Dow Industrials

Summarizing Our Dow Jones Forecast

Published 6th April 2018 & validated 18th May 2018

We see high odds that the Dow Jones Industrial Average will rally into the end of Q2/2018. The rally will probably carry the blue-chip index into the end of a medium-term cyclical trend, which started in 2010.

Market Pulse

Published 18th May 2018 @ 7:45 AM EST

The Dow Jones Elliott wave structure remains at an interesting junction. Our three most likely scenarios have not changed. All of them are likely to resolve to the upside.

However, our most preferred interpretation changed. We just assign slightly higher odds to that scenario versus the other two. The preferred count is depicted in red, contrary to our usual labeling. A double-three correction is probably not over yet. Instead, minute wave-y(circle) extends and takes the form of a triangle. We may see another brief spike into a recovery high before minute wave (c) kicks in.

The black count is our second on the list. It forms a 1-2-1-2 setup after a completed double-three correction into minor wave 4. It suggests a strong rally after the next correction. We assign slightly lower odds to this black scenario.

The third scenario, which is possible but has even lower odds is not depicted in our charts. An upside surprise scenario that sees strong followthrough without notable corrections. Momentum needs to pick up and carry into overbought territory in order to shift odds towards this scenario.

Our May 4th update remains generally valid. The only exception applies to the downside scenario, which has lower odds than the three versions discussed today.

All in all, we remain short-term bullish on US equities despite a likely short-term correction.

Short-Term Dow Jones Elliott Wave Analysis

Published 4th of May @ 7:55 AM EST

The ball is still with the bulls. The Dow Jones Elliott wave pattern still counts terminal to the downside. We record a complete double-three correction pattern from the January 2018 high. Moreover, we count a leading diagonal from the beginning of April. The subsequent decline counts as a corrective double zigzag into yesterday’s low.

It’s up to the bulls to do their homework at this point and start pouring liquidity into US equities. Any potential extension within the black count should not violate the solid red barrier triangle support. This runs around 23,360 index points.

The alternative scenario is our backup plan and plotted in red. It is based on the assumption that the last leg fo the February selloff is an impulse (we count a 3-wave correction). That assumption opens the possibility for a triangle, which resolves to the downside. We assign significantly fewer odds to the red scenario but it is not bad at all to be aware that. Moreover, the scenario gives the possibility to get prepared and potentially act. A triangle usually resolves swiftly. We see quite big support to the downside as well as the 200DMA. Therefore, we would expect a quick selloff if the red scenario plays out eventually. Those familiar with derivatives might want to look into short-dated options as implied volatility appears relatively cheap. Those not familiar with options can protect their exposure by placing stops respectively.

We remain bullish for US equities and see how the „wall of worry“ is being built by the media as well as market participants. The following narratives dominated lately:

  • Tradewar
  • Dollar too strong
  • Dollar too weak
  • Treasuries above 3%
  • Vix too high
  • Vix too low
  • Breaking wedge to the downside
  • Breaking 200dma

The potentially terminal Elliott wave pattern in US equities remains confirmed by some sentiment indicators as well. The Sentix GmbH indicator is one example. It is still around levels, which ignited a significant rally in the recent past. US equities will most likely climb onto the contemporary „wall of worry“ again.

Medium Term Dow Jones Elliott Wave Analysis

Published 17th February 2018 & amended 3rd April 2018 (chart only)

The Dow Jones is in wave I of a cycle trend, which started at the March 2009 bottom. The count below gives a reasonable wave and time relationships. Moreover, the count has been followed and confirmed down to subminuette degree over the years.

We forecast a sizable correction ahead of us in 2018. The correction in primary wave 4° either started already or will start in the weeks ahead. It should trace out as a deep and complex structure due to alternation guidelines.

Long-Term Dow Jones Elliott Wave Analysis

Published 20th April 2018

Grand Supercycle in US equities

The US stock market shows price data all the way back to 1790. It can be fitted into long-term cycles, which result in Elliott waves. The popular opinion is that we are approaching the top of a Grand Supercycle trend. It implies that a long and deep correction is ahead of us. Our conclusion is very different to that and we base it on Elliott’s rules and guidelines.

Nobody reading this will witness the top of the Grand Supercycle during their investment career! The last fractal, Supercycle wave (V), is too short in terms of price and time to be near completion as we write this. It is just 9 years young versus its 72-year lasting Supercycle wave (I) sibling. Supercycle wave (I) started in 1857 and carried into the Great Depression. Supercycle wave (III) took 68 years as well. Hence, a 9-year swing does not fit into that picture.

The Dow Jones Industrial Average has completed a (IV) wave of Supercycle degree at its March 2009 bottom from a long run Elliott wave analysis perspective. The long-term picture is analogous to theS&P 500. Both indices show alternation between Supercycle wave (II) and (IV). Wave (II) was sharp, simple and retraced a great portion of wave (I) whereas wave (IV) finished as a complex and shallow irregular flat. Despite being shallow, Supercycle wave (IV) retraced more than a 38.2% Fibonacci of Supercycle wave (III) on a log scale. Price action during Supercycle wave (III) shows extended behavior. All of this is a textbook fit of Elliott’s rules and guidelines.

Price action confirms our thesis. Supercycle (I) recorded a twentyfold increase in stock prices. Supercycle wave (III) shows a two-hundred fold increase during its extended cycle. The odd one out is the current swing from the March 2009 bottom. It records a fourfold price increase. That stands out again and does not fit into the overall picture. It is way too short!

Please refer to our S&P 500 long-term trend analysis for a chart with a longer time-span.

We are currently most likely approaching the top of cycle wave I, which we expect to take place around 2021. Thereafter, wave action needs to develop cycle waves II-V until the Grand Supercycle completes in US equities.

Grand Supercycle in German equities

The German Dax index confirms the US equity picture. German stocks are completing a fifth wave of cycle degree. We see there a post triangle resolution to the upside. The fifth wave of cycle degree started in 2011. It is too young as well to be complete. More important, we see a three wave swing to the upside since the triangle resolved to the upside. This hints to a 1-2-1-2-3 setup in German equities. That setup after a triangle resolution resolves into strong progress to the upside usually. Again, German equities are way too short in their fifth wave with respect to time and price action as we publish this. Cycle wave 5 will probably run into 2021-2023 before it is complete. After that, the Dax will correct in a fourth wave of Supercycle degree and rally over the next decades. This confirms the picture on US equities. It would have been surprising to see a different conclusion on a western G-8 economy.

Fundamental Outlook For US equities

The implication of an objective interpretation of the Grand Supercycle in US equities is a secular bull run into 2021. It will be corrected thereafter and progress further during the next decades. This translates into a bullish outlook from today’s point of view. How is this possible despite elevated equity valuations at the time we write this paper?

Most likely due to nominal economic growth. Nominal growth is decomposed of factors such as inflation, population growth, technological growth, etc. These factors affect earnings. Especially our inflation forecast is likely to play a key role in this equation going forward. Stocks are a nominal asset and likely to increase during inflationary periods.

The Grand Supercycle top has been called way too often during the past couple of decades. The same analysts will continue to make this call if they do not objectively analyze the long-term cycle. They are currently off target by about six decades.

An inflation driven bull run is more likely instead of witnessing the Grand Supercycle top in the next ten years.

Technical Analysis