Dow Jones Index Elliott Wave count
- Par kpeloille
- Le 13/02/2019
Dow Jones Index Elliott Wave count
As I wrote in my Index newsletter this week (W07), the Elliottist wave count that had been put forward since the beginning of this bearish movement could be questioned.
I also explain that the reversal of a trend and therefore the beginning of a new one is often difficult to count down, the markets being erratic. It is obvious that wanting to reverse such a long upward trend requires operators / investors to have a certain conviction, particularly of a macroeconomic nature. But for now, the announced recession finally does not appear so obvious in the immediate future, especially from the American point of view. It is quite different in Europe.
Finally, staying true to my long-term beliefs, I have always had some reluctance to use Elliott's waves. I consider it an interesting tool to give a very broad view of a market trend, especially to determine a possible reversal point. In the case of this long upward trend initiated in March 2009, succeeding in counting Elliott waves movements has made it possible to determine the market top in 2018 .... but which remains to be validated.
Because that's the problem appears with this type of analysis: any count requires confirmation but as it is done in the long term, we can say that a count is correct only when the wave is finished ... which is not very useful to take a position you will agree. The risk is great to watch the train goes by ....
Moreover strict rules must be respected but there are also a number of very specific configurations that make it a very subjective and ultimately unreliable analytical tool for decision-making about an investment of medium / long term.
Through the following weekly charts on the Dow Jones, I will try to show you what kind of thinking applies to this analysis system.
I start with a monthly overview:
Chart 1 - MONTHLY
The bullish count is clear in 5 waves that break down into 3 impulsive waves (1-3-5) and 2 correctives (2-4).
Combining the Ichimoku with a Elliotist count validates the waves. Indeed, a corrective wave i.e. contrary to the current trend will be activated / validated only on reverse breakout of the Kijun since it is this line that gives the trend signal.
On this index, wave 2 broke the Kijun (blue) as well as wave 4. So there was a reverse signal.
Now if you look at the possible top, it will be necessary for the index to breakdown the monthly Kijun in order to give a reverse signal, i.e. to validate the reversal of this uptrend. This is not the case in this month of February. The Kijun held as support in December despite massive sales as well as in January.
And in February, prices remain for the moment above the Tenkan (red line).
This market has absolutely no bearish configuration. This bearish movement is similar for the moment and on this time frame to a correction with test of the Kijun which still confirms the bullish trend since it has not been broken on close.
The questions, which I must say is the occasion of "heated" debates among the Elliotist that I meet, are: "Is the definitive top in place ?" and "where is the wave 5 top ?"
In the end, would not this index be building a triple top?
To have labeled these waves does not advance us much on the continuation of the evolution of market. This just allows us to say that this long bullish movement is coming to an end and that it is "working" a trend reversal for the coming months.
Let's have a look at a weekly time frame to refine this count of this last wave 5 of potential summit on the lower fractals (red figures):
Chart 2 - WEEKLY
This count is a possibility. Some analysts are considering that Wave 4 would have actually ended on the December monthly Kijun test and that the index would be building Wave 5 which would mean that Wave 5 would not be made> either we would have a truncated double top, or the index could make new highs.
From an Ichimoku point of view, as long as prices are above the cloud, the trend will remain bullish and we can actually consider a larger recovery if the Lagging Span breaks above its prices.
Currently the trend is therefore bullish in the long term ( monthly) and medium term ( weekly) but the momentum weakens.
Now I come back to the assumptions of the current downtrend that have been advanced in recent weeks:
Chart 3 - DAILY
The idea was that the index would be building a 5 waves downtrend and that the current uptrend would be a wave 4. Two elements based on this assumed wave 4 suggest that this scenario would not be valid based on Elliotist rules:
- a wave 4 cannot enter the territory of wave 2 on candle close > here it is largely inside ...
- the combined retracements of waves 2 and 4 must be 100%. Wave 2 retraced 76.4% of wave 1 (black dashed lines) which should have given a 23.6% wave 3 retracement for wave 4, but it has already retraced more than 78.6% (red dots). This count is not possible.
We should rather consider an A-B-C scenario (chart 4 below) in the case of a "leading expanding diagonal" pattern... but each wave must be built in 3 moves. Now this possible A in progress displays 5 movements. We find ourselves again in a dead end or at least in front of a doubt.
Chart 4 - DAILY
Forgetting Elliott, the analysis is clearer> a low point was made on Andrews' pitchfork lower band (corresponding to the monthly Kijun test) and the index rebounded until it broke through the daily cloud. The breakout of 25526 on candle close, corresponding to the top of the cloud (SSB) above the Lagging Span (brown line) or even the pitchfork upper band would give a strong bullish signal with a possible return to the last high point . It is an hypothesis that will be refined with the evolution of the market. But it is quite conceivable that a correction could happen ST with the intermediate median line as target.
Note that the Tenkan provides a perfect support to this up move.
