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May 31
monday update
SHORT TERM: US markets closed for the Memorial Day holiday
On sunday night FED chairman Bernanke's speech was released: http://www.federalreserve.gov/newsevents/speech/bernanke20100530a.htm. Overnight the Asian markets ended mixed. Europe opened higher and closed +0.30%. US index futures traded higher overnight: ES +2, NQ +9 and YM +23. Bonds were flat, Crude gained 25 cents, Gold gained $3.00, and the USD was higher.
For those of us who track the markets using the Elliott Wave Theory (EWT) of mass psychology it is important to know exactly where important waves begin and end. We understand that it is the overall pattern of these waves that define bull and bear markets, not some arbitrary percentage of advance or decline often used by the financial media. These patterns, whether they be three or five wave structures, define a bear market or a bull market respectively.
When RN Elliott disclosed his Wave Theory in the late 1930's he demonstated how bull and bear markets unfold in a series of waves. Applying many of his observations of impulse waves and corrective waves, he was able to illustrate a five wave bull market structure into the 1929 top, the 1929-1932 crash, and then the subsequent 1932-1937 bull market. What he did not define was how to determine precisely when important waves had begun and ended. The very waves that create the basic structure of three or five wave patterns. As a result, nearly all who follow the EWT, over the decades, have been left debating the correct wave count. In fact, the basic question of whether or not we're in a bull or bear market remains in a quagmire of subjectivity. Especially during this past decade. While the EWT in itself was an amazing discovery. The failure to disclose, or uncover, this most fundamental and important point has aided in discrediting the EWT as a whole.
In the early 1980's this particular problem was solved. The important waves, that create bull and bear markets, were no longer left to the subjective view of the observer, but defined and quantified by the market itself. This, of course, did not resolve all the issues in regard to the EWT. But it did resolve the most basic and fundamental problem with observing and counting the waves: what constitues an important wave, and what does not. When one observes the waves quantified by the market they see things differently than those who do not.
After the 2000 bull market top we were told that the market would now plunge to DOW 400 in a five wave sequence. When the DOW bottomed in Oct 2002 at 7,200 we were told that it just completed a five wave Primary wave one. The market would now rally some and then another five wave decline for Primary wave III would unfold. As the 2000-2002 bear market unfolded we counted, quantitatively, a corrective triple zigzag into the Oct 2002 low. Not five waves! We knew the bear market was over and a new bull market was underway. During the quantitative five wave bull market of 2002-2007, whenever the market had a serious correction we were told that Primary wave III, of an ongoing bear market, was now underway. The market then ended its correction and continued to make new bull market highs. After the market made all time new highs in 2007 we were told that it was just a five year bear market rally. No one even took the time to observe that the longest bear market rally in the history of the stock market was only two years!
After the 2007 bull market top the market plunged. Within seventeen months the SPX dropped from 1576 to 667. A 58% decline in market value. Near the Mar 2009 low we were told again that the market just completed five waves down for Primary wave I. We would get a Primary wave II rally and then another plunge for Primary wave III. As the 2007-2009 bear market unfolded we counted, quantitatively, a corrective detailed zigzag into the Mar 2009 low. Again, not five waves! This time, however, due to the degree of the bear market we were not certain if the bear market was over or not. We did know, however, that even a bear market B wave rally could carry the SPX from just under 700 to over 1100.
When the market topped in January 2010 at SPX 1150 it reached an inflection point. For the bear market to resume it had to start impulsing downward. It did not! In fact, after the February 2010 low it started uptrending and making new bull market highs. This inflection point, quantitatively, defined we were in a bull market all along. At the recent SPX 1220 high the market completed five waves up from the March 2009 low. In the EWT we do not get five wave rallies during bear markets. We get three wave rallies!
To summarize. In the subjective world of EW the 2000-2002 and 2007-2009 bear markets were five wave structures implying more bear market lows to follow. In the objective world of OEW both bear markets were three wave structures, correcting previous bull markets of a similar degree. The October 2002 low ended the bear market which led to a five year bull market to all time new highs. The March 2009 low ended the bear market and this bull market will also likely lead to all time new highs. Below is a close up view of the quantitative wave count from 2007 to present. The choice is yours: subjective EW or quantitative OEW?
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