the market alternates between an extremely strong period in equities to a generally sideways period. Probabilities suggest we are currently at the early stages of one of those strong periods. The early stages of what is known as a secular growth cycle. This fits perfectly with what the quantitative Elliott Wave charts are suggesting. Over the next decade or so, we will find out if this is indeed the most probable outcome. Best to your investing!

CHARTS: http://stockcharts.com/public/1269446/tenpp

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After about 40 years of investing in the markets one learns that the markets are constantly changing, not only in price, but in what drives the markets. In the 1960s, the Nifty Fifty were the leaders of the stock market. In the 1970s, stock selection using Technical Analysis was important, as the market stayed with a trading range for the entire decade. In the 1980s, the market finally broke out of it doldrums, as the DOW broke through 1100 in 1982, and launched the greatest bull market on record. 

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Copyright © 2017 Tony Caldaro - 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.

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