Now, let's go back to this index possible long term evolution in several scenarios:
Chart 5 - WEEKLY
On this weekly chart, better adapted to the long-term strategy, a scenario in A-B-C-D-E is possible. The index would then be in wave D which would take place in 3 moves like the previous waves A-B-C. Heiken Ashi candles provide a better view of the sub-waves.
Wave A starts here on the first top (potential end of wave 5).
The second assumption (Chart 6) starts wave A on the second top which means that the index would be in a wave B with a possible correction to come in the next weeks. The red dashed line represents the Lagging Span, which follows the same trend as prices.
Chart 6 - WEEKLY
By projecting the monthly cloud (Chart 7) I repositioned my price arrows (blue) according to the possible movements of the Lagging Span (red arrows) compared to the supports / resistances it might encounter.
Chart 7 - WEEKLY
Then I materialized the area of theoretical objectives for this long-term corrective wave IV by respecting the rule that a wave IV correction often returns to the level of the lower fractal wave 4.
Chart 8 - WEEKLY
What remains possible on this assumption, this area of objectives being just below the long term bullish Andrews' pitchfork median line.
Chart 9 – WEEKLY
On chart 9 above I added the Fibonacci extension of the A-B waves, which gives a possible C point on the 138.2% on the same level as the downtrend line and the top of the monthly cloud for the Lagging Span . It's a cluster of interesting levels. Finally, another confluence zone appears on the 161.8% with the long-term median line and the top of the target zone to give the possible point E. The Lagging Span will be exactly on these two levels.
In this case I therefore considered the possible movements with the Lagging Span that I projected on the prices (red dashed lines to blue lines)
On the next chart 10, with the blue price lines, I set the C wave on the 161.8% Fibonacci extension followed by a D wave that would go back to test the bottom of the monthly cloud (SSB) which is a classic Ichimoku cloud break test.
Chart 10 - WEEKLY
Point E would then reach the lower channel intermediate median line of Andrews Pitchfork, which is the bottom of the target area (pink).
On the other hand, the following hypothesis (Chart 11) that would consider the test of the pitchfork lower band seems unlikely (except for a market krash) because the target zone would be largely exceeded and (not shown on the chart) would be below Wave 1 top of the previous uptrend, which is impossible according to Elliotist rules.
Finally, here is another hypothesis of a corrective movement in A-B-C and not in A-B-C-D-E but which would, however, give the same final target for this long-term correction.
Chart 11 - WEEKLY
The index would then be building the big wave B which should be done in 3 moves.
One finds the same idea as on the scenario in A-B-C-D-E mentioned previously, only the name change.
The immediate major uncertainty lies in the upward momentum> how far will it go? the answer to this question will validate or not the bearish scenario evoked.
To summarize from an Ichimoku point of view, the validation of this long-term bear market will come from a first signal given by the monthly Kijun breakdown on close and definitively acted with prices getting below the monthly cloud. We would then have a long-term trend reversal. The pink zone would then be the target of this decline.
The hypotheses presented here are the result of my reflection and my discussions with experienced professional Elliottists.
We are in general agreement that it is difficult to establish a "reliable" count at the beginning of a trend reversal the latter being however determined but still in its phase of "youth".
It is therefore preferable, and this is what fund managers do that I meet on a regular basis, to rely on analytical techniques that are easier to grasp but above all more able to give precise "timing" in the management of funds investment.
On the charts of this study I positioned Fibonacci ratios, classical trendlines, Andrews pitchforks and of course Ichimoku. These are from my point of view the most relevant and reliable tools to use in this market configuration.
By thus searching for zones of confluence, the objectives appear more clearly. Of course, these are just "zones", prices can move a bit higher or lower.
The Ichimoku relying on simple but strict rules has the merit of clearly giving the supports and the resistances but especially of validating / invalidating short term or medium term trend reversal signals.
On the example of Dow presented here, the monthly Kijun break during December gave a serious warning about the possible end of this uptrend but the closing candle of the same month above this same level invalidated this signal, confirmed by January bullish candle.
This monthly Kijun is therefore the level to watch for the next few months. It will validate the possible "bear market" announced.
In the shorter term, we will focus on the Kijun and the weekly cloud. For now, the index is back above the cloud> so it is technically bullish in the medium term. This does not exclude short-term corrections, which I put forward in my 5 waves scenario. You will notice that on chart 10 I consider a correction which would cross the cloud in order to test the weekly Kijun (blue) before recovering to complete this wave B. A bearish excess towards the monthly Kijun is not impossible. This would then be important information that would be given as to the validity of this assumption.
My advice is to use non-subjective tools that will give you clear and "safe" levels to best take position in the markets.
As hypotheses are multiple, doubt settles and decisions are even more difficult to take.
In one adage: "Keep It Simple, Stupid" ....
PS: I apologize in advance to the Elliotists but I remain faithful to my convictions as a technical analyst and intervener on the markets, reinforced by the enthusiasm shown by some Elliotists more and more numerous that I meet and then train to the Ichimoku reading system.