Elliott Wave Principle : Chapter 9

Chapter 9

Appendix

Long Term Forecast Update 1982-1983

Elliott Wave Principle concluded that the wave IV bear market in the Dow Jones Industrial Average ended in December 1974 at 572. The authors labeled the March 1978 low at 740 as the end of Primary wave ② within the new bull market. Neither level was ever broken on a daily or hourly closing basis. That wave labeling still stands, except that the low of wave ② is better placed in March 1980.

The analysis that follows, from Robert Prechter’s Elliott Wave Theorist, details his real-time conclusion that the 1982 low may also be labeled as the end of the wave IV bear market, particularly when taking the “constant-dollar” Dow into account. This text includes The Elliott Wave Theorist’s dramatic market analysis of September 1982. Published one month after the low of a 16½-year downtrend in the inflation-adjusted Dow, it identified the start of the great “liftoff” for Cycle Wave V.

This Appendix, which first appeared in the April 1983 edition, has been expanded to include all long-term commentary through the first year of the bull market.

All text that follows is quoted as published in Robert Prechter’s the Elliott Wave Theorist on the dates cited below.

January 1982

All text that follows is quoted as published in Robert Prechter’s the Elliott Wave Theorist on the dates cited below.

Blueprint for the '80s

Sometimes obtaining perspective on a current situation necessitates taking a good hard look at what has happened in the past. This report will take a look at the long-term picture to get a sense of what the decade of the 1980s has in store. One of the most revealing presentations of data is the chart of U.S. stock prices going back over two hundred years, the longest period for which such data is available. The accompanying chart [Figure A-1] was first presented in 1978 in A.J. Frost’s and my book Elliott Wave Principle [see Figure 5-4], although the wave count near the end has been amended to reflect current knowledge.

The wave structure from the late 1700s to 1965 on the accompanying chart now unmistakably shows a completed pattern of five waves. The third wave is characteristically long, the fourth wave does not overlap the first, and the guideline of alternation is satisfied in that wave (II) is a flat, while wave (IV) is a triangle. Furthermore, the first and fifth waves are related by the Fibonacci ratio .618, in that the percentage advance of wave (V) is roughly .618 times that of wave (I).

Some analysts have tried to argue that the wave count on the “current dollar” chart [the actual Dow, Figure 5-5] shows a full five waves into 1966. As I have been arguing for years, such a count is highly suspect, if not impossible. In order to accept such a count, one has to accept Elliott’s argument of a triangle formation ending in 1942 (detailed in R.N. Elliott’s Masterworks), a count that was quite correctly shown to be in error by the late A. Hamilton Bolton in his 1960 monograph, “The Elliott Wave Principle — A Critical Appraisal” [see The Complete Elliott Wave Writings of A. Hamilton Bolton]. Bolton’s alternative proposal, a triangle that ends in 1949 as the accompanying inflation-adjusted chart shows, contained problems at the time he proposed it (namely accepting 1932-1937 as a “three”) and subsequent evidence has confirmed that interpretation as impossible.

Figure A-1

The Dow, from the perspective of the [sideways trend], has been in a “bear market” the entire time [since 1965], although all other indexes have been in bull markets since 1974. Elliott was about the only analyst ever to recognize that sideways trends are bear markets. For evidence of this contention, all one need do is look at the chart of the inflation-adjusted Dow from 1966 [and compare it to the same period in Figure 5-5]. Raging inflation plus bear market equals sideways formation.

* These last three sentences are from the immediately preceding December 1979 issue of EWT.

More important is that a clear five-wave downward Elliott pattern from the 1965 peak appears to be in its final stage. As a shorter-term consideration, we can see from the chart that stocks are now deeply oversold and [, having fallen below the long term support line,] historically cheap in terms of value relative to the wholesale price index. Thus, the next few years could witness a countertrend three-wave (a-b-c) rally in real terms that should translate into a dramatic ‘breakout’ in the Dow Industrial Average to new all-time highs in current dollar terms. Such an advance would satisfy the Dow’s wave count from 1932 in nominal dollars by letting it complete its final fifth Cycle wave from 1974. So we still need one more dramatic new high on the Dow Jones Industrial Average, giving us a fifth wave in actual prices and a B wave in inflation-adjusted prices.

September 13, 1982

The Long Term Wave Pattern Nearing a Resolution

This is a thrilling juncture for a wave analyst. For the first time since 1974, some incredibly large wave patterns may have been completed, patterns which have important implications for the next five to eight years. The next fifteen weeks should clear up all the long term questions that have persisted since the market turned sloppy in 1977.

Elliott wave analysts sometimes are scolded for forecasts that reference very high or very low numbers for the averages. But the task of wave analysis often requires stepping back and taking a look at the big picture and using the evidence of the historical patterns to judge the onset of a major change in trend. Cycle and Super cycle waves move in wide price bands and truly are the most important structures to take into account. Those content to focus on 100-point swings will do extremely well as long as the Cycle degree trend of the market is neutral, but if a truly persistent trend gets under way, they’ll be left behind at some point while those in touch with the big picture stay with it.

In 1978, A.J. Frost and I forecast a target for the Dow of 2860 for the final target in the current Super cycle from 1932. That target is still just as valid, but since the Dow is still where it was four years ago, the time target is obviously further in the future than we originally thought.

