Sunday, March 16, 2008

S&P 500 Elliott Wave Count

Here is a longer term Elliott Wave Count for the S&P 500 Index. Elliott Wave, in my opinion is rather subjective and interpretative - it is a useful framework for putting your thoughts about the market direction in perspective, but not very predictive. There are plenty of alternative counts out there, which are totally valid (and plenty which are invalid). This one seems most likely IMO. The current correction which started in July 2007 is labeled ABC (probably should be labeled WXY - see below). The capital letters imply that the correction is complete and that we are now going into wave 3 up since the 2002 bottom. Of course, it is entirely likely that this correction is simply the first wave A or W of a much longer correction. There is no way to know that. OTOH I think the immediate downside if any is very limited - we should get at the very least a substantial correction in the form of a wave X upwards first. So here are the scenarios in order of my subjective probability:

1. Correction is complete go into wave 3 up.

2. Correction is not complete - is just wave A or W of a three wave flat or complex sideways correction that will take another 1 1/2 years to play out.

3. Correction is not complete - is just wave A, the first wave of a five wave triangle that will last another 2 1/2 years or so.

4. Correction is not complete - the correction is the first abc of a correction with much more downside to go - following a wave X up there will be another abc zig-zagging downwards.

My reasoning behind this ordering (and maybe you can think of more scenarios) is that:

1. I believe the recession in the US will be relatively shallow as in 1990 and that the effects have largely been priced in by the market. See the chart of the 1990 stockmarket I posted previously.

2. Stocks are not significantly overvalued as they were in 2000 - such a deep bearmarket is not neccessary to get to reasonable valuations.

3. 2008 is a presidential year when stocks usually do well.

As an example of the relatively unpredictive nature of counts, I also posted a short-term E-Wave count. That count was that the entire correction from the July top was an ABC flat correction. This implied that the January 23rd low should be taken out by the final wave 5 of C. I no longer think this is the most likely scenario (though I labeled the correction in the longer term count ABC too - that's probably a mistake). Rather the correction would be WXY where each wave has three subwaves with wave Y ending on January 23rd. We still could see a lower low, but it probably won't exceed the January low by much. Elliott Wave does give you an idea about more or less likely outcomes.

No comments: