IS THE BIG
BAD BEAR COMING BACK?
by Anthony M.
Cherniawski
The Practical Investor
March 18, 2005
Announcement
We may have a change in trend.
Let’s start with the long view. Those who are cognizant of the Elliott Wave Principle know that the market moves in two basic patterns. The first is a three-wave fractal, also know as a corrective wave. The second is a five-wave fractal, known as an impulsive wave. At a smaller degree, you may also view five waves within the fifth wave pattern. I have inserted one of the Elliott Wave guidelines to add credence to the notion that it is potentially finished.
The wave principle also illustrates the “ageing” of the pattern. In wave 1, the S&P 500 index advances an average of 23.1 points per week. In wave 3, the index averaged 5.8 points per week. Finally, in wave 5 it averaged only 5.5 points per week. In a normal impulse wave, we would more likely see the first wave start off slowly, while the fifth wave would rise in an exponential curve. We are currently seeing this now in oil stocks.
This indicates that we are ending the final wave of a larger correction. The conclusion is evident in the fact that the S&P 500 fell well short for its all-time high. Herein are some of the reasons that technicians who relied on the Elliott Wave Principle became bears too early.
Another anomaly that threw technicians off in this pattern was that, since October 2002, the pattern has been totally comprised of corrective rallies. These rallies may be also be called zig-zags. Zig-zags are normally terminal. So, when Elliotticians saw a zig-zag, followed by an impulse down, the normal conclusion was that a change in trend had occurred. But this wave was a rogue. It may be that liquidity infusions by the Fed kept the market advancing despite the terminal nature of the pattern. So the question, “Is this really the end?”
The answer lies somewhere between trend analysis and wave analysis. The trendline from the August low was clearly broken. We may conclude from that fact that at least a short-term directional change has occurred. We also see two impulse waves down. If the index abruptly reverses from here, the potential downtrend has an issue of being corrective.
There is strong support for the SPX at 1176. If we see a third impulse down near that area, we will have five completed waves and a larger impulse very likely confirming the new trend. It follows that there will be a period of correctiveness, most likely through the end of the month. This is a quarter-end and there will be much effort to turn this sow’s ear into a silk purse.
The bottom line is this...by early next week, it may be time for the bears to take a breather. If the correction stays below 1200 on the S&P 500 index, the bear market will return in time for April Fool’s Day. A rally above 1200 may throw some doubt into the bear camp, but it will take a rally above 1225 to completely exonerate the bulls. Let’s see what happens next. Are you afraid of the big bad bear?
© 2004 Anthony Cherniawski
Editorial Archive
CONTACT
INFORMATION
Anthony M. Cherniawski
President and CIO
The Practical Investor, LLC
East Lansing, MI USA
Email
The opinions of FSU contributors do not necessarily reflect those of Financial Sense.