A tremendous number of long term wave counts have crossed my desk in the past five years, each attempting to explain the jumbled nature of the Dow’s pattern from 1977. Most of these have proposed failed fifth waves, truncated third waves, substandard diagonals, and scenarios for immediate explosion (usually submitted near market peaks) or immediate collapse (usually submitted near market troughs). Very few of these wave counts showed any respect for the rules of the Wave Principle, so I discounted them. But the real answer remained a mystery. Corrective waves are notoriously difficult to interpret, and I, for one, have alternately labeled as “most likely” one or the other of two interpretations, given changes in market characteristics and pattern. At this point, the two alternates I have been working with are still valid, but I have been uncomfortable with each one for reasons that have been explained. There is a third one, however, that fits the guidelines of the Wave Principle as well as its rules, and has only now become a clear alternative.

Double Three Correction Still in Progress

This wave count argues that the giant Cycle wave correction from 1966 is still in progress. The final low [before the great bull market begins] would occur between Dow 563 and 554. Only a break of 766 would have made it certain, however, and no such break has yet occurred.

Figure A-2

Series of 1s and 2s in Progress

This count [see Figure A-2] has been my ongoing hypothesis for most of the time since 1974, although the uncertainty in the 1974-1976 wave count and the severity of the second wave corrections have caused me a good deal of grief in dealing with the market under this interpretation.

This wave count argues that the Cycle degree correction from 1966 ended in 1974 and that Cycle Wave V began with the huge breadth surge in 1975-1976. The technical name for wave IV is an expanding triangle. The complicated subdivision so far in wave V suggests a very long bull market, perhaps lasting another ten years, with long corrective phases, waves (4) and ④, interrupting its progress. Wave V will contain a clearly defined extension within wave ③, subdividing (1) -(2) -(3) -(4) -(5), of which waves (1) and (2) have been completed. The peak would ideally occur at 2860, the original target calculated in 1978. [The main] disadvantage of this count is that it suggests too long a period for the entire wave V, as per the guideline of equality.

Advantages

1.      Satisfies all rules under the Wave Principle.

2.      Allows to stand A.J. Frost’s 1970 forecast for an ultimate low for wave IV at 572.

3.      Accounts for the tremendous breadth surge in 1975-1976.

4.      Accounts for the breadth surge in August 1982.

5.      Keeps nearly intact the long-term trend line from 1942.

6.      Fits the idea of a four-year cycle bottom.

7.      Fits the idea that the fundamental background looks bleakest at the bottom of second waves, not at the actual market low.

8.      Fits the idea that the Kondratieff Wave plateau is partly over. Parallel with 1923.

Disadvantages

1.      1974-1976 is probably best counted as a “three,” not a “five.”

2.      Wave (2) takes six times as much time to complete as does wave (1), putting the two waves substantially out of proportion.

3.      The breadth of the 1980 rally was substandard for the first wave in what should be a powerful Intermediate third.

4.      Suggests too long a period for the entire wave V, which should be a short and simple wave resembling wave I from 1932 to 1937 rather than a complex wave resembling the extended wave III from 1942 to 1966 (see Elliott Wave Principle, Figure 5-5).

Double Three Correction Ending in August 1982

The technical name for wave IV by this count is a “double three,” with the second “three” an ascending [barrier] triangle. [See Figure A-3.] This wave count argues that the Cycle wave correction from 1966 ended last month (August 1982). The lower boundary of the trend channel from 1942 was broken briefly at the termination of this pattern, similar to the action in 1949 as that sideways market broke a major trend line briefly before launching a long bull market. A brief break of the long term trend line, I should note, was recognized as an occasional trait of fourth waves, as shown in [R.N. Elliott’s Masterworks]. [The main] disadvantage of this count is that a double three with this construction, while perfectly acceptable, is so rare that no example in any degree exists in recent history.

Figure A-3

A surprising element of time symmetry is also present. The 1932-1937 bull market lasted 5 years and was corrected by a 5-year bear market from 1937 to 1942. The 3½-year bull market from 1942 to 1946 was corrected by a 3½-year bear market from 1946 to 1949. The 16½-year bull market from 1949 to 1966 has now been corrected by a 16½-year bear market from 1966 to 1982!

The Constant Dollar(Inflation-Adjusted) Dow

If the market has made a Cycle wave low, it coincides with a satisfactory count on the “constant dollar Dow,” which is a plot of the Dow divided by the consumer price index to compensate for the loss in purchasing power of the dollar. The count is a downward sloping Ⓐ-Ⓑ-Ⓒ, with wave Ⓒ a diagonal [see Figure A-3]. As usual in a diagonal, its final wave, wave (5), terminates below the lower boundary line.

I have added the expanding boundary lines to the upper portion of the chart just to illustrate the symmetrical diamond shaped pattern constructed by the market. Note that each long half of the diamond covers 9 years 7½ months (5/65 to 12/74 and 1/73 to 8/82), while each short half cover 7 years 7½ months (5/65 to 1/73 and 12/74 to 8/82). The center of the pattern (June-July 1973) cuts the price element in half at 190 and the time element into two halves of 8+ years each. Finally, the decline from January 1966 is 16 years, 7 months, exactly the same length as the preceding rise from June 1949 to January 1966.

