I get asked from time to time whether the actions of central bankers influence the way the market moves.
The answer is “yes and no.”
The “yes” part is that from 2009 to the present in the SP500 and related indices, we have a B wave, which is highly unusual; in fact, it’s remarkable . But, let’s look first at the bigger picture — using the DOW chart, because the data goes back the farthest.
Big Picture – the DOW 1920 to Today
You can see that 1929 was the top of a (circle) third wave and that in 2007, we topped out at the top of the final (circle) fifth wave. 2007 was both a projected 172 year and a 516 year cycle top. We expected the market to crash then, with a downside target of the previous fourth wave of one lesser degree, at approximately $570 (shown as a white horizontal line). After the final fifth wave, the market always returns to the area of the previous fourth of one lesser degree (which means it will get close to that target, but might not reach it exactly).
So, what happened — why didn’t we keep on going down in 2009?
Central banks happened. Quantitative Easing, which was the injection of cash (with the Fed taking on the debt) into the commercial banking system “saved the day.” In terms of how it affected the market, you can see the B wave on the chart, which is a corrective (based upon its subwaves — what I refer to as “unnatural wave” because it was, in a way, “forced”).
B waves at the top of a market are not supposed to exist.
On page 58 of the Principle book, Prechter provides his opinion that this is impossible (“Erroneous Concepts and Patterns”). Ralph Elliott, on the other hand, believed they were possible. Elliott was obviously correct, as we have one across all NYSE related indices, obviously a result of the QE of central banks.
The Induced “B Wave”
Above is the 7 day chart of the SP500, showing just the “B Wave” up from 2009.
The “no” part is this: The subwaves all play out as they should. The “B wave” up from 2009 is a B wave because it’s clearly a corrective structure. Within that structure, Elliott wave principles hold true, as they always have and always will (until proven otherwise). The planets still revolve as they always have (and hopefully always will), influencing the emotions of humans on this tiny revolving rock called Earth, so the waves play out appropriately to the beat of the Universe.
I have seen no anomalies in the wave structure up from 2009 and I’m doing analysis daily at all degrees of trend across multiple assets classes (and following international indices).
Within the above chart, you can see when QE was announced (in purple):
- QE1: December, 2008
- QE2: November, 2010
- QE3: September, 2012
The market was affected in each instance — QE2 and 3 had the effect of pushing the market up. What’s interesting is that they happened at points of relative weakness, but didn’t really affect “the count.”QE1 was a different story, but still had a major influence, as the chart below shows.
The Great Recession – A corrective “A” wave
Above is the daily chart of the SP500 (click to enlarge) spanning the period of mid-2007 (the top of the bearish wave down) to mid-2009 (a few months after the wave bottom).
What’s important here are the purple letters. This is a zigzag. There’s a purple A wave down of five waves, then a purple B wave in three waves, and finally a purple C wave that is exactly 2.618 X the length of the A wave, a typical length for an extended C wave. There are no fourth and fifth waves.
In fact, you can see that the wave structure changes near the bottom as QE1 kicked in. The drop from the high in 2007 began as a set of impulsive waves, but didn’t complete near the bottom (that where the stimulus began — QE1 began in December, 2008).
As a result of QE1, the next set of waves down became a “three count” — an ABC ending wave. What had begun at the top as an impulsive set of wave down (wave 1 of the start of a larger downturn) changed at that point into a corrective wave. Almost everyone missed this event, but it’s a clear indication as to how Elliott Waves are predictive.
So the entire wave down must be classified as a corrective wave. Although I didn’t pay all that much attention at the time, it predicted another wave up to a new high. We’re getting closer to the top of that “induced” B wave now. Although, we have one more all time high to go, the fifth and final wave.
[addition – PT] These “stimulus events” by central banks usually (if not always) take place at wave lows (additions on the above chart are in red). So, you can see that at the Federal Reserve March, 2008 meeting, after a surprise announcement of a 3/4 of a point interest rate cut, the market turned from the bottom of the first wave (or A wave — after 5 waves down — which is the normal place for a rally). The market first dropped a bit and then rallied 184 points to complete the second wave (top at 1440).
At that time, the Fed also allowed brokerage firms (for the first time ever) to borrow money directly from the Fed at lower rates, Well, we know where that money went! They actually cut the discount rate for banks twice in a three day period!
Likewise, in November, 2008, QE 1 was announced at the bottom of the third wave of the C wave and immediately rallied again (at the appropriate spot in the wave structure). However, the rally was short-lived and resulted in another low to complete a C wave before a much larger rally up, which has become our large B wave (where today, we’re in a large 4th wave close to a top).
Following from this, if we’re going to get QE 4, I would expect to see it at the bottom of the fourth wave, when we’re under the 2100 level that I’m predicting.
In summary, central banks have affected the direction of the market overall (creating a B wave to new highs that we not expected at the time). But the waves reflected that financial injection and predicted another wave up.
But, the subwaves not affected; they still trace out their patterns as if nothing happened; they continue to follow the rules of the Elliott Wave Principle.
The market is influenced by the movement of the planets but nobody’s done anything to change their timing or orbits. The market will continue to play out as it always has, hitting fibonacci ratios on schedule and tracing out Elliott Waves that are as predictable as they’ve always been.
Elliott Wave Basics
Here is a page dedicated to a relatively basic description of the Elliott Wave Principle. You’ll also find a link to the book by Bob Prechter and A. J. Frost.
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US Market Snapshot (based on end-of-week wave structure)
Here's the latest daily chart of ES (emini futures)
Above is the daily chart of ES (click to enlarge, as with any of my charts).
We're still sitting near the top of a B wave that's risen to about the 76% level of the height of the previous set of waves down from the all-time high at October 3, 2018. Almost all the other assets I cover on a daily basis are hovering near inflection points.
The US indices are are working getting all "the gang" to a new high, as predicted in past weeks; progress is slow. That's because all asset classes I cover have to top (all the same market) before we they can all head down in tandem.
As I've been saying, IWM (Russell 2000) and the DOW both need new interim highs before everything heads down in a dramatic capitulation. The US Dollar Index also has another leg down before it turns up in earnest.
We're in the final bullish 5th wave in ES - a minimal new high to finish what appears to be an ending expanding diagonal.
The next major move is to the downside.
As I've been saying, the wave up from Dec. 26 is clearly corrective and, as a result, must fully retrace. This is supported by the US Dollar Index, the major USD currency pairs, WTI Oil, along with DAX and other international exchanges.
Summary: My preference is for a dramatic drop in a C wave to a new low that should begin sometime this week. The culmination of this drop should mark the bottom of large fourth wave in progress since January 29, 2018 - over a full year of Hell. It may be a dramatic drop that lasts multiple months, and will target the previous fourth wave area somewhere under 2100.
Once we've completed the fourth wave down, we'll have a long climb to a final new high in a fifth wave.
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