Elliott Wave Principle : Chapter 5

Chapter 5

Long Term Waves and an Up-To-Date Composite

5.1 Long Term Waves and an Up-To-Date Composite

In September 1977, Forbes published an interesting article on the complexity theory of inflation entitled "The Great Hamburger Paradox," in which the writer, David Warsh, asks, "What really goes into the price of a hamburger? Why do prices explode for a century or more and then level off?" He quotes Professor E.H. Phelps Brown and Sheila V. Hopkins of Oxford University as saying,

For a century or more, it seems, prices will obey one allpowerful law; it changes and a new law prevails. A war that would have cast the trend up to new heights in one dispensation is powerless to deflect it in another. Do we yet know what are the factors that set this stamp on an age, and why, after they have held on so long through such shakings, they give way quickly and completely to others?

Brown and Hopkins state that prices seem to "obey one all-powerful law," which is exactly what R.N. Elliott said. This all-powerful law is the harmonious relationship found in the Golden Ratio, which is basic to nature’s laws and forms part of the fabric of man’s physical, mental and emotional structure as well. As Mr. Warsh additionally observes quite accurately, human progress seems to move in sudden jerks and jolts, not as in the smooth clockwork operation of Newtonian physics. We agree with Mr. Warsh’s conclusion but further posit that these shocks are not of only one noticeable degree of metamorphosis or age, but occur at all degrees along the logarithmic spiral of man’s progress, from Minuette degree and smaller to Grand Super cycle degree and greater. To introduce another expansion on the idea, we suggest that these shocks themselves are part of the clockwork. A watch may appear to run smoothly, but its progress is controlled by the spasmodic jerks of a timing mechanism, whether mechanical or quartz crystal. Quite likely the logarithmic spiral of man’s progress is propelled in a similar manner, though with the jolts tied not to time periodicity, but to repetitive form.

If you say "nuts" to this thesis, please consider that we are probably not talking about an exogenous force, but an endogenous one. Any rejection of the Wave Principle on the grounds that it is deterministic leaves unanswered the how and why of the social patterns we demonstrate in this book. All we want to propose is that there is a natural psychodynamic in men that generates form in social behavior, as revealed by market behavior. Most important, understand that the form we describe is primarily social, not individual. Individuals have free will and indeed can learn to recognize these typical patterns of social behavior, then use that knowledge to their advantage. It is not easy to act and think contrarily to the crowd and to your own natural tendencies, but with discipline and the aid of experience, you can certainly train yourself to do so once you establish that initial crucial insight into the true essence of market behavior. Needless to say, it is quite the opposite of what people have believed it to be, whether they have been influenced by the cavalier assumptions of event causality made by fundamentalists, the mechanical models posited by economists, the "random walk" offered by academics, or the vision of market manipulation by "Gnomes of Zurich" (sometimes identified only as "they") proposed by conspiracy theorists.

We suppose the average investor has little interest in what may happen to his investments when he is dead or what the investment environment of his great-great-great-great grandfather was. It is difficult enough to cope with current conditions in the daily battle for investment survival without concerning ourselves with the distant future or the long buried past. However, we should take the time to assess long term waves, first because the developments of the past serve greatly to determine the future, and secondly because it can be illustrated that the same law that applies to the long term applies to the short term and produces the same patterns of stock market behavior.

In other words, the stock market’s patterns are the same at all degrees. The patterns of movement that show up in small waves, using hourly plots, show up in large waves, using yearly plots. For example, Figures 5-1 and 5-2 show two charts, one reflecting the hourly fluctuations in the Dow over a ten-day period from June 25th to July 10th, 1962 and the other a yearly plot of the S&P 500 Index from 1932 to 1978 (courtesy of The Media General Financial Weekly). Both plots indicate similar patterns of movement despite a difference in the time span of over 1500 to 1. The long term formulation is still unfolding, as wave V from the 1974 low has not run its full course, but to date the pattern is along lines parallel to the hourly chart. At each degree, the form is constant.