Advantages

1.      Satisfies all rules and guidelines under the Wave Principle.

2.      Keeps nearly intact the long-term trend line from 1942.

3.      A break of triangle boundaries on wave E is a normal occurrence.

4.      Allows for a simple bull market structure as originally expected.

5.      Coincides with an interpretation for the constant dollar (deflated) Dow and with the corresponding break of its lower trend line.

6.      Takes into account the sudden and dramatic rally beginning in August 1982, since triangles produce “thrust.”

7.      Final bottom occurs during a depressionary economy.

8.      Fits the idea of a four-year cycle bottom.

9.      Fits the idea that the Kondratieff Wave plateau has just begun, a period of economic stability and soaring stock prices. Parallel with late 1921.

10.  Celebrates the end of the inflationary era or accompanies a “stable reflation.”

Disadvantages

1.      A double three with this construction, while perfectly acceptable, is so rare that no example in any degree exists in recent history.

2.      A major bottom would be occurring with broad recognition by the popular press.

Outlook

Triangles portend “thrust,” or swift moves in the opposite direction traveling approximately the distance of the widest part of the triangle. This guideline would indicate a minimum move of 495 points (1067-572) from Dow 777, or 1272. Since the triangle boundary extended below January 1973 would add about 70 more points to the “width of the triangle,” a thrust could carry as far as 1350. Even this target would only be a first stop, since the extent of the fifth wave would be determined not merely by the triangle, but by the entire wave IV pattern, of which the triangle is only part. Therefore, one must conclude that a bull market beginning in August 1982 would ultimately carry out its full potential of five times its starting point, making it the percentage equivalent of the 1932-1937 market, thus targeting 3873-3885. The target should be reached either in 1987 or 1990, since the fifth wave would be of simple construction. An interesting observation regarding this target is that it parallels the 1920s, when after 17 years of sideways action under the 100 level (similar to the recent experience under the 1000 level), the market soared almost nonstop to an intraday peak at 383.00. As with this fifth wave, such a move would finish off not only a Cycle, but a Super cycle advance.

[Near Term Wave Structure]

In the [August 17] Interim Report, I mentioned the possibility of a diagonal having been completed at the [Friday,] August [12th] low. The two daily charts below illustrate this count. A diagonal from last December would be wave [v of] c of a large a-b-c from the August 1980 peak [see Figure A-4] or wave c of a large a-b-c from the June 1981 peak [see Figure A-5]. The strength of the explosion off the August low supports this interpretation.

Figure A-4 (pertains to Figure A-2)

Figure A-5 (pertains to Figure A-3)

October 6, 1982

This bull market should be the first “buy-and-hold” market since the 1960s. The experience of the last 16 years has turned us all into traders, and it’s a habit that will have to be abandoned. The market may have 200 points behind it, but it’s got over 2000 left to go! The Dow should hit an ultimate target of 3880, with interim stops at 1300* (an estimate for the peak of wave ①, based on post-triangle thrust) and 2860* (an estimate for the peak of wave ③, based on the target measuring from the 1974 low).

* Wave ① topped at 1286.64 (about 1300 intraday) in 1983-1984. EWT later reduced the rough estimate of 2860 for wave ③, as precise figures came out to 2724 (see bracket on page 201). Wave ③ topped at 2722.42 in 1987. Wave ⑤ reached and well surpassed Prechter’s “pie-in-the-sky” target of 3880.

The confirmed status of the long-term trend of the stock market has tremendous implications. It means: (1) no new lows in the averages on the next reactions, (2) no crash or depression in 1983 (although a “mini-crisis” could develop soon), and (3) for those who fear one, no international war for at least ten years.

November 8, 1982

From the perspective of Elliott wave analysis, the stock market is in sharp focus. Surveying all the market’s action over the past 200 years, it is comforting to know exactly where you are in the wave count. [Figure A-6] is Securities Research Company’s yearly range chart. Note that waves II and IV in the DJIA accurately reflect the guideline of alternation, since wave II is a short sharp zigzag, while wave IV is a long sideways combination. As unusual as the Dow’s structure was from 1966 to 1982, it was perfect Elliott, showing that no matter how difficult the pattern is to read sometimes, it always resolves satisfactorily into a classic pattern.

Figure A-6

Make no mistake about it. The next few years will be profitable beyond your wildest imagination. Make sure you make it while the making is good. Tune your mind to 1924. Plan during these five years to make your fortune. Then be prepared to lock it up safely for the bad years that are sure to follow.

November 29, 1982

A picture is worth a thousand words

The arrow on the chart below [see Figure A-7] illustrates my interpretation of the position of the Dow within the current bull market. Now if an Elliottician tells you that the Dow is in wave (2) of ① of V, you know exactly what he means. Whether he’s right, of course, only time will tell.

Figure A-7

The easiest thing to forecast is that the bull market will happen; the second easiest is a price estimate; the last is time. I’m currently looking for 1987 to mark a top, but it could carry into 1990. The important thing is wave form. In other words, it will be a lot easier to recognize when we’re there than to forecast it in advance. We’ll just have to be patient.

Breadth measures almost always begin to show weakness during a fifth-wave advance when compared to the first through third waves. For this reason, I would expect a very broad market through wave ③, then increasing selectivity until the peak of wave ⑤, by which time the leaders in the Dow may be almost the only things going. For now, play any stocks you like. Later on, we may have to pick and choose more carefully.

