Back in 2007 I wrote an article entitled “Putting on the Bear Hat” that suggested a possible count for Elliott Wave on the Dow Jones Index (INDU.CBOT within your software). This count referred to a longer term view based upon an Elliott Wave impulse pattern starting in the latter half of 1982 and with a projecting end around July between 13982 and 14564. Of course, the final top was in October and at around 14200, but it is obvious that the price projections were very accurate.
We are now presented with the chance to resurrect the chart and analysis to regard the recent market action. The premise that the post November rise is a bear market rally can be investigated and we can formulate some simple resistance points where we could find potential lows. Of course, this is the US index, however it is worth noting that the Australian market is likely to follow suit to a large degree. As we have been constantly reiterating, now (at the time of maximum fear) is the best time to start looking at the share market as a longer term investment vehicle and there’s plenty of supporting evidence (e.g. the material Andrew Page has collated on www.dividendkey.com) to suggest that now is an excellent time to buy.
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The first point to note is that the chart is, again, on a logarithmic scale. This ensures that all of the Elliott Waves are put into perspective and can be more easily identified. Our confirmed Wave 5 is followed by the typical A, B, C corrective pattern which is shown in more detail in the following image.
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The end of the 5th impulse wave is evident at the October high which becomes the start of the A, B, C corrective pattern (marked in the blue circles). As dictated by Elliott's wave theory we would expect (and achieved) a 61.8% retracement of wave A to mark the end of wave B. This is followed by the ‘panic selling’ of wave C, confirmed by the high volume (not shown). If this proposed count is correct we have some reasons to look for the November low to hold. Going back to the bigger picture and from the first image, our 50% support is at 7484 and (from the 2nd image) the 223.6% extension of Wave A would suggest support at 7369 (the November low was 7449). A break below this level and the next support could be found at 6997, however this would no longer be the most probable Elliott Wave count and a reassessment of the A, B C formation would be needed.
As it stands, the Dow Jones could begin to embark on a new 5 wave impulse pattern, although the depth of the previous correction and the fact that this first impulse wave will be Wave 1 of the larger picture Wave 1 would suggest that the move will be a long and laborious consolidation.