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Buy On The Dips

03/01/18 04:32:50 PM
by Koos van der Merwe

Elliott wave theory states that after a major WAVE V, an ABC correction occurs. A WAVE A on a daily chart usually corrects in five waves down to the low price of WAVE IV.

Security:   SPX, DJIA
Position:   Accumulate

We all know what the Elliott wave theory is. With the recent correction in the stock market, we can only assume that a major WAVE V has been completed and that an ABC correction is now on the cards. A Wave A correction according to the "Elliott Wave Principle" book by Frost and Prechter, suggests that a major WAVE A on a daily chart falls in five waves, bottoming at the low of the WAVE IV correction in the previous five-wave bull market. With a new Federal Reserve chairman, Jerome Powell; with the recent news that 13 Russian nationals and three Russian entities interfered in 2016 presidential election; and finally, with the tragic Florida school shooting, the stock market is facing news that could influence it negatively.

Figure 1. Monthly chart of the S&P 500 Index and the K-Wave.
Graphic provided by: AdvancedGET.
The chart in Figure 1 is a chart of the Kondratieff Wave with the S&P 500 monthly index suggesting that a WAVE V top could have happened on January 31, 2018. This suggests that an ABC correction could now occur. Looking back at the chart, we see that previously a WAVE V top occurred after the K-Wave suggested a top in 1999. For the WAVE V to top out now, one year before the suggested K-Wave 2019 correction, could be early, suggesting that the WAVE V is not complete, and could rise further. A move above 2885.50 by the index will confirm this, however, until this occurs, one should assume that a WAVE A correction is happening, a correction that could end in the year 2020.

Figure 2. Daily chart of the Dow Jones with Elliott wave count.
Graphic provided by: AdvancedGET.
The chart in Figure 2 is a daily chart of the Dow Jones with an Elliott wave count suggesting that the Dow has completed a Wave 4 of a WAVE III. The RSI indicator has fallen below the 32 horizontal and has given a buy signal. This does suggest that the Dow should rise to test and break above the Wave 3 high of 26616.71. Do note that the Dow fell below the 50-day moving average and is flirting with the 200-day moving average.

Figure 3. Weekly Omnitrader chart of the Dow Jones.
Graphic provided by: Omnitrader.
The chart in Figure 3 is a weekly Omnitrader chart of the Dow Jones Index. The Vote line on the chart is suggesting a buy signal based on a buy suggested by the Vervoort Stop Strategy shown in green below the Vote line. The Vervoort Stop strategy is a strategy developed in Omnitrader, based on the Vervoort stop equation developed by Sylvain Vervoort (check him out on Google and S&C magazine!) The RSI on the chart has not fallen below the 30 horizontal line, suggesting that further downside could occur. This is a chart to watch.

With the tragedy in Florida calling for stricter gun control in the USA, with the Russian investigation hitting the news and with a new Federal Reserve Chairman, market uncertainty is first and foremost. However, one can always take a lesson put out by Warren Buffett, which is "Buy on the dips".

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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