January 1982
Last updated
Was this helpful?
Last updated
Was this helpful?
All text that follows is quoted as published in Robert Prechter’s The Elliott Wave Theorist on the dates cited below.
Sometimes obtaining perspective on a current situation necessitates taking a good hard look at what has happened in the past. This report will take a look at the long-term picture to get a sense of what the decade of the 1980s has in store. One of the most revealing presentations of data is the chart of U.S. stock prices going back over two hundred years, the longest period for which such data is available. The accompanying chart [Figure A-1] was first presented in 1978 in A.J. Frost’s and my book Elliott Wave Principle [see Figure 5-4], although the wave count near the end has been amended to reflect current knowledge.
The wave structure from the late 1700s to 1965 on the accompanying chart now unmistakably shows a completed pattern of five waves. The third wave is characteristically long, the fourth wave does not overlap the first, and the guideline of alternation is satisfied in that wave (II) is a flat, while wave (IV) is a triangle. Furthermore, the first and fifth waves are related by the Fibonacci ratio .618, in that the percentage advance of wave (V) is roughly .618 times that of wave (I).
Some analysts have tried to argue that the wave count on the “current dollar” chart [the actual Dow, Figure 5-5] shows a full five waves into 1966. As I have been arguing for years, such a count is highly suspect, if not impossible. In order to accept such a count, one has to accept Elliott’s argument of a triangle formation ending in 1942 (detailed in R.N. Elliott’s Masterworks), a count that was quite correctly shown to be in error by the late A. Hamilton Bolton in his 1960 monograph, “The Elliott Wave Principle — A Critical Appraisal” [see The Complete Elliott Wave Writings of A. Hamilton Bolton]. Bolton’s alternative proposal, a triangle that ends in 1949 as the accompanying inflation-adjusted chart shows, contained problems at the time he proposed it (namely accepting 1932-1937 as a “three”) and subsequent evidence has confirmed that interpretation as impossible.
Figure A-1
The Dow, from the perspective of the [sideways trend], has been in a “bear market” the entire time [since 1965], although all other indexes have been in bull markets since 1974. Elliott was about the only analyst ever to recognize that sideways trends are bear markets. For evidence of this contention, all one need do is look at the chart of the inflation-adjusted Dow from 1966 [and compare it to the same period in Figure 5-5]. Raging inflation plus bear market equals sideways formation.*
* These last three sentences are from the immediately preceding December 1979 issue of EWT.
More important is that a clear five-wave downward Elliott pattern from the 1965 peak appears to be in its final stage. As a shorter-term consideration, we can see from the chart that stocks are now deeply oversold and [, having fallen below the long term support line,] historically cheap in terms of value relative to the wholesale price index. Thus, the next few years could witness a countertrend three-wave (a-b-c) rally in real terms that should translate into a dramatic ‘breakout’ in the Dow Industrial Average to new all-time highs in current dollar terms. Such an advance would satisfy the Dow’s wave count from 1932 in nominal dollars by letting it complete its final fifth Cycle wave from 1974. So we still need one more dramatic new high on the Dow Jones Industrial Average, giving us a fifth wave in actual prices and a B wave in inflation-adjusted prices.
