Europe

In recent years Europe has been a major focus of financial media. Europe has experienced much more difficulty than the U.S. emerging from the global financial crisis, with many European economies being in-and-out of recession ever since 2008. An interesting observation is that, despite the economic stagnation, most European stock indices have been rising. The bull markets have been more subdued than the U.S., but what this suggests to me is that European stocks are still in the early phases of a very long bull market, with more years of upside left than the U.S.

First, here’s the U.K.’s FTSE-100 index:

FTSE long term Elliott Wave

It looks like the FTSE had a large-scale bear market during 2000-2009 which took the form of a flat, and a new bull market started from the 2009 low. Even though the 2003 low was never broken nominally, the inflation-adjusted FTSE did go below its 2003 low in 2009, which is why I have labeled 2009 as the bear market low.  The first Primary wave of the new bull market was from March 2009 to April 2010. Then there was an expanded flat Primary Wave 2 during Apr. 2010 – Aug. 2011. Primary Wave 3 began from the Aug. 2011 low. Even though the rally since then has been long enough time-wise to qualify as a primary wave, the index isn’t far above its 2010/2011 highs yet. Thus, I think this third wave will turn out to be an extended third wave, in which each of the five subwaves are the magnitude of primary waves. This is a well-known phenomenon in Elliott Wave theory, and more detail about it can be found here. For the FTSE, I think the first leg of the extended wave will conclude within a few months followed by a correction of 20-30%,  similar to the 2011 drop. Support will likely be found around the July 2012 low at 5200. After that, a very strong advance should begin in the FTSE.

Next, I have the chart of France’s CAC-40 index:

CAC-40 long term elliott wave

It’s basically the same pattern as the FTSE.

Germany’s DAX index shows a different pattern:

DAX long term Elliott Wave

The DAX appears to be in a large-scale bull market, with highest-order subwaves more like Cycle degree than Primary degree. I think this was also the case for the U.S. bull market of 1982-2000.  The DAX appears to be in Cycle Wave 3 of a bull market that began in 2003. Within this wave, the DAX is probably near the top of Primary Wave 3. After a Primary 4 drop, the DAX should rise for at least two more years to complete Cycle 3. I should note that I diverge from conventional Elliott Wave theory in that I do not believe in an eternal fractal pattern in which every bull or bear market is part of a larger degree pattern. I have found that it is more helpful to consider each bull and bear market as an isolated event.

Next I have a chart of Spain’s IBEX-35 index:

IBEX 35 long term Elliott Wave

 

The IBEX was in a bear market from 2007-2012. Unless proven otherwise, I think it makes the most sense to assume that the bear market ended in 2012 given that it had a classic 3-wave decline and a long duration of five years. However, it looks like the IBEX is in the fifth Intermediate wave up from the 2012 low, which implies it is close to the Primary 1 top.  From an intermediate-term perspective, this is a dangerous situation given that other European indices had Primary 2 declines of 25-40% back in 2010-2011.

Next we’ll look at Greece:

Greece stock market long term Elliott Wave

The ASE appears to still be in a huge expanded flat that began in 1999. The C Wave appears to be subdividing into five waves (which is expected in a flat), with the fifth wave decline underway now. The ASE will probably fall below its 2012 low later this year and then begin a long term bull market.

Last we’ll look at Italy:

MIB long term Elliott Wave

The MIB appears to be in a double-zigzag bear market that began in 2000. It appears that a terminal C Wave is underway now to complete the pattern and will result in a decline below the 2012 low.

A Macroeconomic view:

The European stock market performances and Elliott Wave counts make sense from a Macroeconomic perspective. Germany has been one of the most stable European economies, and it also has the most bullish Elliott Wave pattern. Italy and Greece have been two of the weakest economies, and their stock indices have ongoing bear market patterns. The U.K. and France are somewhere in the middle economically. Correspondingly, their stock indices have bull market patterns but are more subdued than Germany so far.

Elliott Wave theory generally expects that visible economic improvement will begin at or before the midpoint of a bull market’s third wave. For the U.K., France, Germany, and Spain, this implies that a strong economic advance will began within the next year or so.

Sources of stock index data:

FTSE, CAC, DAX – http://www.freestockcharts.com

MIB, IBEX – http://www.tradingview.com

ASE – http://www.tradingeconomics.com

Inflation-adjusted index data – http://www.aboutinflation.com

 

 

 

 

 

 

 

Domed House Update – Jan 14, 2015

Hi everyone,
As I mentioned here, I think the Dow is in a Three Peaks and Domed House pattern that began in early 2014. The “five reversals” phase (Points 15-20) is probably complete after the drop this week, implying a rally to substantial new highs (probably over Dow 19000) in the coming months.

dow tpdh with possible 5 reversals

If, on the other hand, the “five reversals” phase is not complete, the Dow could drop to the mid-16000s before casting too much doubt on the pattern’s validity in and of itself. However, given the bearish behavior of the NASDAQ-100 and its potential Elliott Wave patterns described in the previous post, a drop of more than 2% or so from current levels on the major indices with accelerating downside would suggest a correction much bigger than a drop within a Domed House.

Watch the NDX – Jan. 6, 2014, 1:30 pm

I just noticed something that I missed before, which is that during the late-December rally, the NASDAQ-100 (NDX) did not take out its high on Dec. 3. This is significant because the NDX has shown the best Elliott Wave patterns for the current bull market. As shown on the chart below, the Dec. 3 high could be considered the top of Primary 3, implying a subsequent correction of a magnitude similar to Primary 2 in 2011.

As I type this, the NDX is retesting its Dec. 17 low at 4089. If the NDX breaks 4060 with strong downside momentum, that would be a strong signal that a correction to 3400 has started.

NDX nov 2008 - jan 2015

Click the chart for a clearer image.

Historical Bull Market Gains

Happy new year everyone,

I have been reading some commentaries which argue that since 2009, stocks have seen abnormal gains as a result of monetary policy, and that another crash like 2007-09 is imminent. However, the current bull market is only abnormally large if you count short-term plunges like 1987 as bear markets, or count large rallies within bearish phases (i.e. 1974-76) as bull markets.

Excluding such countertrend moves, I find the following bull and bear markets from 1920 to the present:

Bull markets:

1921-1929, 1932-1937, 1942-1946, 1949-1960, 1962-1966, 1982-2000

Bear markets:

1929-1932, 1937-1942, 1946-1949, 1960-1962, 1966-1982, 2000-2009

The current bull market is almost 6 years old now. On the list of bull markets above, any bull market that lasted more than 5 years had a total duration of at least 8 years. There are three previous bull markets that meet this criteria: 1921-1929, 1949-1960, and 1982-2000.

For each of those bull markets,  I calculated the Dow’s percentage gain from the preceding bear market low to the high of the same quarter of the year six years later.

1982-1988: 182%
1949-1955: 183%
1921 – 1927: 211%

Median: 183%
Average: 192%

Current bull market: 180%

So, for a bull market lasting more than 5 years, the current bull market is historically normal.