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Market direction a Macro view – Dow industrials average

I would like to offer a view on the direct of the stock market. I will be using the Dow industrials average (^DJI) for this as most indices follow it’s lead. I tried to use the Elliot wave theory and apply it to the beginning of the 2008 crisis. In my view this was the beginning of a new primary cycle (bearish).

According to my analysis this primary cycle has now ended and we have just begun a new primary cycle which in my view is bullish.

I would advise from this point on for you to have the chart attached in front of view as I intend to reference it frequently

Wave 1

Started on the 15th of May 2008 and completed on the 10th of July same year. The drop was 16%. At this point most still were under the impression this is just a minor correction
Wave 2
This corrective wave tells the real story, it lasts about almost 2 months until October with a perfect 23.60% Fibonacci retracement. It end abruptly is Lehman brothers go under.
Wave 3 – This was the largest wave with a 34% decline from the top of the wave 2 , with a perfect internal ABC structure, it lasts 2 long months
Wave 4
This corrective wave gives hope that the worse may be behind us but, again a perfect Fibonacci retracement to the 38.2% line from the top of the wave and 23.60% from the beginning of the cycle ,just like the books says it should be.
Wave 5
This wave appears as soon as everyone are back from the Christmas break and there seems to be no stopping .If you may remember back then many thought the financial world is imploding and many started to claim capitalism is gone.

A nice anecdote is too look into the what some of the investment and trading legends of our time , Mr George Soros and Mr Warren buffet where doing , If you don’t know then I will tell you. They were buying anything they could get their hands on . In the words of the legendary investor Benjamin Graham ” When other are greedy be fear full when they are fear full be greedy.

March of 2009 marked the beginning of the corrective wave for the primary movement. A was from March to June , 2 was from June to July and C from July until….

This is the tricky part. Some may say that we are still in the midst of wave C but, Allow me to offer an alternative solution. In late August 2009 the index hit it’s 50% Fibonacci retracement line from the beginning the cycle. Even more you can observe that the angle of the rise changed. From a 71% angle to a 26% angle.

This hypothesis is also supported by the flow of fundamental information typical to a bullish wave 1. Does this sound familiar in any way.

– Fundamental data is still negative
– put options are in vogue
– implied volatility in the options market is high

So , where are we today then ? My view is that we are now in the middle of 2 for in the new primary cycle, therefore as long as 10,146 holds as support this should be confirmation of the trend. My target price before reevaluation would be around 11,000 . In many ways it’s not the number on it’s that tells the story but they the market reached the target level which may reveal what will be the next step. 

Good luck and happy trading

Shai Heffetz

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