Stepping Back in Time – Elliott Wave Count of 2000 to 2003

Dec 19, 2008: 2:52 PM CST

Stuart, a reader, asked me an excellent question that I wanted to share with you all which raises some interesting questions we may need to discuss.  he noted that the proposed Elliott Wave count in 2002 was very similar to the current structure, and noted that the bottom – using Elliott Wave – could not have been predicted.  Let’s take a look at what he means and then try to determine if we can apply this lesson to today’s Elliott Wave count (and add an additional viewpoint to the current “Which Wave 4” debate that continues).

Stuart asked me to take an objective – no bias – look at the market from 2000 and stop early October 2002.  I’ve tried to do that and recreate how I would have interpreted the Wave count at the exact – though clearly unknown – bottom of 2002 in the S&P 500.

SP500 Elliott Wave Count in 2002:

Click for larger image.

I suspect we could have had yet another spirited and valid “Which Elliott Wave 4 are we Currently In?” debate then just as now.  I have applied my best, objective analysis, and would have stated something similar to these lines:

“We see the moving averages are in the most bearish orientation possible, and we may have just completed the final fractal wave 5 of the larger Wave 3 impulse.  This means we’re likely to launch into a larger fourth wave which could take us up to 950 or perhaps 1,000 where we would meet resistance from the falling 50 period EMA and from the September 11th price lows.  Also, the 38.2% Fibonacci retracement of the entire Wave 3 impulse lies at 980, so the 950 to 980 level would reflect confluence initial resistance.  Note the development of a multi-swing positive momentum divergence, which further clues us in that the 3rd wave is complete at this time and a corrective “ABC” Fourth Wave may be emerging soon.”

After Wave 4 completes around these levels, we would have another 5-wave fractal impulse to the downside, which would roughly equivocate Wave 1, which took us from roughly 1,500 to 1,100 – a 400 point move.  If Wave 4 terminates near 980 to 1,000, then the Final 5th Wave should take us down to 600 or so on the S&P (these are rough approximations of course without the finer details).”

I suspect there were even more bearish price objectives than 600 at that time – I was not applying Elliott Wave analysis at all during this time period, but rather had a more fundamental analysis view of the market sprinkled with basic chart reading (I had not fully discovered or embraced technical analysis at this point, though the 2000-2003 Bear Market forced me to seek alternate sources of investment/trading knowledge).

Stuart’s point was that – applying classic Elliott Wave counts would have most likely (if not certainly) caused the analyst to miss the bottom fully, particularly if he or she held rigidly to the most likely wave count (as I interpret it – I have not sought other sources on their wave counts at this time) that I have labeled above.

Update:  Reader Andrew in the comments portion suggested that instead of ‘fishing’ for 5 Waves, we should have been looking for 3 Waves – ABC – for a larger scale Corrective Phase.  That would be in keeping with the larger-scale notion that we are currently in a large-scale Expanded Flat (Where A would have 3 waves, B would have 3 waves, and C would have 5 Waves.  More on this later).

Here is a possible “ABC” Three Wave Corrective Phase Count that may be more in line with proper Elliott Analysis than the 5-Wave count above:

Under this count, Wave A terminated at the September 11th 2001 price lows with Wave B swinging up into EMA resistance and then Wave C terminated at the absolute bottom in October 2002.

Now, let’s step forward one year and see how this played out.  Remember, at this point – the exact 2002 bottom – we have a highly probable and internally valid Elliott Wave count that has us at the terminal point of Wave 3 down.

I’ve taken away all the fractal waves and focused on the major Waves.  Keep in mind I’m now labeling waves with hindsight.

Sure enough, Wave 4 played out as expected, finding overhead resistance actually shy of my target of 980 to 1,000 (based on the 50 week EMA and 38.2% Fib retracement).  One can see a small-scale “abc” pattern that terminated at the highs.

Now, one can count out a 5-wave fractal impulse down that terminates at the 5th wave lows, so technically this wave count would be correct, but would it have been realistic and expected?  That’s the heart of Stuart’s question.

Objectively, I have to conclude “No.”  The way I interpret Elliott Wave, I would never have anticipated or thought of the March 2003 lows as the termination point of Wave 5.  I would have had terminal targets closer to 600 than 800, and I would have had a full expectation that the final 5th wave would terminate at new price lows beyond the 2002 “Wave 3” bottom.

