May 2009 Commentary

We are still looking at the Dow Jones and its direction. As can be seen, the last trough was not as deep as the previous. In Elliott jargon, this means we may still have at that scale a bullish pattern. We do not have enough displayed data on this chart to conclude that a fifth wave will deploy. The retracement is so large that the price could plunge again and this time it could very well be below the 2003 trough. However we can also observe on the right side of the chart, a blue trendline that has been penetrated by price on the last few bars. This sign is positive but not as important as the level of the support (the last trough) being above the previous support. Let's look at the context, we know that we are presently in the middle of a recession and that the experts predict that it may last until next year. Is it convergent with the chart? This huge pattern is deploying over several years, my opinion is that it is in agreement with their scenario. The ascent is usually slower than the descent.

Double click to enlarge

The interesting part is that if we believe that a fifth wave will take place, we can anticipate several waypoints to manage properly a trade. For example, before entering such a trade, we would set our entry point at a reasonnable retracement from the trough. To be consistent with our Elliott approach, it would require a 34% increase from the trough price to take a position, so at 2900 in this case. Then we would establish a stop loss at 2870, to be moved as a trailing stop at set intervals. The rest of the trading plan would consist of progressive targets corresponding to applied Fibonacci ratios. Once a target has been reached, we could either liquidate a portion of the position or continue with a tighter trailing stop. This is not a recommendation to buy or sell and it is solely intended as an educational commentary.

If we do not believe that a fifth wave will take place, the pattern is more difficult to predict.

 

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