Question:
A reader asks, "[Robert] Prechter's recent prediction based on his interpretation of the EWT [Elliott Wave Theory] cycles calls for a market top in 2012 and then a slide of humongous proportions to bottom in 2016. I am of course very familiar with his EWT, but just wanted to bring this to your attention.
"How do you view this in light of your cycle work? Prechter is mentioning two cycles -- 7.25 yr and 20 yr -- both topping in 2012 as per the last paragraph in the article titled 'Elliott Wave predicts triple-digit Dow in 2016.'”
Answer:
Our most recent article of June 13, 2010 on the 4 ½ year cycle perfectly lines up with the EWT assertion of a peak in the market around 2012. Remember, our 2011 estimate for a peak was conservative since it ignores that most 4 to 4 ½ year peaks occur in the 3rd year while we only assumed the 2nd year as the most likely (preemptive) top. Interestingly, the 2016 cycle bottom fits snugly within Charles H. Dow’s claim of a 3 to 4 year cycle with a concentration on half-cycle tops.
Our view on the specific downside targets based on the Wave principle was addressed in the article dated October 16, 2009. In that article we said,
“The second type of market low is based on the premise that the Dow fulfills the Wave principle and falls below the upward trending line (red) to the old support level 8100 and then 6440. A true Wave move down to the old low would bring the market below 6440. However, the last time this was fulfilled, in the period from 1970 to 1974, the market only fell 8.5% below the previous low of 631.16 on the Dow Industrials in 1970. Additionally, the Industrials ran up from 631.16 in 1970 to 1051.70 in 1973, an increase of 118% of the previous peak. As more time passes I expect the index to fall to 5474 [8.5% of the March 9, 2009] if we do manage to complete a Wave formation on the downside.”
Our view is that we start from the premise of prior fulfillment of the Wave Principle (using Dow’s requirement of precedent to prove; until proven otherwise) at or near major market bottoms and then work our way down from there. The Wave principle, as strictly defined by R.N. Elliott, indicates that the market only needs to fall slightly below the prior all time low to be complete. The major super cycle low that was predicted for 1974 didn’t go to 100 or 200 as expected at the time. Instead it fell only 8.5% below the 1970 low.
We believe that the 5474 is the most realistic starting point to work from. Any declines below 5474 level need to be assessed based on the conditions of the market at that specific time.
We cannot emphasize enough the fact that the calls of 90% declines, or Grand Supercycle bottoms, are based falsely, in our opinion, on the Dow declines of 1929 to 1932 which was largely a result of dramatic changes to the index during that period rather that a relatively static constituency of the index from the 1929 top to the 1932 bottom (Article 1 and Article 2 addressing the issue of index changes and post Depression performance, respectively).
Again, we would rather assess the situation once we meet the minimum requirement of “fulfilling” the Wave principle which may concurrently meet the requirement needed to acquire stocks at “traditionally” undervalued levels.
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