Elliott

Elliott wave theory has become very popular in the wake of the 2008-09 financial crisis. Lots of Elliott wave blogs have sprung up and most of them focus on the U.S. stock market averages.

I have mixed feelings about Elliott's wave theory. On the one hand it can sometimes enable one to construct spectacularly correct market forecasts. On the other, it offers too much scope for personal prejudice and bias to influence the wave count. For this latter reason I don't find it much of much use in my day-to-day market activities.

In my view the top two Elliott wave interpreters of the last 60 years were Hamilton Bolton and Charles Collins (sadly, both now deceased). They shared one important attitude towards Elliott's theory. Each believed that one should not expect the small details of the price movement to fit the theory exactly. Instead they emphasized the importance of looking only at the big picture, especially if it just jumps out at you from the chart.

The chart above this post shows the cash S&P from the start of the current bull market on March of 2009 at the 666 level. I have traced in green the first upward leg of the bull market which divided clearly into a classic, five wave Elliott pattern. Elliott's theory asserts that a five wave movement up from a low such as was seen in March 2009 is never a completed bull market. Instead it will be followed by a three wave corrective movement, and then by at least one more, five wave move up to new highs.

The drop from the 1219 level of the April 26, 2010 high subdivides into a classic, three stage, "flat"correction: three smaller waves down to the May 25 low, then three smaller waves up to the June 21 high, and finally a fast, scary movement down to the final low of the correction at 1010. I have traced this wave sequence for you in red.

Not only is the wave pattern of this correction exceptionally clear, but the correction ended almost exactly at the .382 Fibonacci retracement of the five wave up leg. This is added evidence that the correction is complete. Further support for this deduction comes from the extreme bearishness of individual investors and the strong bullish divergences shown by the advancing issues oscillators at the July 2 low point.

So I think that Elliott's wave theory offers more evidence that new highs for the move up from the March 2009 low lie ahead. The remarkable thing about this analysis is that, despite its simplicity, it is not the view of most of the Elliott wave blogs (exceptions: Caldaro and PUG). The Elliott wavers are bearish, almost to a man. This illustrates how easy it is to fit Elliott's theory to one's own market biases.