E Why The Stock Market Rallied So Fast

Most market analysts didn’t expect the stock market to recover so fast, but if you knew how Elliott Wave works, you could have anticipated the current move. This week, I will be looking at the S&P 500 from the perspective of 20-years 1999- 2019.

The basic premise behind the Elliott Wave Theory is that markets move up in 5 waves and down in 3 waves, completing a perfect octave (like music). R.N. Elliott (ca. 1920’s-40’s) was able to see the Fibonacci sequences that are found in nature (e.g. the spiral of galaxies, seashells and the inner ear) and apply them to waves of mass greed and fear in collective human buying and selling activity.

The top in late January 2018 to the bottom in December 2018 was a three wave buying pattern I call X-Y-Z (an a-b-c or 3 wave pattern).  Elliott noted that these patterns are very bullish once completed and launch markets to higher highs. This is where we are now.

True bull waves always move in 5 waves (1 up, 2 down, 3 up, 4 down, 5 up).  The last such bull wave lasted from 1974-99, which I have labeled (in the chart below) as Super Cycle Wave III. After 1999, the S&P 500 completed an XYZ wave in March 2009, which I labeled as a larger Wave X.

What is surprising (given the magnitude of the launch), is that the wave up from the 2009 low to now (April 2019) does not have any true 5 wave sequences in the impulse waves.  It is a double 3 wave affair (ABC X A now B with C to come or a Double Three Pattern). This can happen only if Wave Y is an irregular topping wave. For this wave to have gone this far up (and looking to go higher in the next 2-3 years) means to me that it is likely what Elliott termed a “rare” Running Correction pattern since 1999.

A Running Correction basically exceeds the previous top (SPX 1552 Wave III-1575 Wave Y of [X]) by the same percentage amount it fell below the top (Wave Z of [X] 2009) completing Wave [Y] and then falls back to test that area in Wave [Z].  Wave [Z] then completes Super Cycle Wave IV, launching the final Super Cycle Wave V.

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Gary Anderson 2 years ago Contributor's comment

2007-2009, close, real close, to doom. But better than Great Depressions.

Brad Gudgeon 2 years ago Author's comment

Yes, my sentiments exactly!

Gary Anderson 2 years ago Contributor's comment

No that the clown in chief is seeking tariffs again, all bets are off. If Wall Street wants to stop the madman, they need to take the market down. They have no other hope.

Alexis Renault 2 years ago Member's comment

How can I learn more about how Elliott Wave Analysis works?

Brad Gudgeon 2 years ago Author's comment

The best way, in my opinion, is to become a subscriber to my service. Also, buy the original works of R.N. Elliott.

Barry Glassman 2 years ago Member's comment

Is X-Y-Z your own term? I haven't heard that before?

Brad Gudgeon 2 years ago Author's comment

XYZ is like ABC only in an uptrend a bull flag where Y takes out the previous impulse. In a bear flag it is labeled WXY.

Brad Gudgeon 2 years ago Author's comment

The market looks toppy in here. A 10-12% pull back would not surprise me in the month of May.

Kurt Benson 2 years ago Member's comment

Yes, I agree.