April 6, 1983

A Rising Tide
The Case For Wave V
In The Dow Jone Industrial Average

In 1978, A.J. Frost and I wrote a book called Elliott Wave Principle, which was published in November of that year. In the forecast chapter of that book, we made the following assessments:

1.      That wave V, a tremendous bull market advance, was required in order to complete the wave structure that began in 1932 for the Dow Industrial Average.

2.      That there would be no “crash of ’79” and in fact no ’69-’70 or ’73-’74 type decline until wave V had been completed.

3.      That the 740 low in March 1978 marked the end of Primary wave ② and would not be broken.

4.      That the bull market in progress would take a simple form, unlike the extended advance from 1942 to 1966.

5.      That the Dow Industrial Average would rise to the upper channel line and hit a target based on a 5x multiple of the wave IV low at 572, then calculated to be 2860.

6.      That, if our conclusion that 1974 marked the end of wave IV was correct, the fifth-wave peak would occur in the 1982-1984-time period, with 1983 being the most likely year for the actual top [and 1987 the next most likely].

7.      That “secondary” stocks would provide a leadership role throughout the advance.

8.      That after wave V was completed, the ensuing crash would be the worst in U.S. history.

One thing that continuously surprised us since we made those arguments was how long it took the Dow Jones Industrial Average finally to lift off. The broad market averages continued to rise persistently from 1978, but the Dow, which appeared to mirror more accurately the fears of inflation, depression and international banking collapse, didn’t end its corrective pattern, dating from 1966, until 1982. (For a detailed breakdown of that wave, see The Elliott Wave Theorist, September 1982 issue.) Despite this long wait, it fell only briefly beneath its long term trend line, and the explosive liftoff finally began when that downside breaks failed to precipitate any significant further selling.

If our overall assessment is correct, the forecasts Frost and I made based on the Wave Principle back in 1978 will still occur, with one major exception: the time target. As we explained in our book, R.N. Elliott said very little about time, and in fact our estimate for the time top was not something that the Wave Principle required, but simply an educated guess based on the conclusion that wave IV in the Dow ended in 1974. When it finally became clear that the long sideways wave IV correction hadn’t ended until 1982, the time element had to be shifted ahead to compensate for that change in assessment. At no time was there a doubt that wave V would occur; it was only a matter of when, and after what.

I would like to take this space to answer these important questions:

1.      Has the sideways correction in the Dow that began in 1966 actually ended?

2.      If so, how big a bull market can we expect?

3.      What will be its characteristics?

4.      What will happen afterward?

1) In 1982, the DJIA finished a correction of very large degree. The evidence for this conclusion is overwhelming.

First, as those who take the Wave Principle seriously have argued all along, the pattern from 1932 [see Figure A-8] is still incomplete and requires one final rise to finish a five-wave Elliott pattern. Since a Super cycle crash was not in the cards, what has occurred since 1966 is more than adequate for a correction of Cycle degree (the same degree as the 1932-1937, 1937-1942 and 1942-1966 waves).

Figure A-8

Figure A-9

Second, the sideways pattern from 1966 (or arguably 1964 or 1965, if you enjoy talking theory) pushed to the absolute limit the long-term parallel trend channel from 1932. As you can see in the illustration from Elliott’s own Nature’s Law [see Figure A-9], it is an occasional trait of fourth waves that they will break beneath the lower boundary of the uptrend channel just prior to the onset of wave five. The price action in 1982 simply leaves no more room for the correction to continue.

Third, the pattern between the mid-’60s and 1982 is another wonderful real-life example of standard corrective formations outlined by Elliott over forty years ago. The official name for this structure is a “double three” correction, which is two basic corrective patterns back-to-back. In this case, the market traced out a “flat” (or by another count, a[n unorthodox] triangle [from 1965]) in the first position and an “ascending [barrier] triangle” in the second, with an intervening simple three-wave advance, labeled “X,” which serves to separate the two component patterns. Elliott also recognized and illustrated the occasional propensity for the final wave of a triangle to fall out of the lower boundary line, as occurred in 1982. The doubling of a correction is moderately rare, and since the 1974 low had already touched the long term uptrend line, Frost and I weren’t expecting it. Moreover, a “double three” with a triangle in the second position is so rare that in my own experience it is unprecedented.

Fourth, the pattern has some interesting properties if treated as a single formation, that is, one correction. For instance, the first wave of the formation (996 to 740) covers almost exactly the same distance as the last wave (1024 to 777). The advancing portion, moreover, takes the same time as the declining portion, 8 years. The symmetry of the pattern prompted Frost and me to come up with the label “Packet Wave” in 1979, to describe a single pattern starting at “rest,” going through wider, then narrower swings, and returning to the point from which it began. (This concept is detailed in the December 1982 issue of The Elliott Wave Theorist.) Using the alternate count of two triangles, it happens that the middle wave (wave C) of each triangle covers the same territory, from the 1000 level to 740. Numerous Fibonacci relationships occur within the pattern, many of which were detailed in a Special Report of the Elliott Wave Theorist dated July 1982. Far more important, however, is the Fibonacci relationship of its starting and ending points to part of the preceding bull market. Hamilton Bolton made this famous observation in 1960:

Elliott pointed out a number of other coincidences. For instance, the number of points from 1921 to 1926 were 61.8% of the points of the last wave from 1926 to 1928 (the orthodox top). Likewise, in the five waves up from 1932 to 1937. Again the wave from the top in 1930 (297 DJIA) to the bottom in 1932 (40 DJIA) is 1.618 times the wave from 40 to 195 (1932 to 1937). Also, the decline from 1937 to 1938 was 61.8% of the advance from 1932 to 1937. Should the 1949 market to date adhere to this formula, then the advance from 1949 to 1956 (361 points DJIA) should be complete when 583 points (161.8% of the 361 points) have been added to the 1957 low of 416, or a total of 999 DJIA.