To make matters worse, I could see a decent argument for a Wave Count that has us at the terminus of large-scale Wave 4 right where this chart ends.  Instead of the circled “4,” place an “A” there, and instead of circled “5,” place a “B” there and then place a “C” at the top of the current price swing as the chart ends.  This would have had the Elliott analyst expecting a large-scale final 5th Wave just above the official confirmation point (meaning, the moving averages have crossed and price has formed a higher high and higher low) of the fresh Bull Market that launched exactly at that time.

However, this – to me – is why you do not apply Elliott Wave in isolation.  Despite the bearish analysis, notice in July when the 20 and 50 week EMAs crossed “bullishly.”  Just like they crossed “bearishly” in November 2000, this large scale technical signal is sort of a “Line in the Sand,” meaning when this Golden (or Death) Cross occurs on a weekly chart, it is a major technical signal and many funds take notice of such a simple yet effective structural change.

By this I mean it would have been fine to hold bearish price targets and objectives UNTIL this cross occurred.  Of course, there was a multiple swing positive momentum divergence setting up as well that preceded the reversal, as well as a Triple Bottom-style bullish pattern, among many other more complex forms of technical analysis.

All that being said, what might that mean for Today’s Market?

We have realistic price projection targets that take the S&P 500 down to 600, and more aggressive targets that take it to 400.  We have a spirited and valid debate about how far this corrective phase will go, but we have near universal agreement – among Elliotticians at least – that we will crack the November 750 lows and push on lower once the final large Fifth Wave completes (perhaps completing a large-scale “C” Wave in which the “A” Wave was 2000 – 2003; the “B” Wave was 2003-2007; and the “C” Wave was 2007 to present).  Keep in mind that if we are in a large-scale Expanded Flat, then the “C” Wave actually has to play out in a 5-Wave terminal fashion, so we cannot expect a “Three Wave ABC” Corrective period for the current environment.

I believe we will see a Final 5th Wave.  I believe we will break the November 2008 lows sometime in early 2009.

However, I do not need to let these views color (bias) my analysis such that I close off other possibilities of price action.  I feel this is the most likely price course of action and it is based on a growing faith in Elliott Wave Theory, but my faith in Elliott is not absolute – my belief in price structure (and supply/demand forces) is.  My belief (a la Mark Douglas) that “Anything Can Happen in the Market” is stronger than my belief that “We Have to Have a Terminal 5th Wave Which Will Crack the November 2008 Price Lows”.

In sum, apply your analysis including Elliott Wave as best you can, act on it in a risk-controlled environment/method, but do try to keep an open mind with a healthy respect that anything can happen at anytime in the market – it may be frustrating at first, but I suspect it’s a much more profitable way to trade than being caught blind when the market does something you never foresaw happening.

Corey Rosenbloom
Afraid to Trade.com

35 Comments

35 Responses to “Stepping Back in Time – Elliott Wave Count of 2000 to 2003”

  1. Andrew Stanton Says:

    The problem is that the fractals of circle wave 1 overlap too much and circle wave 2 is smaller than its fractal: wave (2). The only wave that has a clear impulsive structure is the last one from March to October and that is appropriate because C waves (except in a triangle) are normally fives. The whole thing counts better as a correction of some sort; I can quickly think of a few variations off the top of my head. Of course we do have the benefit of knowing how it all played out but it is a good exercise.

  2. Corey Rosenbloom Says:

    True, they say professional Elliott counting is in the Corrective Waves, but obviously that can take years to master.

    It’s actually quite possible that the “A” large scale corrective wave (from 2000-2003) may have been either a 3-wave corrective impulse itself (each with fractals).

    I’m perhaps making the false assumption that the “A” Wave had to have a 5-wave impulse which it does not – particularly if we are in what appears to be some sort of ABC Expanded Flat from 2000-2009. If that’s the case then we would have a 3 fractal wave move of the 2000-2003 period.

    But you’re right – the more practice I – and all of us – get counting and applying Elliott – the better we’ll be with the intracacies.

  3. Corey Rosenbloom Says:

    I re-did a Wave Count and updated the chart with a possible Three Wave ABC Count. Thanks Andrew.

  4. NotAfraidofTrend Says:

    Excellent post, again. Cory, your dedication to perfection is amazing! However, I would like to mention one point.

    Let us compare the daily charts of 2002-2003 with 2008.

    For 2002-2003, we can see two major lows between the circled 2 and circled 3. The third major low marks the completion of circled 3 and is not far below the second major low.

