Believe it or not, another drop won't break the DJIA or S&P500 equities markets - yet; Elliott analysis

Believe it or not - and as cautious as I'm feeling about the possibility of another big move down in equities - another churning drop won't "break" the really big, long-term bullish uptrend of the equities markets. Yet. Here's why:

One of the most reliable guides for investors and traders is trendline analysis. This is used by Elliott Wave analysis and all kinds of other technical and even fundamental analysts in gauging the strength and likely future path of all types of markets - equities, bonds, commodities, gold, currencies. What does the really big picture look like for U.S. equities in terms of very long-term channel trendlines?

You may be surprised to learn that those long-term uptrending channels haven't been broken yet, and that even another big move down won't break them as long as it happens relatively soon and doesn't drop down too very far. Let's take a look - starting with a chart with comments that I posted here on November 24, 2008 (you remember - just after the big drop into the November lows):



And here are the comments I made with that 11/24/08 post:

A friend has contributed this very long term, big picture chart view of the Dow Jones Industrial Average. When you look closely you can see the trendlines that create a "fork" with parallel channels particularly in the years since the major uptrend from 1982. And, you can also see that the market may be receiving important support from the uptrending channels in this area.

Now, of course this doesn't say that "the low" is in, or that the market couldn't poke lower in mid-December. What it does say, to me at least, is that the markets have a good probability of going into a rally of significant proportions for a significant time.

What it also says, which should be remembered by everyone looking at this, is that if the market "loses" (falls under) the trendline support shown by these long-term trendlines, then that's confirmation of bear market trending of a much more substantial degree than we've seen yet.

Now, friends, I wish I had a bit more time to elaborate on what I'm about to show, because it does deserve more explanation. And I'll do so when I can find a bit more time. For now, I can tell you that the following charts draw on an appendix at the back of a book called The Elliott Wave Principle ("EWP") by Frost & Prechter. (Yes, that Prechter.) The appendix was written about 1983, and has a fascinating discussion about their then-current idea that the S&P 500 was about 5 years "ahead" of the Dow Jones Industrial Average in terms of wave count. It goes on to state that, when the ultimate grand supercycle top comes in, it's expected to be with the Dow Jones Industrial Average making yet higher highs, with declining support from the advance-decline indicators and with the other indices having already topped out and not confirming by also making new highs of their own.

The following charts are only one way of interpreting how this might apply to the current environment. I believe there are a couple of other ways to mark the Elliott Wave counts that might flow out of this general idea, but frankly just don't have time to prepare them and post them today. Maybe this could be an exercise for future weekends, as it certainly isn't something that needs to be completely analyzed right away ... the consequences will evolve over months and years. And we've also got indicators to watch that will guide us as we go. (This is a major reason why I do not rely on Elliott Wave analysis alone - in my opinion, it must be informed by other analytical methods such as volume and breadth, cycles, and trendline analysis; hence why I seek to blend these methods at this site.)



You'll notice, especially if you're an Elliott Wave practitioner or student, that both the counts charted above indicate a forthcoming wave V in BOTH the DJIA and the SPX. So, I'll need to post a different set of charts (maybe next weekend) showing a count in which the wave V is already finished in the SPX, while keeping the DJIA chart count the same as shown above.

This does illustrate, in any event, one reason why I like Tony Caldaro's Objective Elliott Wave ideas - because he's showing different possible wave counts for the DJIA and SPX. I think Tony may be trying to reconcile them, however, while I'm open to the idea that the counts may simply be different, period, end of story. I'm not sure I'd have that idea if it weren't for that appendix in the EWP book. The EWP book is a very impressive and good work, and I tend to think that A.J. Frost must have been one brilliant fellow. I suspect that Mr. Frost contributed to the idea of the different wave counts in those two major market indices. And I cannot think of any reason why the counts must be exactly the same in these indices.

It's certainly interesting that the SPX went under the 2002/2003 lows, while the DJIA has not done so. Of course, if we see another leg down in the equities markets, that can change. (It's also possible that another leg down could see the SPX go to a lower level in a C wave to complete an expanded flat, while somehow the DJIA does not make new lows under the 2002/2003 lows.) For that matter, the count as I marked it on the DJIA chart doees not "require" that the DJIA remain above its 2002/2003 lows, either.

So these are ideas to ponder while the market action unfolds around us. Meantime, let me return to the major point that ties to these ideas: the very long-term channel trendlines still give us reason to believe that, despite all the volatility, that the markets have not - yet - broken through the very, very long-term support lines.

There also remains another possibility ... my late, best trading mentor once mentioned to me that a trendline break is often what sets up a diagonal movement for an ensuing continuation wave that works its way back up (or down as the case may be, but in this case up) in the direction of that broken trendline, until the final wave is done. Something I look forward to studying more (and may have a chance to observe currently with bonds, if bonds do surprise many with yet another new high).

All these ideas I'm discussing here leave open the possibility that, even assuming we continue to see volatility through the year 2012 or 2015 or so, the dire predictions by some of the DJIA pointing to 800 or 400 remain very premature.

You can find Elliott analysis of the shorter term picture in posts I've been making here (look under the "Elliott Wave" label at the right), and also in the trading analytical charts at my UBTNB3 site (see link at upper right side of the page). Good luck all, be careful out there and happy investing and trading!