In this chapter we shall outline the current position of the progression of "jerks and jolts" from what we call the Millennium degree to today’s Cycle degree bull market. Moreover, as we shall see, because of the position of the current Millennium wave and the pyramiding of "fives" in our final composite wave picture, this decade could prove to be one of the most exciting times in world history to be writing about and studying the Elliott Wave Principle.

Figure 5-3

5.2 Long Term Waves

1. The Millennium Wave from the Dark Ages

Data for researching price trends over the last two hundred years is not especially difficult to attain, but we have to rely on less exact statistics for perspective on earlier trends and conditions. The long term price index compiled by Professor E. H. Phelps Brown and Sheila V. Hopkins and further enlarged by David Warsh is based on a simple "market basket of human needs" for the period from 950 A.D. to 1954.

By splicing the price curves of Brown and Hopkins onto industrial stock prices from 1789, we get a long-term picture of prices for the last one thousand years. Figure 5-3 shows approximate general price swings from the Dark Ages to 1789. For the fifth wave from 1789, we have overlaid a straight line to represent stock price swings in particular, which we will analyze further in the next section. Strangely enough, this diagram, while only a very rough indication of price trends, suggests a five-wave Elliott pattern.

Paralleling the broad price movements of history are the great periods of commercial and industrial expansion over the centuries. Rome, whose great culture at one time may have coincided with the peak of the previous Millennium wave, finally fell in 476 A.D. For five hundred years afterward, during the ensuing Millennium degree bear market, the search for knowledge became almost extinct. The Commercial Revolution (950-1350) eventually sparked the first new Grand Super cycle wave of expansion. The leveling of prices from 1350 to 1520 represents a "correction" of the progress during the Commercial Revolution.

The next period of rising prices, coincided with both the Capitalist Revolution (1520-1640) and with the greatest period in English history, the Elizabethan period. Elizabeth I (1533-1603) came to the throne of England just after an exhausting war with France. The country was poor and in despair, but before Elizabeth died, England had defied all the powers of Europe, expanded her empire, and become the most prosperous nation in the world. This was the age of Shake-speare, Martin Luther, Drake and Raleigh, truly a glorious epoch in world history. Business expanded and prices rose during this period of creative brilliance and luxury. By 1650, prices had reached a peak, leveling off to form a century long Grand Super cycle correction.

The next Grand Super cycle advance within this Millennium wave appears to have begun for commodity prices around 1760 rather than our presumed time period for the stock market around 1770 to 1790, which we have labeled "1789" where the stock market data begins. However, as a study by Gertrude Shirk in the April/May 1977 issue of Cycles magazine points out, trends in commodity prices have tended to precede similar trends in stock prices generally by about a decade. Viewed in light of this knowledge, the two measurements actually fit together extremely well. This Grand Super cycle wave coincides with the burst in productivity generated by the Industrial Revolution and parallels the rise of the United States of America as a world power.

Elliott logic suggests that the Grand Super cycle from 1789 to date must both follow and precede other waves in the ongoing Elliott pattern, with typical relationships in time and amplitude. If this be true, then the 1000-year Millennium wave, unless it is extending, has almost run its full course and stands to be corrected by three Grand Super cycles (two down and one up), which could extend over the next five hundred years. It is difficult to think of a low-growth situation in world economies lasting for such a long period. This broad hint of long term trouble does not preclude that technology will mitigate the severity of what might be presumed to develop socially. The Elliott Wave Principle is a law of probability and degree, not a predictor of exact conditions. Nevertheless, the end of the current Super cycle (V) should lead to some form of economic or social shock ushering in another era of decline and despair. After all, if it was the Barbarians who finally toppled a rotting Rome, can it be said that the modern day barbarians do not have adequate means and a similar purpose?