Figure A-10

So in projecting a Fibonacci relationship, Bolton forecast a peak that turned out to be just three points from the exact hourly reading at the top in 1966. But what was largely forgotten (in the wake of A.J. Frost’s successful forecast for the wave IV low at 572, which was borne out in 1974 at the hourly low of 572.20) was Bolton’s very next sentence:

Alternately, 361 points over 416 would call for 777 in the DJIA.

Needless to say, 777 was nowhere to be found. That is, until August 1982. The exact orthodox low on the hourly readings was 776.92 on August 12. In other words, Bolton’s calculations [see Figure A-10] defined the exact beginning and end of wave IV in advance, based on their relationships to the previous price structure. In price points, 1966-1982 is .618 of 1957-1982 and of 1949-1956, each of which, being equal, is .618 of 1957-1966, all within 1% error! When weekly and monthly patterns work out time after time to Fibonacci multiples, the typical response from Wall Street observers is, “Another coincidence.” When patterns of this size continue to do it, it becomes a matter of faith to continue to believe that Fibonacci multiples are not characteristic of the stock market. As far as I know, Bolton is the only dead man whose forecasts continue to fit the reality of Wall Street.

From these observations, I hope to have established that Cycle wave IV in the DJIA, which the “constant dollar Dow” clearly supports as a single bear phase, ended in August 1982.

2) The advance following this correction will be a much bigger bull market than anything seen in the last two decades. Numerous guidelines dealing with normal wave behavior support this contention.

First, as Frost and I have steadfastly maintained, the Elliott wave structure from 1932 is unfinished and requires a fifth wave advance to complete the pattern. At the time we wrote our book, there was simply no responsible wave interpretation that would allow for the rise beginning in 1932 already to have ended. The fifth wave will be of the same degree and should be in relative proportion to the wave patterns of 1932-1937, 1937- 1942, 1942-1966, and 1966-1982.

Second, a normal fifth wave will carry, based on Elliott’s channeling methods, to the upper channel line, which in this case cuts through the price action in the 3500-4000 range in the latter half of the 1980s. Elliott noted that when a fourth wave breaks the trend channel, the fifth will often have a throw-over, or a brief penetration through the same trend channel on the other side.

Third, an important guideline within the Wave Principle is that when the third wave is extended, as was the wave from 1942 to 1966, the first and fifth waves tend toward equality in time and magnitude. This is a tendency, not a necessity, but it does indicate that the advance from 1982 should resemble the first wave up, which took place from 1932 to 1937. Thus, this fifth wave should travel approximately the same percentage distance as wave I, which moved in nearly a 5x multiple from an estimated (the exact figures are not available) hourly low of 41 to an hourly peak of 194.50. Since the orthodox beginning of wave V was 777 in 1982, an equivalent multiple of 4.744 projects a target of 3686. If the exact hourly low for 1932 were known, one could project a precise number, Bolton style, with some confidence. As it stands, the “3686” number should be taken as probably falling within 100 points of the ideal projection (whether it comes true is another question).

Fourth, as far as time goes, the 1932-1937 bull market lasted five years. Therefore, one point to be watching for a possible market peak is 5 years from 1982, or 1987. Coincidentally, as we pointed out in our book, 1987 happens to be a Fibonacci 13 years from the correction’s low point in 1974, 21 years from the peak of wave III in 1966, and 55 years from the start of wave I in 1932. To complete the picture, 1987 is a perfect date for the Dow to hit its 3686 target since, to reach it, the Dow would have to burst briefly through its upper channel line in a “throw-over,” which is typical of exhaustion moves (such as the 1929 peak). Based on a 1.618 time multiple of the time of wave I and on equality to the 1920s fifth Cycle wave, an 8-year wave V would point to 1990 as the next most likely year for a peak. It would be particularly likely if the Dow is still substantially below the price target by 1987. Keep in mind that in wave forecasting, time is a consideration that is entirely secondary to both wave form, which is of primary importance, and price level.

Fifth, while the Dow Industrial Average is only in its first Primary wave advance within Cycle Wave V, the broader indexes began wave V in 1974 and are already well into their third Primary wave [see Figure A-12]. These indexes, such as the Value Line Average, the Indicator Digest Average and the Fastback Total Return Index, are tracing out a traditional extended third, or middle wave, and have just entered the most powerful portion. Estimating conservatively, 60% of five-wave sequences have extended third waves, so this interpretation is along the lines of a textbook pattern, whereas attempts to interpret the broader indexes as being in their fifth and final wave are not. With a third wave extension under way in the broad indexes, a good deal of time will be necessary to complete the third wave, and then trace out the fourth and fifth waves. With all that ahead of us, the size of the current bull market will have to be substantial.

April 6, 1983 (Continued)

3) Now that the likelihood of wave V occurring has been established and its size and shape estimated, it might be helpful to assess its probable characteristics.

