12,000 Years of Elliott Waves - Part 2

Recent history and the current market bubble.

SETTING THE STAGE

Why should we care about the long-term outlook for the stock market?

First let's discuss what we mean by "Long Term". Most people consider long term to be a few years at the most. Most businessmen seem to be preoccupied with the next quarter and at the outside, next year. Long term as used by us in this article will be much longer. Twelve thousand years long, which makes this effort a very ambitious undertaking.

Now let's go back to why we should be interested in these long-term periods of history. "History repeats itself," is a common saying. A study of the Elliott Wave Principle lends validity to this statement, as we will endeavor to demonstrate here. As the reader will appreciate, obtaining reliable data for stock market series going back over many years is difficult. Fortunately, there is reasonably reliable data available, which can be used going back several hundred years. There is also a large body of human history going back to the beginning of civilization, which we can draw upon.

Readers who understand the Elliott Principle know that when we look at the larger degree waves and see the simple and elegant eight-wave structure, we must realize this is less true when we try to analyze the smaller degree waves. We find in the smaller degree waves a great deal of diversity which is often difficult to fit into the wave pattern. We also find that there is a great deal of variation in corrective waves, which Elliott and his followers tried to codify.

In addition, fifth waves can become extension waves of a bull trend. When this occurs it usually surprises and confuses Elliott analysts. This makes accurate wave analysis a risky business from a forecasting point of view. This problem has tripped up most practitioners of the Principle at one time or another, with embarrassing results. This very thing happened in 1995 when a fifth wave became an extension wave.

Extension waves are typical of major blow-off in the markets, at times becoming a complete market bubble with all the signs typical of such developments. Our first discussion therefore hinges on more recent history to illustrate that we are experiencing extension waves and, therefore, that we are in the process of a market blow-off. This leads to the conclusion that global markets, which have been largely sustained and driven by Wall Street and American imports, are due to enter a major correction, again lead by events on Wall Street.

The question of how large this correction might be is evaluated later.

THE CURRENT GRAND SUPER CYCLE WAVE

It is fortunate for our purposes of examining the current Grand Super Cycle (GSC) that we have stock market data series of increasing validity as we progress through the cycle. It makes our task easier and gives it greater validity. A GSC wave is made up of lower order Super Cycle (SC) waves and these in turn consist of the next lower order Cycle (C) waves.

The current Grand Super Cycle is usually taken to begin around 1775-1785. We should take note of the fact this is the time period when the United States of America was born. On August 25, 1941, Elliott wrote a letter concerning the market from 1776 to 1941. The Super Cycle Waves which compose the present Grand Super Cycle as described by Elliott are as follows:

Super Cycle Wave 1          1776-1850

Super Cycle Wave 2          1850-1857

Super Cycle Wave 3          1857-1929

Super Cycle Wave 4          1929-1932?

The intervening years from 1932 to 1941 were difficult stock market years and the interpretation of those years by various Elliott Principle practitioners varies. That is why a question mark was placed after 1932 in Wave 4. With greater hindsight gained from market action since 1941, it appears we can take the question mark away and say the Super Cycle Wave 5 did in fact begin in 1932. When it will end requires a great deal of discussion.

There is not reliable enough data to break down Super Cycle Waves 1 and 2 of the current Grand Super Cycle Wave into their component waves. However, starting just prior to the beginning of Super Cycle Wave 3 in 1857, a reliable data series was started. It was the Axe-Houghton Composite Index. Using this index, Elliott broke down Super Cycle Wave 3 into the following Cycle Waves:

Cycle Wave 1          1857-1864

Cycle Wave 2          1864-1877

Cycle Wave 3          1877-1881

Cycle Wave 4          1881-1896

Cycle Wave 5          1896-1929

It is at this point of our discussion that we need to introduce the concept of an Elliott Extension. The reason for this is that Cycle Wave 5 from 1896 to 1929 contained a five-wave extension as described below:

Cycle Wave 5 (Extension Wave 1)          1896-1899

Cycle Wave 5 (Extension Wave 2)          1899-1907

Cycle Wave 5 (Extension Wave 3)          1907-1909

Cycle Wave 5 (Extension Wave 4)          1909-1921

Cycle Wave 5 (Extension Wave 5)          1921-1929

Elliott describes in a letter dated May 3, 1944, how Extension Wave 5 of Cycle Wave 5 (1921-1929) also became an extended wave of five waves, which ended in a colossal blow off in the fifth wave of this sequence between 1927 and 1929. Figure 1 shown below gives us a picture of Super Cycle Wave 3, with its component waves.