2. The Grand Super Cycle Wave from 1789 to Present

This long wave has the right look of three waves in the direction of the main trend and two against the trend for a total of five, complete with an extended third wave corresponding with the most dynamic and progressive period of U.S. history. In Figure 5-4, the Super cycle subdivisions have been marked (I), (II), (III) and (IV), with wave (V) currently in progress.

Figure 5-4

Considering that we are exploring market history back to the days of canal companies, horse-drawn barges and meager statistics, it is surprising that the record of "constant dollar" industrial share prices, which was developed by Gertrude Shirk for Cycles magazine, forms such a clear Elliott pattern. Especially striking is the trend channel, the baseline of which connects several important Cycle and Super cycle wave lows and the upper parallel of which connects the peaks of several advancing waves. A market high in 1983 would touch the upper parallel reasonably within our target area of 2500-3000, assuming no radical net change in the wholesale price index.

Wave (I) is a fairly clear "five," assuming 1789 to be the beginning of the Super cycle. Wave (II) is a flat, which neatly predicts a zigzag or triangle* for wave (IV), by rule of alternation. Wave (III) is extended and can easily be subdivided into the necessary five sub waves, including an expanding triangle characteristically in the fourth wave position. Wave (IV), from 1929 to 1932, terminates within the area of the fourth wave of lesser degree.

An inspection of wave (IV) in Figure 5-5 illustrates in greater detail the zigzag of Super cycle dimension that marked the most devastating market collapse in U.S. history. In wave a of the decline, daily charts show that the third sub wave, in characteristic fashion, included the Wall Street crash of October 29, 1929. Wave a was then retraced approximately 50% by wave b, the "famous upward correction of 1930," as Richard Russell terms it, during which even Robert Rhea was led by the emotional nature of the rally to cover his short positions. Wave c finally bottomed at 41.22, a drop of 253 points or about 1.382 times the length of wave a. It completed an 89 (a Fibonacci number) percent drop in stock prices in 3 (another Fibonacci number) years.

It should be mentioned again that Elliott interpreted 1928 as the orthodox top of wave (III), with the 1929 peak marking an irregular top. We find several faults with this contention, as does Charles Collins, who agrees with us that 1929 probably marked the orthodox high. First, the decline from 1929 to 1932 is a fine specimen of a 5-3-5 zigzag decline. Next, for wave (III) to have topped in 1928, wave (IV) would have to assume a shape that is not consistent with the "right look" for a 3-3-5 expanded flat correction. Under that interpretation, wave c is way out of proportion to the smaller a and b waves and terminates an uncomfortably great distance below the low of wave a. Another problem is the power of the supposed b wave, which remains well within the uptrend channel and terminates through the upper trend line, as a fifth wave often does. Ratio analysis of wave (IV) supports both Elliott’s contention of an irregular top and our thesis of an orthodox top, since wave c under Elliott’s analysis is 2.618 times as long as the net decline of wave a from November 1928 to November 1929, and under our analysis wave c is 1.382 (.382 is the inverse of 2.618) times as long as wave a from September 1929 to November 1929.

Wave (V) of this Grand Super cycle is still in progress, but has so far conformed beautifully to the expectation that since wave (III) was an extension, wave (V) should be approximately equal to wave (I) in terms of time and percentage magnitude. Wave (I) took about fifty years to complete, as should wave (V) if it ends when we expect. Its height on the constant dollar chart is about equal to the height of wave (V), expressing equality in terms of percentage advance. Even their "looks" are not dissimilar. Wave (V) of the Grand Super cycle is further analyzed below.

5.3 The Super Cycle Wave from 1932

3. The Super Cycle Wave from 1932

Super cycle wave (V) has been in progress since 1932 and is still unfolding (see Figure 5-5). If there were such a thing as a perfect wave formation under the Wave Principle, this long term sequence of Elliott waves would be a prime candidate. The breakdown of Cycle waves is as follows:

Wave I: 1932 to 1937 — This wave is a clear cut five-wave sequence according to the rules established by Elliott. It retraces .618 of the market decline from the 1928 and 1930 highs and, within it, the extended fifth wave travels 1.618 times the distance of the first through third waves.