First, the advance should be very selective, and rotation from one group to another should be pronounced. Breadth during wave V should be unexceptional, if not outright poor relative to the spectacular breadth performance in the monolithic markets of the 1940s and ’50s, during wave III. Since it’s an impulse wave, however, it will certainly be broader than anything we saw within wave IV from 1966 to 1982.b

*A moment’s thought explains the reason why the wave V advance will be thin in relationship to waves I and III. In a fifth wave, the prolonged “bull” move is coming to its conclusion, and relative to the corrections within that bull phase, major damage is due to follow. In long term waves, fundamental background conditions have by then deteriorated to the point that fewer and fewer companies will increase their prosperity in the environment of the upswing. (It seems clear to me that these conditions exist today on a Super cycle basis.) Thus the bull market, while providing huge opportunities for profit, becomes observably more selective, as reflected by an underperforming advance-decline line and fewer days of abundant “new highs” in stocks. Have you noticed how, since the 1974 low, stocks have rarely gone up all at once, but prefer to advance selectively, a few groups at a time?

* The next two paragraphs are from the April 11, 1983 issue of The Elliott Wave Theorist, published five days later. The sentences before and after the asterisk include wording from the December 1982 issue.

Figure A-11

All degrees of non-extended (and even most extended) fifth waves act this way, which is exactly what causes standard “sell signals” based on divergence. The problem is that most analysts apply this concept only to the near or intermediate term swings. However, it is just as true of Super cycle swings as the smaller ones. In effect, the flat a-d line of the 1920s [see Figure A-11] was a “sell signal” for the entire advance from 1857. Similarly, the flat a-d line in the mid-’60s was a “sell signal” for the 1942-1966 bull market. A relatively poorly performing a-d line from 1982 to (I expect) 1987 will be a “sell signal” for the entire Super cycle from 1932. The lesson for now is, don’t use that underperformance as a reason to sell too early and miss out on what promises to be one of the most profitable up legs in the history of the stock market.

Figure A-12

Second, this bull market should be a simple structure, more akin to 1932-1937 than to 1942-1966. In other words, expect a swift and persistent advance, with short corrections, as opposed to long rolling advances with evenly spaced corrective phases. Large institutions will probably do best by avoiding a market timing strategy and concentrating on stock selection, remaining heavily invested until a full five Primary waves can be counted.

Third, the wave structure of the Dow and that of the broader indexes should fit together. If the count based on our 1978 interpretation [see Figure A-12] is still the correct one, then it is the same as that for the broad indexes, and their waves will coincide. If the preferred count is the correct one, then I would expect the third wave in the broad indexes to end when the Dow finishes its first wave, and the fifth wave in the broad indexes to end when the Dow finishes its third wave. That would mean that during the Dow’s fifth wave, it would be virtually alone in making new highs, as market breadth begins to thin out more obviously. At the ultimate top, then, I would not be surprised to see the Dow Industrials in new high ground, unconfirmed by both the broad indexes and the advance-decline line, creating a classic technical divergence.

Finally, given the technical situation, what might we conclude about the psychological aspects of wave V? The 1920s bull market was a fifth wave of a third Super cycle wave, while Cycle Wave V is the fifth wave of a fifth Super cycle wave. Thus, as the last hurrah, it should be characterized, at its end, by an almost unbelievable institutional mania for stocks and a public mania for stock index futures, stock options, and options on futures. In my opinion, the long term sentiment gauges will give off major trend sell signals two or three years before the final top, and the market will just keep on going. In order for the Dow to reach the heights expected by the year 1987 or 1990, and in order to set up the U.S. stock market to experience the greatest crash in its history, which, according to the Wave Principle, is due to follow wave V, investor mass psychology should reach manic proportions, with elements of 1929, 1968 and 1973 all operating together and, at the end, to an even greater extreme.

4) If all goes according to expectations, the last remaining question is, “what happens after wave V tops out?”

The Wave Principle would recognize the 3686 top as the end of wave V of (V), the peak of a Grand Super cycle. A Grand Super cycle bear market would then “correct” all the progress dating from the late 1700s. The downside target zone would be the price area (ideally near the low*) of the previous fourth wave of lesser degree, wave (IV), which fell from 381 to 41 on the Dow. Worldwide banking failures, government bankruptcy, and eventual destruction of the paper money system might be plausible explanations** for a bear phase of this magnitude. Since armed conflicts often occur after severe financial crises, one would have to consider the possibility that the collapse in value of financial assets of this magnitude would presage war between the superpowers. Regarding time, either wave (A) or wave (C) of the Grand Super cycle correction should bottom in 1999, + or - 1 year, based on several observations. From a 1987 top, a decline matching the 13 years up from 1974 would point to the year 2000. From a 1990 top, a decline matching the 8 years up from 1982 would point to 1998. It also happens that the very regular recurrence of turning points at 16.6-16.9-year intervals [see Figure A-8, bottom] projects 1999 for the next turning point. Finally, with the Kondratieff economic cycle due to bottom in 2003 (+ or - 5 years), a stock market low a few years prior to that time would fit the historical pattern.

* More likely near the high; see at the Crest of the Tidal Wave. (The daily closing high was 381.17; the intraday high was 383.00.)

August 18, 1983

The Super Bull Market of the '80s-
Has the Last Wild Ride Really Begun?

