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ELLIOTT WAVE


DJIA Close In On Top

10/20/09 08:50:23 AM
by Alan R. Northam

The Dow Jones Industrial Average has now hit the 10,000 market again. Now, will the market continue higher or will it reverse and move lower? The Elliott wave theory is calling for a market top.

Security:   $INDU
Position:   N/A

All I hear from the media these days is that the recession is over and the stock market is headed higher. Market gurus are also getting more and more bullish in their forecasts of higher prices for the stock market. At times like this when everyone has turned bullish on the stock market, it is time to watch out as the market is often much closer to a peak than it is the beginning of a rally. I like to use classical technical analysis to follow a market trend, but I also like to use the Elliott wave theory to look ahead and see where the market is going. In this article, I will examine the wave structure from last March to forecast where the market is going from here.

Looking at the rally from early March to mid-June in Figure 1, I count 11 waves. In addition, these waves are overlapping waves, which identifies them as corrective waves. According to the Elliott wave theory, 11 waves also signify a market correction. Elliott noticed that markets normally correct in three waves, but when market corrections extend, you add four waves for each extension. The rally from early March extended twice, which makes the wave count 3 + 4 + 4, which equals 11. From this analysis, we now know that the upward rally is corrective and not a new bull market upward trend.

FIGURE 1: DJIA, DAILY. The daily bar chart of the Dow Jones Industrial Average showing the Elliott wave count.
Graphic provided by: StockCharts.com.
 
From mid-June to early July, the Dow Jones Industrial Average (DJIA) moved downward in three waves and then started to climb higher again. Once the market broke out above wave b at the end of June and the beginning of July, it was possible to count these waves a, b, and c. It was also possible to count the bear market corrective rally from early March to mid-June, as wave A of a larger three-wave market correction to be labeled waves A, B, and C. In addition, it was also possible to count wave B complete and to label it as such. From this analysis, it was not possible to identify that wave C of the larger ABC bear market corrective rally was under way.

Looking at the wave structure of wave C, I have identified that the DJIA is forming a rare expanding ending diagonal wave pattern. Ralph Nelson Elliott identified ending diagonal wave patterns as an upward-sloping triangle affair with converging lines and not diverging lines. The Elliott wave theory also allows for diverging lines, but these types of ending diagonals are rare and are not the typical wave form. Elliott also identified ending diagonal wave patterns as normally occurring in wave 5 of an impulse wave (a bull market upward trend) and in wave C of an ABC corrective wave. In our case, here the ending diagonal is occurring in wave C of an ABC corrective wave. Elliott also identified ending diagonal wave patterns to be made up of seven waves. I have labeled these seven waves on the chart. It is not clear if wave 7 is yet complete, as there has not been given a one- or two-bar reversal pattern. In addition, it is possible for the ending diagonal pattern to extend. If it does, it will add on four more waves before wave C is complete.

In conclusion, the upward rally from early March looks to be nearing its completion. However, it is always possible for an ending diagonal pattern to extend, which would allow for a somewhat higher price before its completion. Either way, the DJIA is near its top.



Alan R. Northam

Alan Northam lives in the Dallas, Texas area and as an electronic engineer gave him an analytical mind from which he has developed a thorough knowledge of stock market technical analysis. His abilities to analyze the future direction of the stock market has allowed him to successfully trade of his own portfolio over the last 30 years. Mr. Northam is now retired and trading the stock market full time. You can reach him at inquiry@tradersclassroom.com or by visiting his website at http://www.tradersclassroom.com. You can also follow him on Twitter @TradersClassrm.

Garland, Tx
Website: www.tradersclassroom.com
E-mail address: inquiry@tradersclassroom.com

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Date: 10/20/09Rank: 3Comment: 
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