Wave II: 1937 to 1942 — Within wave II, sub wave Ⓐ is a five, and wave Ⓒ is a five, so the entire formation is a zigzag. Most of the price damage occurs in wave Ⓐ. Thus, there is great strength in the structure of the entire corrective wave, much beyond what we would normally expect, as wave Ⓒ travels only slightly into new low ground for the correction. Most of the damage of wave Ⓒ was due to erosion, as continued deflation pushed price/earnings levels to below those even of 1932.

Figure 5-5

Wave III: 1942 to 1965(6) — This wave is an extension, by which the Dow rose nearly 1000% in twenty-four years. Its principal features are as follows:

1.      Wave ④ is a flat, alternating with a zigzag, wave ②.

2.      Wave ③ is the longest Primary wave and an extension.

3.      Wave ④ corrects to near the top of the preceding fourth wave of one lesser degree and holds well above the peak of wave ①.

4.      The length of sub waves ① and ⑤ are related by the Fibonacci ratio in terms of percentage advance (129% and 80% respectively, where 80 = 129 x .618), as is often the case between two non-extended waves.

Wave IV: 1965(6) to 1974 — In Figure 5-5, wave IV bottoms in the area of wave ④, as is normal, and holds well above the peak of wave I. We show two possible interpretations: a five wave expanding triangle from February 1965 and a double three from January 1966. Both counts are admissible, although the triangle interpretation might suggest a lower objective, where wave V would trace an advance approximately as long as the widest part of the triangle. No other Elliott evidence, however, suggests that such a weak wave is in the making. Some Elliott theorists attempt to count the last decline from January 1973 to December 1974 as a five, thus labeling Cycle wave IV a large flat. Our technical objections to a five-wave count are that the supposed third sub wave is too short, and the first wave is then overlapped by the fourth, thereby offending two of Elliott’s basic rules. It is clearly an A-B-C decline.

Wave V: 1974 to? — This wave of Cycle degree is still unfolding. It is likely that two Primary waves have been completed at this juncture and that the market is in the process of tracing out the third Primary, which should accompany a break-out to new all-time highs. The last chapter will cover in somewhat more detail our analysis and expectations with respect to the current market.

Thus, as we read Elliott, the current bull market in stocks is the fifth wave from 1932 of the fifth wave from 1789 of possibly even the fifth wave from the Dark Ages. Figure 5-6 gives the composite picture and speaks for itself.

The history of the West from the Dark Ages appears in retrospect to have been an almost uninterrupted period of human progress, which, as we have proposed, might be termed a wave of Millennium degree. The cultural rise of Europe and North America, and before that the rise of the Greek city-states and the expansion of the Roman Empire, and before that the thousand year wave of social progress in Egypt, might be termed waves of Cultural degree, each of which was separated by Cultural degree waves of stagnation and regress, each lasting centuries. One might argue that even these five waves, constituting the entirety of recorded history to date, may constitute a developing wave of Epochal degree, and that some period of social catastrophe centuries hence (involving nuclear or biological war, perhaps?) will ultimately ensure the occurrence of the largest human social regress in five thousand years.

Figure 5-6

Of course, the theory of the spiraling Wave Principle suggests that there exist waves of larger degree than Epochal. The ages in the development of the species Homo sapiens might be waves of even higher degree. Perhaps Homo sapiens himself is one stage in the development of hominids, which in turn are one stage in the development of even larger waves in the progress of life on Earth. After all, if the existence of the planet Earth is conceived to have lasted one year so far, life forms emerged from the oceans five weeks ago, while manlike creatures have walked the Earth for only the last six hours of the year, less than one one-hundredth of the total period during which forms of life have existed. On this basis, Rome dominated the Western world for a total of five seconds. Viewed from this perspective, a Grand Super cycle degree wave is not really of such large degree after all.