When A.J. Frost and I wrote Elliott Wave Principle in 1978, the prevailing attitude was that the Kondratieff cycle was rolling over and would create the “Awful ’80s.” Books such as How to Survive the Coming Depression and The Crash of ’79 were on the bestseller lists. Gold and inflation were skyrocketing, and Jimmy Carter was battling the memory of Herbert Hoover for a place in history as the country’s worst president.

In writing a book about how to apply Elliott’s Wave Principle, it was virtually impossible to avoid making a forecast, since a wave interpretation of the past almost always implies something about the future. At that time, the evidence was overwhelming that the stock market was at the dawn of a tremendous bull market. Even at the stage, the Wave Principle revealed some of the details of what the bull might look like: a classic five-wave form in the price pattern, a 400% increase in the Dow Industrials in a short span of five to eight years, and a Dow target close to 3000. While that figure was met with some derision at the time and a good deal of skepticism even today, Elliott wave-based forecasts (even competent ones) can often appear extreme. The reason is that the Wave Principle is one of the few tools which can help an analyst anticipate changes in trends, including trends that are so long term that they have become accepted as the normal state of affairs. I have no doubt that by the time this bull market is ending, our call for a huge crash and depression will be laughed off the street. In fact, that’s exactly what we should expect if there is to be any chance that we’re right.

If our ongoing analysis is correct, the current environment is providing a once-in-a-generation money making opportunity. This opportunity takes on greater importance, however, because it may well precede not merely a Kondratieff cycle downswing, but the biggest financial catastrophe since the founding of the Republic. In other words, we had better make our fortunes now just in case “Elliott” is right about the aftermath. But for this article, let’s forget the “crash” part of our forecast and concentrate on the “bull market” part. There are still plenty of questions to be answered about the expected bull market years. After all, no forecast is proven correct until it’s fulfilled, and the Dow is still a long way from our recently refined target of 3600-3700 in 1987. Do we have any evidence that stocks have started what we call “Wave V” in the long advance from the Depression depths of 1932? The answer, in a word, is an emphatic “yes.” Let’s examine several powerfully confirming signs.

The Wave Principle

The wave structure coming off the August 1982 bottom has been strikingly clear in contrast to the corrective wave ramble which preceded it. Advancing waves are all “fives,” while declines all take the form of one of Elliott’s corrective patterns. The move channels well, contains no “overlaps,” and follows all the rules and guidelines that R.N. Elliott spelled out over 40 years ago. Volume and internal momentum figures confirm the preferred wave count at every point along the way. Wave counting adjustments have been minimal in contrast to the frequent uncertainties during corrective periods. All of these elements strongly support the case that a bull market is in progress. Detailed evidence is continually presented in ongoing issues of The Elliott Wave Theorist, so there is no reason to recount it all here. What is particularly interesting at this stage is the corroboration provided by standard technical analysis, the social environment and the recently constructed machinery for financial speculation, all which have signaled a major change in the status of the market.

Momentum

Indicators of stock market momentum almost always “announce” the beginning of a huge bull market. They do so by creating a tremendously overbought condition in the initial stage of advance. While this tendency is noticeable at all degrees of trend, the Annual Rate of Change for the S&P 500 is particularly useful in judging the strength of “kickoff” momentum in large waves of Cycle and Super cycle degree. This indicator is created by plotting the percentage difference between the average daily close for the S&P 500 in the current month and its reading for the same month a year earlier. The peak momentum reading is typically registered about one year after the start of the move, due to the construction of the indicator. What’s important is the level the indicator reaches. As you can see [in Figure A-13], the level of “overbought” at the end of July 1983, approximately one year after the start of the current bull market, is the highest since May 1943, approximately one year after the start of Cycle wave III. The fact that they each hit the 50% level is a strong confirmation that they mark the beginning of waves of equivalent degrees. In other words, August 1982 marked the start of something more than what has come to be regarded as the norm, a 2-year bull market followed by a 2-year bear. On the other hand, it has not indicated the start of a glorious “new era” either. If a wave of Super cycle degree were beginning, we would expect to see the kind of overbought reading generated in 1933, when the indicator hit 124% one year after the start of wave (V) from 1932. There is now no chance that such a level can even be approached. Thus, the highest overbought condition in forty years signals to me that our Elliott wave forecast for the launching of wave V is right on target.

Figure A-13

Sentiment

Foreknowledge of how indicators might be expected to act is another example of just useful an Elliott wave perspective can be. As I have argued since the early days of the current advance, the sentiment indicators should reach much more extreme levels than they ever saw in the 1970s. This assessment has been proved by now, with the Dow over 300 points higher than when the sentiment figures first gave sell signals based on the old parameters. Sentiment figures are a function of the vitality and extent of the market in progress. The fact that the indicators’ 10-year parameters have been exceeded is more good evidence that Cycle Wave V has begun.

The Social Scene

By the top, the nostalgic conservatism of the current social scene should give way to a wild abandon characteristic of the late 1920s and late 1960s. [For the rest of this text, see page 41 of Pioneering Studies in Socionomics — Ed.]

Falling into Place

With sentiment, momentum, wave characteristics and social phenomena all supporting our original forecast, can we say that the environment on Wall Street is conducive to developing a full-blown speculative mania? In 1978, an Elliott analyst had no way of knowing just what the mechanisms for a wild speculation would be. “Where’s the 10% margin which made the 1920s possible?” was a common rebuttal. Well, to be honest, we didn’t know. But now look! The entire structure is being built as if it were planned.

