The Big Picture
By Don Delavan
October 2/04
Historic tops may have occurred today with the completion of green Wave B up. A year from now or even sooner, most investors will be wondering, "What happened to the return of the bull market in 2003 and 2004?" It will turn into a multi-month trend reversal that will decline into the fall of 2006 - the relentlessly falling green Wave C down. As shown below, all of the major indexes are pointing to 1991 levels for the bottom of green Wave C down in the fall of 2006.
The green waves shown below are primary degree, multi-month Elliott waves. The green waves are divided into black intermediate degree, multi-week waves. In my newsletters, the black waves are subdivided into red minor degree, multi-day waves.
DJ Industrials and Transports
The most obvious divergence is between DJIA and DJT, as seen below. DJT continued to make new highs so far this year while DJIA continued to make lower highs after its 2/19/04 high. Even when DJT made a new high for 2004 today, DJIA stayed significantly below its 9/7 and 6/25 highs and could not even rise above its 20-day moving average today!
Green Wave A down for DJIA started on 1/14/00 and ended on 10/10/02. DJIA fell -4553 points or -38.7% during Wave A down. Since most people track the stock market using DJIA, it has been the most deceptive since DJIA fell the least out of all the major stocks indexes. DJIA's black 5 of C of green Wave B up probably truncated below its black 3 of C while DJT's black 5 of C made a new high. It's interesting how DJT peaked in May 1999, about 7+ months before DJIA peaked in January 2000, and now DJT has peaked in October 2004, about 7+ months after DJIA peaked in February 2004. Some amazing symmetry!
However, now green Wave C down should start at the recent highs and
last for about the same amount of time as Wave B up lasted. Wave C down
is known for its relentlessly falling prices, and the charts are showing
DJIA dropping to around 3000-3200 and DJT to around the 1100s by the fall
of 2006 with the bottom of the current 4-year cycle. So the coming
October decline will be just black wave 1 of green Wave C down.
S&P 500
The S&P 500 chart below shows a much weaker picture than the DJIA chart. Green Wave A down for SPX started on 3/24//00 and ended on 10/10/02. SPX fell -784 points or -50.5% during Wave A down while DJIA fell only -38.7%. Its green Wave B up may have completed today with a truncated black 5 of C up. Wave B up for SPX has retraced only 50% of its Wave A down while the DJIA has retraced 78% of its Wave A down.
But then green Wave C down should start soon and last for about the same amount of time as Wave B up lasted. Wave C down is known for its relentlessly falling prices, and the chart is showing SPX dropping to around 380-400 by the fall of 2006 with the bottom of the current 4-year cycle. Thus, the magnitude of Wave C might be the same magnitude of its Wave A down. So the next decline will be just black wave 1 of green Wave C down.
The 1998-2002 4-year cycle was bearish because it ended lower than it
started. Since its 4-year moving average is still pointing down and
is acting as resistance, the current 4-year cycle is still bearish. Its
4-year moving average has crossed below its 8-year moving average, which
is a very bearish sign for the remainder of this 4-year cycle. The last
time that a similar crossover occurred after a multi-year bull market
was in 1971, and that bear market continued until 1982. The 8-year
moving average will probably turn down later this year.
The wave count becomes more obvious when you look at the following chart
of the SPX/VIX ratio. Because VIX usually moves opposite of SPX, this
ratio amplifies the top and bottoms of waves. This ratio is just 2 points
below its previous high in late August 2000 just before SPX fell in half
in 23 months. The last several months have been similar to the summer
2000 when SPX was making lower highs while VIX was making lower lows,
causing these ratios to rise, i.e., higher complacency without higher
prices. What's amazing is that SPX closed today -25.6% below its 9/1/00
close when this ratio last peaked, and VIX closed today -27.7% lower than
on 9/1/00. In other words, investor complacency is about 27% higher
now than on 9/1/00 just before SPX fell in half in 23 months, even though
price does not confirm this high level of complacency!
Nasdaq
The Nasdaq composite chart below shows a much weaker picture than the SPX chart. Green Wave A down for COMPX fell -4024 points or -78.4% during Wave A down! Its green Wave B up may have completed on 6/30 with a truncated black 5 of C that peaked just below its 8-year ma. Wave B up for COMPX has retraced only 26% of its Wave A down.
Wave C down is known for its relentlessly falling prices, and the
chart is showing COMPX dropping to around 460-470 by the fall of 2006
with the bottom of the current 4-year cycle.
Thus, the percent decline of Wave C might be the same percent decline
as its Wave A down, which was -78.4%. So the next decline will be
just black wave 1 of green Wave C down.
Gold Bugs Index
Gold stocks are doing just the opposite of the other stock indexes. An index of 15 unhedged gold stocks, HUI bottomed on 11/17/00 at 35.31 and then made an all-time high of 258.60 on 12/2/03, a 732% rise! Its 4-year moving average turned up in early 2002, a very bullish sign. HUI appears to have started its black 5 of green Wave 1 up to around 300-330 in December.
Some have labeled green Wave 1 up as ending in December 2003, but I have not because of the previous highs of XAU and NEM. I cannot reason why a primary multi-month Wave 1 up would end significantly below the all-time highs for XAU and NEM, which are 157 and 60.75. In early 1996, XAU and NEM had 5 consecutive months with highs between 149.10-155.60 and 60.0-60.75. So these are major resistance levels that will probably stop green Wave 1 up later this year. Since HUI started in 1997, HUI does not have any 1996 history, but it should peak around 300-330 in December.
If this is the correct wave count, then the bad news is that green Wave
2 down will last for more than 12 months and decline to around HUI 160
until it finds support from its 4-year moving average. Thus, gold stocks
may be a poor investment for all of 2005 along with the rest of the stock
market. But whenever green Wave 2 down is complete, green Wave 3 up will
be the best news. Since green Wave 1 up will be around a 900% rise, then
who knows how high green Wave 3 up will rise - maybe HUI 1500???
By Don Delavan
Market Waves Newsletter
marketwaves@adelphia.net
28 June 2004
Don Delavan is the editor of the Market Waves newsletter. For subscriptions, contact marketwaves@adelphia.net
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