Sunday, July 15, 2012

TSX Elliott Wave Count

If you're ever lost and on a deserted road without a cell phone, grab paper and pen and begin an Elliott Wave count. Within seconds, a stranger will appear to correct your wave count. Ask this guy for a ride.

The problem has always been where to begin the wave count.

Students of Elliott Wave will easily recognize the three advances (impulse waves) that are interrupted by two corrections (waves) to be a perfect five-wave Elliott bull market. The completed bull is then followed by a three wave A-B-C bear phase.. Keep in mind cycle analysts have observed that, for the most part, bull markets tend to persist for about 36 to 42 months and will contain three separate and distinct advances or “up legs” which ties into the three impulse Elliott Wave theory.

Our chart spanning about 200 weeks of the S&P/TSX composite index appears to display a complete Elliott Wave bull and bear phase if we begin the wave count from the lows of March 2009. The first advance or wave (1) ran from the March 2009 low to the peak of mid-June. The first short corrective wave bottomed at (2) in July 2009. The second advance or wave (3) ran from the mid July 2009 low (2) to the April 2010 peak at (3). The second corrective wave (4) was longer the corrective wave (2) and bottomed in July 2010. The final advance or wave (5) ran from the July 2010 low at (4) to the final peak in April 2011 at (5).

The bear phase is usually an A-B-C correction with time duration shorter than the bull phase. The first, or A, down wave is a corrective wave that “comes out of nowhere” and is initially thought to be a buying opportunity. In the example of the TSX composite, the A down wave began from a price peak in early March 2011 and ended in early October 2011 for a loss of about 3,400 points or a 50% retracement of the 2009 – 2011 bull phase.

The subsequent rebound wave B ran from the lows of October 2011 and peaked in March 2012 retracing about 50 per cent of the losses sustained in wave A. During the recovery wave B, many investors are still bullish because they still regard the A down wave low to be a buying opportunity.

The final C down wave can take many forms. It can be a sudden and sharp decline accompanied by fear, confusion and panic, which is typical of a C wave bottom or it could be shallow and not violate the lows of the A wave. In any event investor temperament will change from bullish to bearish and may cause investors to stampede out of risky assets such as cyclical stocks and into safe assets such as utilities and telecoms. If this is a C wave bottom, then we start into a new Elliott 1-2-3-4-5 wave advance that should run through 2013. 


dh12 said...

How can this elliott wave thing work. It's like seeing images of the virgin mary in your cereal bowl in the morning. said...

Hello dh12

If you see images of the Virgin Mary in your cereal bowl in the morning you should cut back on your medication.

Anyway - if you have better analysis please share it with us

Bill Carrigan

Shawn Severin said...

Hi Bill,

I know how much you love divergence.

The article above illustrates long term negative divergence between the NASDAQ and the NASDAQ New Highs/New Lows line. The author shows how the same divergence was present at the 2000 market top. He also notes that no such divergence exists in the NYSE AD line nor NYSE New Highs/New Lows line and that these indicators are in fact bullish as you have also indicated.

If you bring up a long term chart of the NASDAQ Advance/Decline line it appears to be in perpetual decline since the mid 90s. It has recently broken to new lows once again.

What do you think of the argument the author is making regarding the NASDAQ New Highs/New Lows being a more "important" indicator? Or is these NASDAQ indicators simply not that reliable due to the more relaxed listing requirements for "speculative start-ups" unlike the NYSE?