Options on hundreds of stocks (and now stock indexes) allow the speculator to deal in thousands of shares of stock for a fraction of their values. Futures contracts on stock indexes, which promise to deliver nothing, have been created for the most part as speculative vehicles with huge leverage. Options on futures carry the possibilities one step further. And it’s not stopping there. Major financial newspapers are calling for the end of any margin requirements on stocks whatsoever. “Lookback” options are making a debut. S&L’s are leaping into the stock brokerage business, sending flyers to little old ladies. And New York City banks are already constructing kiosks for quote machines so that depositors can stop off at lunch and punch out their favorite stocks. Options exchanges are creating new and speculative instruments — guess the C.P.I. and win a bundle! In other words, the financial arena is becoming the place to be. And, as if by magic, the media are geometrically increasing coverage of financial news. New financial newsletters and magazines are being created every few months. Financial News Network is now broadcasting 12 hours a day, bringing up-to-the-minute quotations on stocks and commodities via satellite and cable into millions of homes.

Remember, this is just the set-up phase. The average guy probably won’t be joining the party until the Dow clears 2000. The market’s atmosphere by then will undoubtedly become out and- out euphoric. Then you can start watching the public’s activity as if it were one huge sentiment indicator. When the stock market makes the news reports every single day (as gold did starting about two months before the top, remember?), when your neighbors find out you’re “in the Business” and start telling you about their latest speculations, when stories of stock market riches hit the pages of the general newspapers, when the best seller list includes “How to Make Millions in Stocks,” when Walden’s and Dalton start stocking Elliott Wave Principle, when almost no one is willing to discuss financial calamity or nuclear war, when mini-skirts return and men dress with flash and flair, and when your friends stay home from work to monitor Quotron machines (since it’s more lucrative than working), then you know we’ll be close. At the peak of the fifth wave, the spectacle could rival Tulipomania and the South Sea Bubble.

Part of the character of a fifth wave of any degree is the occurrence of psychological denial on a mass scale. In other words, the fundamental problems are obvious and threatening to anyone who coldly analyzes the situation, but the average person chooses to explain them away, ignore them, or even deny their existence. This fifth wave should be no exception, and will be built more on unfounded hopes than on soundly improving fundamentals such as the U.S. experienced in the 1950s and early ’60s. And since this fifth wave, wave V, is a fifth within a larger fifth, wave (V) from 1789, the phenomenon should be magnified by the time the peak is reached. By that time, we should be hearing that the global debt pyramid is “no longer a problem,” that the market and the economy have “learned to live with high interest rates” and that computers have ushered in a “new era of unparalleled prosperity.” Don’t lose your perspective when the time comes. It will take great courage to make money during this bull market, because in the early stages it will be easy to be too cautious. However, it will take even greater courage to get out near the top, because that’s when the world will call you a damn fool for selling.

Perspective

One way to avoid the premature selling that is so typical during bull markets is to obtain a long term perspective on the present which most investors lack. One of the reasons that the Wave Principle is so valuable is that it usually forces the analyst to look at the big picture in order to make all relevant conclusions about the market’s current position. Put/call ratios and 10-day averages are valuable as far as they go, but they are best interpreted within the context of the broad sweep of the market events.

Take another look at the long term Dow chart and ask yourself a few questions about some points that are considered common knowledge.

— Is the market really “more volatile” today than it has ever been in the past? No. A look at 1921-1946 throws that idea right out the window.

— Is the 1000 level a “high” level? For that matter, is 1200 a “high” level? Not anymore! The long period spent going sideways since 1966 has put the Dow back at the lower end of its fifty-year uptrend channel in “current dollar” terms (and down to a point of very low valuation in “constant dollar” terms).

— Is the current bull market an “old” bull market which began in 1974 and is therefore “running out of time”? Hardly. Both in “constant dollar” terms and with reference to the 40- year uptrend, the Dow was more undervalued in 1982 than at the crash low in 1974.

— Is my Elliott-based expectation of a 400% gain in 5-8 years a wild one? It appears to be, when compared to recent history. But not when compared to 1921-1929, a 500% gain in 8 years, or 1932-1937, a 400% gain in 5 years.

— Can you always extrapolate current trends into the future? Definitely not. The one rule of the market is change.

— Is any cycle ever “just like the last one”? Not too often! In fact, Elliott formulated a rule about it, called the Rule of Alternation. Broadly interpreted, it instructs the investor to look for a different style of patterns as each new phase begins.

— Is recent market action “too strong,” “overextended,” “unprecedented,” or even a “new era”? No, variations on today’s theme all happened before.

— Is the market a random walk, or an erratic wild ride, whipping back and forth without form, trend or pattern? If so, it’s “wandered” into long-lasting periods of clear trend, rhythmic cyclical repetition and impeccable Elliott wave patterns.

At the very least, [Figure A-13] helps you picture the market’s action within the broad sweep of history, thus making next week’s money supply report appear as irrelevant as it really is. Furthermore, it helps you visualize why a bull market which is larger than the 30%-80% gains of the upward swings of the last sixteen years is probable, while illustrating the potential for a bull market bigger than any in the fifty years.