Elliott Wave and Hurst Cycle Analysis of the U.S. Stock Market by Sid from ElliottWavePredictions.com. Click on the charts twice to enlarge.
Many Elliotticians (including myself) regard the Y2K peak in stocks as the Supercycle wave 3 top. Supporting evidence includes the record-high RSI reading at that peak, as shown on the quarterly DJIA chart below. While many times, RSI readings reach their extreme at the wave 3 (burgundy: 1987), and show divergence at the end of the 5th wave (burgundy: 2000), I’ve found that if the 5th wave is extended (as it was from 1987-2000), the RSI will reach its extreme at the end of the 5th wave, as it did in Y2K. The significance of the 2000 high cannot be overstated, as panic buying pushed price action into a parabolic mania from 1995 into the Y2K top.
Since 2000, stocks have generally been moving in a sideways, boom and bust pattern. Rather than attach European data going back centuries to the beginning of the DJIA to develop a combined ultra-long-term count, it appears to me that because the 1929-1932 correction was a 90% crash that lasted only 3 years, it was most likely a wave 2 within a larger 5-wave impulse. It seems unlikely that it was a wave 4 at very large degree because of the extreme depth and brevity of the move. Wave 4′s typically retrace the entirety of the preceding 3rd wave by 30 to 50%. Not 90%. Also, Wave 4′s are typically long-lasting sideways affairs (like triangles), while wave 2′s are more likely to be sharp and deep (like zigzags or double zigzags). I’m therefore counting what I see with my own eyes, with over 100 years of data to look at, and have labeled the 1929 top as supercycle wave 1, and the 1932 bottom as supercycle wave 2.
Using R.N. Elliott’s trendline system, I’ve connected the extremes of supercycle wave 1 (1929) and 3 (2000), and have placed a parallel copy at the extreme of wave 2 (1932). R.N. Elliott found that wave 4′s will typically challenge that trendline, using it as support before a 5th wave to the upside ensues. I therefore believe that supercycle wave 4 is still underway, as price hasn’t even moved into the lower half of that trend channel yet.
The topping pattern since the Y2K top can be one of two Elliott Wave patterns in my opinion. My main count is that the 2000-2009 period was an “expanded flat”, and because price did not move into the lower half of the supercycle Elliott trend channel, I’ve labeled 2000-2009 as cycle (teal) wave A within what will likely end up being a long-lasting ABC “flat” for supercycle wave 4. Cycle wave B of that flat has been underway since March 2009, and may have topped a few days ago (July 3). B waves are typically accompanied by low volume, and continue higher on lousy fundamentals. Those characteristics have certainly been present ever since the 2009 low. Wave C of the flat would be next, and should move down in 5 waves, likely ending below the 2009 low, completing an expanded flat for supercycle wave 4. However, a new low below the 2009 low is not required, as a more rare “running flat” is also possible. As long as Central Banks around the globe continue colluding to debase their currencies, I find it quite easy to accept that wave C may not be able to take out the 2009 low (using nominal pricing), as the value of the fiat measuring unit (the US Dollar, in this case) may continue to be forcibly shriveled. If wave C ends above the 2009 low, but moves down from near current levels in 5 large waves, supercycle wave 4 will go down in history as a running flat.
The pattern I find second most likely since Y2K is that of an expanding wave 4 triangle. Edwards and Magee referred to this pattern as a “megaphone”, or “broadening top” This happens to have been the exact pattern seen in stocks from 1966-1974, but that was at one lesser degree of trend. It is therefore possible that supercycle wave 4 is carving out a larger fractal of the most recent cycle-degree wave 4 pattern. If the expanding triangle interpretation is correct, Wave D of the triangle is likely finished, or very nearly so, and wave E must take the form of a crash to below the 2009 low next, moving downward in a massive and aggressive ABC.
A closer-up monthly chart of the topping process since January 2000 in the DJIA is shown below. Notice the broken RSI trendline, followed by the RSI most recently testing the underside of the broken trendline. This is textbook RSI behavior before a breakdown.
Now for a new idea. I’ve been incorporating Hurst cycle analysis along with Elliott Wave now for almost a year now thanks to Sentient Trader software. This allows me to combine the expected Hurst cycle peaks and troughs, even at small degree, with Elliott Wave, and its associated Fibonacci price targets. The combination of these two tools is quite powerful, as Elliott Wave/Fibonacci is great for projecting how far price movements will go, but is lacking in its ability to project how long it will take for price to get there.
Hurst analysis essentially unveils the “tempo” of the natural underlying “rhythm” of the market. J. M. Hurst believed that there are numerous “cycles” operating within the market simultaneously, some long-term, some shorter term, and some in-between. These cycles combine to pressure price to the upside or downside. The more cycles that are sloping to the upside simultaneously, the more upside pressure there is, and vice versa.
In my experience, at significant trend changes, the market switches gears, and starts marching to a different underlying rhythm than it was prior to the trend change. Since I am counting the Y2K top was the last significant (supercycle) trend change, I believe that Hurst cycle analysis starting at the Y2K high best measures the underlying “rhythm” within the market at this time. Below is a screenshot of the Sentient Trader, Hurst Cycle analysis starting at the March 2000 price top in the S&P-500. I’ve made some additional notations on the chart.