    For 2008, we see only one major low between circled 2 and supposed completion of wave 3. Therefore, it appears that wave 3 is not yet complete. What we all are thinking to be wave 4 is, most probably, just another fractal up of yet to complete wave 3. It appears that wave 3 will complete in early part of 2009. And then only can wave 4 up start.

  5. Corey Rosenbloom Says:

    NotAfraid,

    That is the view I currently have gravitated towards – that of we are in “Fractal 4” of large-scale 3, though I have tried to present both sides on the blog.

    It’s very difficult for me to accept this, as it places the final lows at such low levels – possibly 400 – 500 which is unthinkable in terms of what it would mean for the economy and the average investor utilizing Buy and Hold methods – virtual total destruction of so many people’s wealth.

    But, we can’t let our feelings guide our analysis or trading in either direction, so we continue to play it day by day.

  6. NotAfraidofTrend Says:

    Cory, the whole reason for this debate is to guesstimate the extent of the current move up and for long we will have to wait to see a retest of 750.

    If we are in wave 4, then it is supposed to go up higher. And if it is just another fractal of the wave 3, then the move up is not supposed to much higher.

    However, in both cases, we will be coming down to meet 750. But the people who are saying that we are in wave 4 are only saying that we are still to go higher the wait for a rendezvous with 750 will be longer.

  7. NotAfraidofTrend Says:

    Cory, the whole reason for this debate is to guesstimate the extent of the current move up and for long we will have to wait to see a retest of 750.

    If we are in wave 4, then it is supposed to go up higher. And if it is just another fractal of the wave 3, then the move up is not supposed to be much higher and we will coming down quicker.

    However, in both cases, we will be coming down to meet 750. But the people who are saying that we are in wave 4 are only saying that we are still to go higher and the wait for a rendezvous with 750 will be longer.

    The major question is to determine the right time for going short. We will make money so long we don’t close the position too early due to fear or a margin call. Very question important for money management!

  8. NotAfraidofTrend Says:

    Cory, the market is ruthless. However, because people like you and me, Bernie Madoff, Hedge Funds, Mutual Funds, Arbitrage scalpers, Paulson, Bernanke and Bush etc. etc., make the market, are we all ruthless?

    But, as you have rightly pointed out, what have our own feelings got to do with it. The Elliott waves are only helping us to gauge the feelings of others.

  9. toad37 Says:

    Can we retest 750 and still be in wave 4? Sorry for dumb question.

  10. toad37 Says:

    Can we retest 750 and still be in wave 4? Sorry for dumb question.

  11. toad37 Says:

    Can we retest 750 and still be in wave 4? Sorry for dumb question.

  12. Corey Rosenbloom Says:

    Toad,

    Hmm. I’ll let the more experienced Elliotticians correct me if I’m wrong but I don’t see how it’s possible. Wave 4 is an ABC Corrective wave (swing) up, and even if it’s an Elliott triangle (where I have more to learn), the terminal point at the end would be higher than the beginning.

    The way I understand it, if we break 750, we would have to be in one of the two possibilities of a 5-wave (either the fractal 5th of the large 3rd… or the large 5th wave)

  13. Corey Rosenbloom Says:

    NotAfraid,

    Excellent explanation! Precisely – both interpretations have us breaking 750, so I guess the next question/debate would be “Which Wave 5 are we in?”

    If we’re still in fractal 3, things indeed will get terrible. I’m not sure people (mainstream investors) are prepared to handle that.

    If we’re still in fractal 3, then you’re right on – we’ll hit new lows sooner than later and then have a decent rally before shattering those new lows and then shattering them again, resulting in a potential of three new swing lows yet to come… with a potential final stop near S&P value 400. Wealth destruction on a wide-spread scale not known to most modern investors.

  14. Corey Rosenbloom Says:

    NotAfraid,

    I continually remind myself that but I still sometimes have problems with the idea of profiting from others’ pain – though that’s about the only way to make money in this environment (ie short, puts, bear spreads, and inverse ETFs).

    And yes, the market is nothing more than the aggregate activities of all investors, funds, etc as they put forth and act upon their bias based on the facts as they see them.

    I have no problem with traders playing the game and I have no problem winning or losing in this arena. I do have some remorse for the S&P 500 falling 70% in perhaps two years from 1500 to 400 and what that will mean for investors worldwide – if we do make it that low. That implies a 50% drop from the levels we’re at currently.

