This writing will contain an in-depth Elliott Wave and Fibonacci analysis of the DJI index on the monthly and daily chart in order to understand two essential things: 1) where are we now? and 2) where are we heading to?
Understanding this analysis requires intermediary to advance knowledge of technical analysis, especially the Elliott Wave Principle (EWP).
Part I: Historical Analysis of the Dow Jones Index from 1897 till today January 2021
To analyze different eras of social mood and investment crowds, stretched throughout decades and centuries, it is always recommended to work with logarithmic charts. As Robert Prechter wrote in his book, Elliott Wave Principle: Key to Market Behavior, a 10% move in DOW in the year 1920 compared to now does not translate into the same price range, hence, to understand the overall secular trend, we must look at the log scale chart.
Moving on to the chart below, first, you must understand the three key wave degrees: Cycle - Primary - Intermediate. Dow is currently trading in Intermediate wave (5) of Primary Wave ⑤ of Cycle wave III. We are in a historic moment regarding the social mood during a global pandemic, where stock indices continued to hit all-time highs every week after Central bank interventions; thus, disregarding the economic and psychological effects of the health crisis. The question arises: for how long will this blinded optimism into the financial markets continue?
Take a moment to review the chart above, locate the Cycle, Primary and Intermediate waves, and see how corrective waves followed the guideline of alternation quite well. This is our primary view/wave count (we also have an alternate count in case market invalidates this view).
Key observations from the Monthly chart:
Cycle wave I: a Leading Diagonal (LD) - the Era of the Great Minds (Carnegie, Rockefeller, Edison, JP. Morgan, Ford) & the 2nd Industrial Revolution - 1870-1920;
Cycle wave II: deep retracecement following LD as per EWP guidelines - Great Depression era.
Cycle wave III had started when the Great Depression hit with maximum force and finished on the early years of WWII; The Cycle wave III is comprised of a few major events, such as: post WWII expansion era & the Cold war spending and inventions (1945-1990), Oil crisis and American invasion of the Middle East (1973-1980), the Internet Era (1990-2004), the Subprime Crisis (2005-2009), the Tech Advance Era (2010-now);
Primary wave ④: barrier triangle pattern from 1973 until 1982 consuming 9 years with a shallow price range - The Great Stagnation - the Oil Crisis and American invasion of the Middle East;
The expansion outside the barrier triangle proved to be an elongated fifth wave suggesting further extensions and the beginning of a new era: the Internet Era;
It is a essential feature of growth to record setbacks: 3 moves up and 2 steps down, and therefore, scoring progress.
The current social mood suggests we are approaching the end of Tech Era as we know it and something else may be around the corner. The immense growth of the past 12 years needs another setback sooner rather than later. In the grand-scheme of things, the Covid-19 market sell-off was quite insignificant and relatively the same as the flash-crash of 1987. That is why it cannot separate or mark a new era, at least yet.
Fibonacci projections, in relation to the Elliott waves, are suggesting a possible advance of the Dow Jones to the cluster zone of 32,500-34,000 and the upper extreme being at 36,400 (see the following chart).
To confirm the top of Cycle wave III, DJI price must not rally over 34k. A key measurement for Cycle wave IV is 20k-16k price area which can take the shape of a triangle or expanded flat and consume a minimum of 4 years.
Part II: Medium-Term Outlook and Projections for Wave (5) of ⑤ of III
The following chart simply helps us track the short-term movements below "Intermediate" degree, and therefore, take trading decisions or refrain from large investments. You can see that the main Fibonacci cluster zone for a possible top is at 32,500-34,000, particularly a 100%-123.6% measurement. The upper-extreme being the 161.8% extension of wave "v" to "i" at 36,400.
As it stands, and to keep this view valid, price of DOW must not drop below 28,800 until it reaches our Fib. cluster.
Keep in mind that the above is a primary long-term analysis of the Dow Jones. We are always updating the count every 2-weeks depending on market information. We apply the same techniques for short-term trading, however, always keeping in mind these two questions:
Where am I now?
Where am I heading to next?
Until the next time, "Be a Mindful Trader!"