Long Term Elliott Wave Prognostications on the Dow Jones Industrial Age

December 15, 2022No Comments

Today we are going to talk about the Dow Jones Industrial Average and applying a very long-termed macro approach to where we may be in the Elliot Wave cycle of the Dow. Now, I should point out that I am not an Elliot Wave Theory specialist. I like to say I know enough to be dangerous. So if you read my blog or watch my videos on a regular basis you will, on the occasion, see me refer to some Elliot Wave work that I attempt to do. But I do like to say that compared to a true Elliottician, I’m an amateur. Now, I will also point out that I have yet to be convinced after almost 33 years of being involved with this industry, and almost as long in technical analysis, that I am not convinced that Fibonacci numbers such as retracements and targets and all that kind of stuff offers a lot of value to investors.

Now I know that that statement might get me some hate mail, but I’m okay with that because I’ve applied it, I’ve tried it and what I find is that with Elliot Wave itself, and particularly with Fibonacci retracements, people keep adjusting the target. Oh, it wasn’t a 50% retracement. Well maybe it’ll be a 62.8% retracement and on they go. As far as making prognostications as to how far a market will correct or how far a market may reach in an uptrend, I like to use good old fashioned trend analysis and support resistance, which is clusters of where real investors have actually bought or sold in the past rather than just abstract mathematical ratios. So there’s my peace on it, however, I do like Elliot Wave for its ability to give us a pretty good idea of approximately where we are within broader macro market cycles. Let’s get into it right now so you get that same idea.

Now some of this is covered in my online technical analysis course, but we’re going cover a bit of it right here and then we’re going to apply it to the Dow Jones today. So this is my Dow Jones Industrial Average Elliot Wave prognostications, or as I like to call it, armchair Elliot Wave theory. I’m not a dedicated Elliot Wave theory person, but I know enough to be dangerous. So let’s start off with talking about what the basics of Elliot Wave are, and this is a really high-level look, but basically, there are five waves. You will see this when you look at long-term charts. The reason I like the Elliot Wave is because you can see it.

There’s kind of a short wave off of a bottom. So let’s say the market’s been in a bear market and then you see this rally up and it often fools a lot of people, this rally up, because a lot of the retail investors have been pretty scared by the bear market. So they don’t buy into that first wave. Understandable. They’re kind of paranoid. Sophisticated analysis done by professional and institutional investors do buy in at this point. In fact, they’re the only ones that buy in and that’s the reason why it’s a relatively short wave. The market has been falling and then it decides to spike up. And a lot of people are asking, is this a head fake or is this the beginning of a bull market? I’m writing this in the early part of December 2022 and I’m sure that the recent rally up from October to now is inspiring that same question.

Is this a head fake or is this the real thing? Is it the bottom? So at the real bottom, professional investors do buy in and because they’re smart, they usually know more than the rest of us. There’s usually a counter wave of selling that doesn’t take out the full move that the smart money makes and that’s your clue as to if the market is actually moving into a true bull because it will not test the old lows. It does a counter-move, but it doesn’t go as far down as it did at the bottom. The third wave is the big wave and that’s when over time, more and more retail unsophisticated investors and other investment managers that are not in the upper echelon of the Warren Buffet and whatnot world start moving into the market. This can last for years and years and years if we’re looking at a macro point of view, like many years.

And then we do get some sort of a correction and the correction is where people buy the dips for good reason. It’s been in an uptrend. That dip doesn’t go down to new lows, it just dips. Then the last wave is kind of the speculative wave. And this is really important because the speculative wave is always notifying you that it is a speculative wave by concentrated breadth. Technology, oil, whatever it is that’s been the hot topic for the past year or two, that’s the thing that’s driving the market and in fact, a lot of the other components of the market get ignored. So it’s not a broad market rally. It becomes a feverish speculative market that quite frankly is bought by mostly retail investors and a lot of the pros are selling happily to those retail investors.

Then finally we move into a top and then we go into a corrective sequence. Now this is the simple version of the corrective sequence and we’ll talk a little bit later about an equally common corrective sequence, but we’ll call it the ABC. So rather than one, two, three, four, five, we’ll call it ABC. The pros start selling. The general public buys that dip and it does actually create a rally. The other question is right now, in December 2022, is this just a rally within the bear or is this the real McCoy? So that’s the question of the day. And then finally the general public sell out at the very end, very often near the very bottom, if not at the bottom. And, anecdotes, because I’ve been doing this for 33 years, I’ve got stories I could tell you.

As a retail broker during both the 2001 and the 2008 crash, I did have retail. Now I was a portfolio manager in 2008, but I was early stage portfolio manager and I was dealing largely with retail clients who were a little bit more emotional. I must say my clients today are much better selected than the way I selected clients back then. I had people sell literally against my advice. Literally, in 2009, I had two people sell in the week of the very bottom. The March 2009 bottom, I had two separate clients totally unrelated to each other. One person sold on the day and the hour, the hour of the low of the day of the bottom of the entire year and a half bear market, and the other person sold within a few days of that.