    Pensions, Endowments, Retirement accounts – all but wiped out if they remained in the market. I’m certainly all for defensive action, but in reality, most people just won’t get out – and in fact many are being told by their advisers “Stick it out! It will come back” and it will no doubt.

    But alas, in the final calculation, we have to do what we have to do to make money and so do they – it’s not like the writing has not been on the wall.

  15. toad37 Says:

    Thanks Corey, that’s what I assumed but just wanted verification.

  16. toad37 Says:

    Hey Corey, I’m sure you know, but Mish mentioned your site in one of his post today. He is a sharp cookie, so it really verifies what I already knew; your site it awesome. 🙂

  17. beanieville Says:

    Great job.

    So, what do you think of the future of solars?

  18. jackiev Says:

    Great stuff Corey.
    Fascinating. But dont you think that the Vix and international markets should confirm any counts you have??
    After all we are ‘coupled’ you know 🙂

  19. Anonymous Says:

    Here are my EW counts for the current wave 4, please comment. The first graph was up to 12/15/2008.
    http://img508.imageshack.us/img508/9478/four3cp4.png
    http://img258.imageshack.us/img258/4011/down1jf3.png

  20. beanieville Says:

    What does Elliott Wave say about Dow 36,000 within 8 years?

  21. Corey Rosenbloom Says:

    Toad,

    Thank you for letting me know! I would have missed that. I’ll have to drop Mish a thank-you. I love his site as well.

  22. Corey Rosenbloom Says:

    JackieV,

    Yes, many markets are showing near identical patterns at the moment, though I wouldn’t put too much faith in an Elliott Count of the VIX (though I could be mistaken). The commodity markets are showing roughly expected patterns (in terms of relationships).

    It’s a unique market we’re trading in currently and it’s not ‘normal’ to have such high cross-market correlations.

  23. Corey Rosenbloom Says:

    Beanieville,

    I don’t follow the Solar stocks as much as I should, though I have colleagues who preached the virtues of Solar stocks to me since 2006, saying that market has to take off because oil keeps going higher – unfortunately it has not yet and some of them are still holding major losses, particularly in ESLR. I believe the arguments, but the stocks are not bearing out the expected movement – in fact, quite the opposite.

    I’d be happy to hear your thoughts as I don’t have much to add to the discussion yet.

  24. Corey Rosenbloom Says:

    Beanieville,

    I have absolutely no idea 🙂

    I don’t follow other sites’ wave counts and in casual conversations with other traders, I’ve never heard anyone – at least in my circle – say anything about EWT and Dow 36,000. I’ll have to see it to believe it, but I suspect it’s not entirely out of the realm of possibilities.

    For me, I take the market one swing at a time, believing the future that far out is inherently unknowable, especially with so many variables entering the system. I find it easiest to do my best to keep up with what the market’s doing right now and manage my risk/ideas accordingly and then take in new information as needed.

    I’d love to see Dow 36,000 of course!

  25. Corey Rosenbloom Says:

    Anon,

    Why did you alter the count from ABC to XYZ? I made more sense out of your ABC labeling, in terms of A being corrective up, B being a triangle sideways, and C being back up. I’m not sure I understand the second image.

    An XYZ label is needed if you’re connecting three corrective patterns in a complex wave.

    I would lean more towards your first image – Wave 4 – in terms of how I interpret the structure.

  26. Anonymous Says:

    Corey, thanks for your comments on my charts. The only problem of my ABC pattern is that wave A seems a three wave a-b-c zig-zag on the 60-minute chart. If A is a a-b-c three ,ABC can not be a zig-zag because a zig-zag is 5-3-5, i.e, A contains 5 sub waves, B three and C five. If A is not a zig-zag, ABC can only be a flat, a triangle or a combination. ABC is not a flat because wave B ended much higher than the start of wave A. So far this wave 4 is not forming a triangle (I mean a triangle defined by EW). So combination is the only choice left.

  27. Anonymous Says:

    “If A is not a zig-zag, ABC can only be a flat, a triangle or a combination”
    Should read “If ABC is not a zig-zag, ABC can only be a flat, a triangle or a combination”

  28. mmrzammrza Says:

    It seems to me that if the sp 5oo goes to 400 its going to take a massive bout of deflation to do it.I think the fed will print money to no end to fight it,so I dont see it happening.

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