Wednesday, March 19, 2014

The Dow and the A-B-C Correction:

A few posts ago I reviewed the structure of an Elliott A-B-C correction – the A wave which is a downward move that comes “out of no where.” – the fundamentals continue to improve and investor psychology goes from very bullish to moderately bullish.  They do not believe a new bear market has arrived. Then the B wave which is a “phoney rally.” – and normally weaker technically and the fundamentals sometimes start to weaken. Investor psychology goes from slightly bullish to very bullish, usually more bullish than it was at the top, creating a negative divergence between momentum and sentiment... This is the most reliable sell point. Finally the C wave – or the “killer wave” - a serious down trend with serious losses and deteriorating fundamentals with investor psychology changing from very bullish to very bearish.

I am focusing on the Dow Industrial Average because unlike the “hot” 1980’s the Dow should have a name change – to the Dow Consumer Average – because unlike the 1980’s when there were 18 industrial components – now there are only 6 industrial components. The number of consumer related components has jumped from 6 in 1982 to 12 in 2014 – add-on the current financial (4) and health care (4) and you have the Dow Jones buy-stuff-made-somewhere-else average.

Anyway – the A-B-C correction is still likely – with a B wave top completed and a C wave down just getting underway

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