Many economists acknowledge the existence of a naturally recurring, 4.5-year business cycle. When markets ebb and flow naturally, history shows a tendency toward cycle “troughs” about every 4.5-years. J.M. Hurst documented this phenomenon in his cycles research many decades ago, and economists like David Stockman often refer to the 4.5-year business cycle still today. Notice that the Sentient Trader software, when the analysis is started at the Y2K supercycle wave 3 top, places a 4.5-year cycle trough at the 2002 low. The next 4.5 year cycle trough was in July 2007, just before the late-2007 market peak. By the way, it is not unusual for cycle troughs to occasionally be placed at price dips that aren’t obvious as large cycle troughs on the charts, especially when there is a very long, strong trend underway (like 1982 though 2000), or when central bank and/or congressional interventions are as prevalent as they’ve been in recent decades. Case in point: legislation promoting easy mortgage credit for the masses is widely believed to have largely contributed to the market bubble continuation into the 2007 peak.
Then, the next 4.5-yr cycle trough is placed at the October 2011 low, and not at the March 2009 low. This is quite interesting, as the October 2011 low was the stock market low since Y2K when priced in gold. This indicates to me that the extraordinary, experimentally huge intervention into the economy by the Fed starting in November 2008 (QE1) may have artificially stopped the stock market from continuing (nominally) downward into its natural 4.5-yr cycle trough in October 2011.
So, if October 2011 was the last 4.5-yr cycle trough, the next large-degree cycle troughs are expected in March 2015 (18-month cycle), and then March of 2016 (the next 4.5-yr cycle trough). Notice on the chart that the over-arching 4.5-year (53.9-month) cycle crested on 12/31/13, and the 18.1 month cycle crested on 5/31-14. That means that starting last month, there are two large-degree cycles now applying downward pressure on the U.S. stock market. The last time this occurred was in early 2010, just before QE1 ended in March of that year. Interestingly, those events were followed closely by the flash crash of May 6, 2010, a market correction of 15%, and the inception of QE2.
Labeling the October 2011 low as the most recent 4.5-year cycle trough also helps explain some of unnatural price action since March 2009, from an Elliott Wave perspective. What if March 2011 was the natural end of Cycle (teal) wave A? See the weekly chart below for the “food-for-thought” depiction. The labeling does not follow Elliott Wave rules, but attempts to show what the wave count might have been, had the Fed not been distorting the markets by constantly f?/king with the unit of measure.
Notice the interpretation of 5-waves down (outlined in red), from the October 2007 high though the October 2011 low. Notice the timing of QE 1 (Nov. 2008), and the resulting prolonged upward grind for black (intermediate) wave 4, followed by an unnaturally short 5-waves down through the October 2011 low. From an Elliott Wave standpoint, there are some very fishy goings on throughout the entirely of black waves 4 and 5, when attempting to interpret the nominal price action. For instance, I remember thinking in realtime that the initial blue wave A up from the March 2009 low had a lousy (pink) wave 3 inside of it, with choppiness at the wave 3 of 3 (point-of recognition) section. The same thing goes for the following blue wave C starting July 2010. As a matter of fact, there is a conspicuous absence of strong wave-3 mid-sections within all upside lower-degree waves ever since the March 2009 low. Also, the blue waves 3 and 5 from August through October 2011 saw price continually trying to pound lower over the 2-month period, and I remember thinking in realtime that there must be some “mysterious force” putting a floor under the market, especially after the July 2011 Fitch downgrade of U.S. debt.
So what does this all mean in today’s market? This “distortion adjusted” interpretation would allow the upward movement since October 2011 to be counted as a double zigzag, which may have ended just a few days ago (on July 3), or may find a slight and final new high in mid-August (according to the latest Hurst cycle analysis). Note that the expected mid-August peak might also be the extreme of wave 2 within a downward 5-wave impulse starting July 3.
Ultimately, had the dollar not been systematically and dramatically debased since the inception of QE1 in November 2008, the rise since March 2009 would not have stretched as far as it has in relation to price action prior to November 2008. Duh. This makes it very easy to accept the continued labeling of the overall rise since March 2009 (or October 2011!) as a cycle-degree wave B (teal), despite it reaching a fairly elongated 1.618 times the length of cycle wave A (teal), when labeling the nominal March 2009 low as the end of cycle wave A.
So why wouldn’t the Fed just taper the taper, and start printing more heavily again to keep the market moving upward forever? Because this isn’t 2008, 2009, 2010, or 2011. It’s July 2014, and they’ve already “broken the bank” by blowing up the Fed’s balance sheet, and it hasn’t worked. Not for the middle class it hasn’t. So we’re on to them, and their constant lies about the condition of the economy, inflation and employment. Their actions have stolen the expendable income AND savings from the middle class. And without a strong, employed, and spending middle class that doesn’t require sub-prime credit to sustain itself, the house of cards WILL FALL. The recent comments coming from the CEO’s of a number of retailers tell the real tale of what’s ahead.
As ugly as all that sounds, I want everyone to know that deep down, I am an optimist. In my opinion, deep economic corrections create amazing opportunities. And not just opportunities to make money going short as a trader. There will be opportunities to invest in great companies at a deep discount fairly soon, and opportunities for entrepreneurs to protect and grow their businesses, while debt-ridden, unprepared competitors fall to the wayside.
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If you are interested in Hurst Cycle analysis, I highly recommend Sentient Trader Software! Here’s a link to find out more about the same highly beneficial tool I’m using: Starter Bundle – Training Course – FLD Trading Strategy and EOD Trader Edition Monthly Rental. I also find that the DTN IQ data feed works quite well with Sentient Trader.