There’s varying degrees of this within retail investors, but often the banks get a flush of mutual fund or ETF-type sales because that’s what retail investors buy and sell. So they’re selling them in this last wake. So that’s what it looks like, if we want to sort of summarize these waves. In wave one, because it’s coming off of a bear, the smart money buys, the crowd says oh, that was a false start so there’s a correction. Then as the wave three begins, more and more news is positive, the retail the crowd buys, including investment managers, the less smart investment managers. Counter four wave is just a dip buying opportunity as far as the retail investor and other investors are concerned. Then finally in wave five, that’s the concentrated breadth, the speculative wave, and dumb money is very, very bullish.

Corrective wave A, there is smart money and pros are selling. There’s a counter wave where again, the retail money buys the dip thinking that was a good opportunity and that causes wave B to move up because of that dip buying money flow and then eventually the dumb money sells out in total. Now, I mentioned that sometimes that ABC wave can take on a different look. This is called running flat. In fact, if you’ve got a lot of sideways movement after a bull market finishes, they’ll often be marked A, B, C, X, A, B, C, X. It can go on for a while, but this is a simple way of looking at it. You can see there’s smaller waves within the bigger waves. But if we look at the big wave A, B, C, and then the market took off.

It didn’t look like this where it went A, B, C in a down trend. It moved kind of sideways. So now let’s get to the grand finale. We’re going talk about what the Dow Jones has done since 1900. I hope that’s enough history for you. So since 1900, that’s really just a short while after that index was incepted, we were in a ABC corrective mode which finished up with the 1929-1930 crash. It was relatively like that sideways movement. So again, corrective modes can be sideways and then we moved into a bull market. So if we look at the very big picture, assuming that this was the last bear market, 1929, we moved into a five wave sequence where you have A B corrective wave, doesn’t have to be down, just has to be not going up.

Number three wave, number four another counter corrective with a couple of opportunities for the dip buyers. Again, lots of opportunities in this one for the dip buyers. Then finally the fifth wave. Now the fifth wave, like I said, is characterized by concentrated breadth, speculation. We saw Bitcoin. Remember the Kathy Wood Ark Fund went crazy because it was all the new technology, the Shopifys and whatever that were in there. It doesn’t mean that they’re all garbage stocks. It means that they were overvalued because people were bidding them up too much, like Tesla. Tesla’s a great company. I am a major Elon Musk fan, but the stock got way too expensive and I blogged and videoed about this many, many times in the past. So this is the sign of the fifth wave. The fifth wave really took place over the last decade or so, and you can see that.

But it finished up with a big move up. So the question right now is, are we in, as the market corrects, my arrow is covered up part of this correction, but the question is, are we in wave A of the ABC sequence, which could be like this or could be down, up, down again. That’s the question, but I might suggest we could be, because remember the characteristic of wave five is speculation and dumb money jumping in and low breadth, like very concentrated market. In fact, if you look, you can see these patterns even within any length. So you had kind of 1, 2, 3, 4, 5 here. There are many ways you can count waves and that’s why I’m not an expert because I just get too wrapped up in this stuff and it’s not as pragmatic as I’d like, but it does give you a feel.

So when this was happening, anybody that reads my blog or watches my videos, you know that I was telling you that things were too speculative. I talked about market breadth all through the latter half of 2021. And lo and behold, we’re in a bear market right now. Now the question is, is it going to be a biggie or is it going to be just part of the grand up trend? Well, my bet is that we have a little bit more room to go down and I think we’ve seen part of those corrective waves, but I think we may have a little bit more to go maybe early next year. But that’s just an opinion and my opinion is no better than yours, quite frankly, because I need to only follow the trends. What’s the market doing? I just thought I would bring it up, this wave count of mine, and this look at how Elliot wave can help us.

Because, again, even if you don’t use it to accurately project where the market is going, you can absolutely get a feel for where we are in the cycle. So if you believe that we are making a bottom, here it is December of 22, if you believe this is the bottom then you say, okay, yeah, the public’s been throwing in the towel. Everybody’s been selling their mutual funds and ETFs. The smart money’s sold out. You have got to look for those signs. If you believe that this is just one of the waves in this down three wave sequence, then you could say this maybe is right now a counter wave. As I mentioned, from October to December we’ve had a rally. Maybe this is a counter wave in ABC correction. Well, the way you’re going to be able to tell if it’s not over is if you do not hear of everybody you know selling out, panicking, and freaking out.

Because I can tell you that, even on a smaller scale, is what happened in 2008, like I said, with my couple of clients that sold out and just the raw panic you could feel in late 2008, early 2009, and the raw panic you could feel in 2001 and even into 2002. These are moments of not just, I’m disappointed in my investment portfolio because it’s gone down 20% stuff. This is, I’ve lost half my money, I’m freaking out. I don’t know if that’s happening yet. You be the judge. So thanks for watching. We’ll catch you next week.


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