FIGURE 1

Super Cycle Wave 4, which was the corrective wave for the entire bull market from 1857 to 1929, turned out to be fast, violent, traumatic, and ushered in a very bad period for America. We will not dwell on that point since there are many sources of information on that period of American History.

We are now ready to attack Super Cycle Wave 5 (1932-????). Figure 2 below displays the yearly price range for the Dow Jones Industrial Average from 1900 to the top made in early 1999. Please note the y-axis is logarithmic scale.

FIGURE 2

Bar chart of Dow Jones Industrial Index, 1900-1999

From Figure 2, we can clearly see the cycle waves making up Super Cycle Wave 5 break down as follows:

Cycle Wave 1          1932-1937

Cycle Wave 2          1937-1942

Cycle Wave 3          1942-1966

Cycle Wave 4          1966-1974

Cycle Wave 5          1974-1999/2000?

Cycle Wave 5 (1974-1999/2000?), brings us closer to a period of stock market history familiar to many current stock traders. Cycle waves consist of what Elliott termed Primary Waves and the five Primary Waves that make up Cycle Wave 5 are as follows:

Primary Wave 1          1974-1976

Primary Wave 2          1976-1982

Primary Wave 3          1982-1986

Primary Wave 4          1986-1987

Primary Wave 5          1987-1999/2000?

Figure 3 below gives us a schematic picture of Super Cycle Wave 5 (1932-1999?). Readers should note at this point in our discussion that the same basic schematic was used for both Super Cycle Waves 3 and 5 (Figures 1 and 3). The Elliott Wave Principle does indeed seem to have form and structure.

FIGURE 3

Super Cycle wave 5 of the current Grand Super cycle breaks down into Cycle waves (I) to (V). The extensions take place as described in Figure 1.

We can further see from Figure 3 that Primary Wave 5 (1987-1999?), of Cycle Wave 5 (1974-1999?), of Super Cycle Wave 5 (1932-1999?), started from the low made in 1987. This point is emphasized because of its great significance - we are approaching the end of the fifth waves of three orders of waves. It is also very important to recognize that we are therefore in the process of ending a Grand Super Cycle Wave (GSC - the largest wave Elliott recognized). This implies a sizable correction is ahead of us - greater than the one that followed the 1929 Crash. More on that important topic is to come later.

The wave action from 1994 to 1998 is complex and may find differing counts by various Elliott analysts. For example, many analysts treat the July 1998 top in the Dow as the end of wave 5 of the Cycle and Super Cycle. The correction that started with the virtual collapse of the Russian financial system then becomes a major A wave correction. This is followed by a rising B wave that exceeded the high of the previous fifth wave. This constitutes an irregular top, which is also, a sign of a market blow off. Alternative counts try to fit the end of wave 5 to the highs reached in 1999.

Using any of these wave designations does not in any way change the fact that all of the evidence points to the end of a Grand Super Cycle in the 1998-2000 time frame, and therefore to a major correction just ahead.

Table 1 shown below, lists the important waves from 1780 to the present time in 1999 in terms of Grand Super Cycle, Super Cycle and Cycle waves.

TABLE 1

Even though the Table does not show this clearly, it is of great importance to remember that the bull trend concluded with Extension Waves. In the Elliott Principle, an Extension Cycle is evidence of a highly speculative market.

As was mentioned earlier, there are also striking similarities (in Elliott terms as well as other criteria) in stock market behavior between the period of 1921-1929 and 1987-1998(9).

IMPLICATIONS

Indications suggest there is a very high probability that over the period 1998-2000 we have come to the end of a Grand Super Cycle Elliott Wave, the largest size wave Elliott listed in his wave descriptions. The bull phase of this cycle started about 1776 and has lasted over two hundred years. When the bull phase of any cycle ends, the logical conclusion is that we are going to start the bear (correction) phase associated with this cycle. Each correction phase of any cycle degree is commensurate with the preceding bull phase it is correcting.

We are ending a Grand Super Cycle Bull Market, so we can expect at the very least a Grand Super Cycle Bear Market Correction.

The question now to be discussed is whether this is a GSC1, GSC3 or GSC5 wave of the larger X-wave. If the current GSC wave is a GSC1 or GSC3, the correction will be shorter and of less intensity than the correction which would occur at the end of the GSC5 wave. We must realize any GSC correction is bound to be worse than the one at the end of the previous Super Cycle in 1929.

If we are dealing with a GSC5 wave, the correction would be more extensive as it would also come at the end of the next higher order X-wave.

(C) 1999 By The Authors

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