Predicting the Future Using Elliott Wave Analysis

10/07/02 10:57:17 AM

by Koos van der Merwe

Through the years, I have found that Wave theory acts better as a guiding light than a predictive strategy.

Security: N/A
Position: Accumulate

Elliott wave analysis of the market was developed by Ralph Nelson Elliott and popularized by Robert Prechter. I discovered Elliott in 1969, and became a devout follower. Wave theory tells me where the market is today in the scheme of things and where it could possibly, but not necessarily, go. I will never cast a primary count in stone, but will always have an alternate count in the background. As the market unfolds, I will not hesitate to switch my primary count to my alternate count. This flexibility is very necessary in today's markets.

The chart below is a long term chart of an Index I use, weighted towards the Nasdaq. I have started the wave count from 1974, which is, in my opinion, the start of a major Wave count after the correction from 1969 to 1974. Many Elliotticians believe that 1969 - 1974 is the fourth wave correction in the long term bull market. The Wave C as I have shown it on the chart below for my Nasdaq index fund, should fall to the level of 1970 - 1972, which suggests that the Dow could collapse to the 700 region, its level in 1970. However, for this exercise, I will stick to the chart below.

The chart shows Wave II as the 1987 correction. This was a simple correction, which meant that Wave IV would have to be a more complicated correction. In the chart below, it could have been the squiggle shown at the top of Wave III. Wave V was the inevitable blowoff in February 2000.

Elliott wave trend prediction for the market over the next few years using an index fund weighted towards the Nasdaq.

Graphic provided by: AdvancedGET.

From the top of Wave V, I would now expect to see an ABC retracement down, with Wave C ending in the 4-wave of lesser degree. I have drawn lines to show the expected movement. Theory also states that the time scale for a wave C should be 38.3% of the rise of the five impulse waves. With the rise starting in 1974 and ending in 2000, a 38.2% projection takes me to 2009, as shown in the chart. That is the date then, theoretically, when the present bear market should end.

Now, determining the top and time of the B-wave is extremely difficult. B-waves are always very volatile and in the grand scheme do not follow the impulse wave count of 1-2-3-4-5, but are inclined to follow an a-b-c-x-a-b-c pattern. Although I show a simple a-b-c-x-a-b-c pattern, this need not necessarily be so. The count can continue indefinitely until the top of the B-wave is reached. This could even be higher than the top of the fifth wave, or it could hardly move at all from present levels, and simply collapse into a Wave C.

In the chart, I have shown Wave B as ending at a point that is a 61.8% retracement of the rise to Wave V. It could be greater than this as discussed earlier, or less than the point shown on the graph. At the moment, it does not particularily matter. What is important to know is that when the market turns, the new bull market that will develop will be extremely volatile, probably ending once again in a bull trap as investors believe the market is on its way to the moon.

So, what has my Elliott count of the market taught me? It has told me that the next few years are going to be extremely volatile, that many investors will stay away from the market but gradually be sucked back into it as they remember the hype of 2000, and sometime between 2004 and 2006, the start of a major crash will occur, with Wave 2 of Wave C probably forming a double top and another opportunity to exit the market.

Finally, I must remind the reader of the following quote attributed to Samual Goldwyn, "It is always difficult to forecast, especially the future." And as a true Elliott theorist knows, one always prepares an alternate count in case the primary count does not act out as expected. More on that at some other time.

Koos van der Merwe

Has been a technical analyst since 1969, and has worked as a futures and options trader with First Financial Futures in Johannesburg, South Africa.

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Predicting the Future Using Elliott Wave Analysis

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