Sunday, August 30, 2009

The Correction Zone

As most readers of my blog know, I think that Elliott Waves reveal fundamental insight into the practices and methods of Mother Nature. That doesn't mean they are always predictive, but it does mean that they provide valuable insight. Just like understanding the DNA makeup of human beings gives one tremendous insight into how a certain individual might look or act, it will never let you predict exact behavior or appearance at any given moment.

One of the most reliable Elliott Wave "guidelines" (there are also a few "rules" but this isn't one of them) is of particular importance today, on at least two levels or degrees:
1) Short term implication - insight into the depth and duration of our current bear market rally

2) Long term implication - insight into the initial bottom of the macro bear market that began in Y2000, and continues to unfold

So what is it?

The guideline pertains to the termination point of C wave corrections, and it is one of the more reliable guidelines that exists in EW theory, perhaps second only in importance to the guideline of alternation. This guideline states that whenever an ABC correction is unfolding, its total retracement will often backtrack to the previous Wave 4 termination point, then reverse to continue the main trend.

More specifically, the guideline states that one can expect any intermediate C wave (by "intermediate" I mean any C wave that precedes an expected resumption of the macro trend) to terminate somewhere between the previous Wave 4 of the same degree, and the Wave 2 of 5 of one lesser degree.

The following illustration comes from; I added the red markup:

My transparent red box shows the generic EW waveform was drawn about right, at least with respect to common expectations, because the C wave terminates in the zone bounded by the points forming the guideline outlined above. At this point, we would expect the C Wave's correction to stop, and the bull market, depicted above in generic terms, to continue.

Bull market behavior is generally more predictable than bear market behavior, but in a bear market, the guideline still generally holds. Here is the diagram, inverted, to illustrate the a similar bear market expectation:

I hope the applicability of this guideline to (1), the short term implication, is clear:

The applicability to (2), or the long term implication, is not as pressing but certainly more interesting. Let's save that discussion for next time.


  1. do you think any of these patterns apply, what with the massive govt interventions in the market, QE, etc.?

  2. FDR what does it mean in layman terms? Are we setup for Dow 14k again? Please throw some light on this as i am completely clueless on EWT and its implications

  3. "FDR what does it mean in layman terms?"

    It means we've hit the target range for the counter trend rally (+/- a few hundred points), and we will likely resume the bear market collapse, in earnest.

  4. FDR do you always vacation through bull markets? You must have had long break 2002-2007. Now that you are back, I expect to see an immediate market collapse. - Shadrach

  5. Thanks for the update FDR.What are your short term and long term targets for DOW,Gold and USD dollar now? Any change in perception?

  6. Welcome back :) :) :)

  7. "do you think any of these patterns apply, what with the massive govt interventions in the market, QE, etc.?"

    Yes, gov't interventions are one key way that large degrees of EW behavior manifest. In other words, lots of people acting in unison.

    "Intervention" in this sense is a misnomer, since it is actually a primary market force registering mass behavior.

  8. What's your view on corporate bonds and muni's,


  9. "What's your view on corporate bonds and muni's, "

    Depends on the offering, but most corporations and local governments are in sad shape, especially those dumb enough to issue high interest debt in the face of the greatest deflation in history. So in general, I think the risk is drastically understated.

  10. Fdr both you and prechter have called for a top of this counter trend rally.But there are a few experts out there who are calling for the counter trend rally to continue after some fall and take DOW to around 12k.Even biggies like Goerge Soros etc have said the economy may have bottomed.In face of all this do you still completelty rule out such a possibility? If yes then where do you see the next bottom for DOW?


  11. When Geithner is again
    pressed on the issue, he makes the stunning assertion that conducting an audit
    of the Federal Reserve-something never before done in its 96 year history-is a
    "line that we don't want to cross," proclaiming that such a move would be
    "problematic for the country."

  12. FDR,

    I am strating to study EWT and I have a question regarding your chart above. My doubt is whether primary wave 2 retracement is over yet since the Fibonacci rule of 0.618 is not complete yet.

    Please advise thanks

  13. Good to see you back FDR - thought you might be hanging by your thumbs in some subterranean vault.

  14. FDR a lot of people say gold is heading towards 1500$.You agree with that? Amazingly Gold refuses to go down inspite of deflationary forces acting on it.Why?

  15. "FDR a lot of people say gold is heading towards 1500$.You agree with that? Amazingly Gold refuses to go down inspite of deflationary forces acting on it.Why?"

    As many know, I think gold and silver remain in a trading range at the very top end of a multi-decade bubble.

    I define a bubble as any price that moves or remains counter-fundamental. As the money supply dries up due to the most severe contraction in credit on record, all asset prices will fall. This makes gold and silver one of the best long term short sales on the market.

    This deflation is not small. The inflation that preceded it started almost a century ago, so it will take time to fully unwind. ...perhaps another 20 years.


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