Gold 2005-2014

It looks like gold is near a major intermediate term bottom. However, I think it will be a bear market rally given that the decline off the 2011 peak has been a five-wave decline, which, according to Elliott Wave theory, is the first leg of a larger decline.

I find classic characteristics of a market bubble in the 2008-2011 gold rally. It was a frenzied rally driven by fear of hyperinflation as central banks began Quantitative Easing. There was a pervasive sentiment in the media that gold was the “smart” investment to protect yourself in volatile times. I think the bullish sentiment in gold was comparable to the tech-stock euphoria in the late 1990s. During 1998-2000, the NASDAQ Composite rose from 1300 to 5100. Afterwards, it retraced that whole rally and bottomed out below its 1998 low in 2002. I think that gold will ultimately retest its 2008 low of $681 within the next few years.

Despite the NASDAQ’s crash, the software industry didn’t go away, and since 2009 it’s been one of the hottest market sectors. Likewise, I would not deny that in a generational time frame, gold is probably one of the safer investments, especially as loose monetary policy is becoming more accepted as a way of dealing with financial crises.



Ascending Middle Section on the Dow

The Ascending Middle Section is a pattern discovered by George Lindsay, a famous market technician in the previous century. I first learned about this pattern on Carl Futia’s blog in 2009. He identified an instance of this pattern that began in 2005.  The pattern predicted a bear market low in November 2008. That was noteworthy because, even though the final low on the Dow was in March 2009, the Dow bottomed within a month of breaking the 2008 low. The Middle Section also predicted that after the low, the next major top would form in February 2011. I consider Feb. 2011 to be the top of Primary Wave 1 in the new bull market.

Here is Carl Futia’s post explaining the 2005-2011 pattern, including the idealized schematic:

I recently discovered another prospective instance of this pattern on the Dow as shown on the charts below:

Dow Middle Section

Dow Middle Section with Forecast

It appears that the Dow is currently rallying to the first Point J. After Point J, the market declines for a period of time equal to the time elapsed between Point E and Point J. If Point J occurs in early-mid 2015, that would imply a decline lasting roughly a year. After the bottom at the second Point A, the market rallies for a period of time equal to the time elapsed between Point E and the second Point A. That would imply a rally of roughly two years during 2016-2018.

This analysis fits my long term Elliott Wave count as well. The J – A decline would be Primary 4, and the subsequent two-year rally would be Primary 5.

Typically, secular bull markets end when the general public is very enthusiastic about stocks and the economy. That is not always the case for cyclical bull markets within secular bear markets (ex. 1974-1976, 2002-2007, etc.). However, I really think the current bull market is a secular bull market given that it began after a nine-year expanded flat on the Dow and S&P 500, with both declining phases being severe.

Although sentiment among market professionals has been bullish for a while, the general public is far from applauding the economy and the stock market, largely due to the slow employment growth. Although the U3 (official) unemployment rate is getting close to pre-recession levels, the U6 unemployment rate (which includes discouraged workers who have left the work force and part-time workers who want full-time work), is near the midpoint between it’s recession peak and it’s pre-recession low. This suggests to me that, assuming no unexpected crisis for the U.S. economy erupts, we are only half-way through the economic recovery cycle, so the longer term bull market in stocks should continue for several years.

However, major corrections (like what the Middle Section forecasts for 2015), can still happen if the market gets too overbought as a result of bullish sentiment among market professionals that’s too far ahead of the economy.




Some New Patterns and Targets – November 2, 2014

Hi everyone,

As described in the previous post, I have updated my Elliott Wave counts for the Nasdaq-100 and the Dow to allow a continued rally in response to the strong upside recently. As for the Three Peaks and a Domed House patterns that I had been tracking on the NDX, the larger pattern’s final decline fell far short of the expected target. However, the smaller pattern did come to a completion as the index took out the August low by a large margin.

Here are my current Elliott counts:


dow primary 3 updated


ndx primary 3 updated

I think both indices are in a Wave 5 of Intermediate degree. The question becomes, how high will Wave 5 rise? That is often difficult to determine. Occasionally,  after highly extended 3rd waves as we saw in this cycle, the 5th wave fails to even make a new high. Assuming the market does make a meaningful new high, a target that Elliotticians often watch is the level in which Wave 5 equals Wave 1. On an arithmetic point basis, such a relationship implies very limited upside from current levels (only about 100 points on the NDX, 500 points on the Dow, and no substantial upside on the S&P 500). Therefore, any drop that exceeds 5% with accelerated selling should be taken seriously and would probably signal the start of a Primary 4 correction.

However, a logarithmic analysis of the market provides a more bullish outlook. On the log chart, a Wave 1 = 5 relationship would give us a target of about 18500 on the Dow, 4700 on the NDX, and 2200 on the S&P 500.

If upside continues from here, the Dow appears to have a prospective Three Peaks Domed House pattern developing:

Dow three peaks domed house

The “domed house” rally of the pattern tends to last roughly as long as the “three peaks phase”, which in this case would imply a top during the 2nd quarter of 2015.

In addition to Three Peaks Domed House, I just recently identified a prospective instance of another George Lindsay pattern (the Ascending Middle Section) on the Dow. This pattern is rather complicated to explain, so I’ll make a separate post about it soon.