Fibonacci and Elliott Wave: Predicting Up or Down?

by JDH on March 5, 2011

Interesting week. And by interesting, I mean “not really very interesting.”

The S&P 500 Index, on the week, was up a grand total of one point. Not one percent. One point. That’s about as flat as it gets. So let’s take a longer term perspective (say the last 20 years):

You could argue that the market ran from 306 up to 1,534, before pulling back to the 61.8% Fibonacci retracement level. The market then returned to that peak, corrected, and then resumed it’s upward leg.

If you believe that last paragraph, that means that we are still in the same bull market we were in from 1991 to 2000. In other words the market ran up, and then consolidated for ten years, before resuming it’s upward run. If you believe that, then you are expecting the market to make new highs at some point in the next year, or two, or three. The long consolidation period has ended, and the upward momentum has resumed.

In other words, all is good, and we have nothing to worry about.

Of course the beauty of this is you can make the charts look like whatever you want. Here’s another example.

In this chart we have the standard Elliott Wave three up two down formation. As you can see, we just finished the final up-leg, so now we can expect the market to correct back down to 1,200 (the peak of wave 3), or perhaps down to 1,100 (the Fibonacci 38.2% level), or 1,000 (the 50% level), or 934 (the 61.8% level).

Of course, as we know, Ellilott Wave theory says that Wave 3 cannot be the shortest up wave. So far, so good. But, if the market continues on up, and hits around 1,422, then that means that Wave 5 is bigger that Wave 3, which means it wasn’t Wave 5, so the count is wrong, so we have to start over.

So the market might go up, or it might go down. We might see new highs, or we might see 934. It will be one or the other. Or something else. You never know.

My opinion? You can make the chart predict whatever you want it to predict. Obviously at the moment the market is going up, but what it will do tomorrow is anyone’s guess.

Of course the Labor Market numbers (or Labour Market, as we say in Canada) aren’t great. On the surface it looks good, because in February 192,000 jobs were created in the U.S. But as Rick Santelli, and others, have reported, the real story is that the labor force is shrinking. The labor force participation rate is down to 64.2%.

You can read the labor department charts here, and they show that the civilian population increased by 147,000 people, but the labor force (people looking for work, or working) only increased by 60,000. How is that possible? Yes, there are many possible explanations, but it’s also possible that the books are being cooked. Without these wacky labor force adjustments, the unemployment rate would be much higher, which would make the economy look much worse, and the stock market may not be on such a tear.

Oh well, for now the trend is up, so let’s go with it.

That’s the market; let’s close with a quick not on one individual stock that I have liked for a long time: SLW.TO – Silver Wheaton Corp., which this week declared it’s inaugural dividend. The dividend is small, and really somewhat meaningless, but it is evidence that Silver Wheaton has graduated to the big time.

The breakout in early 2010 has led to a double since then, which is great news, and on Friday Silver Wheaton made a new all time high, which is also good news. The RSI is looking toppy, so I would expect a short pullback at some point in the next few weeks, at which point I’ll buy more. For now, it looks like an obvious long term hold.

As for gold, to quote Peter Brimelow, what exactly is gold telling us? All indications are that since it was making new highs this week, it also wants to move higher.

So, to include, in the short term the market will either go up or down, depending on which Elliott Wave count you want to believe, but in the medium to long term there’s little doubt that precious metal shares are on the upswing, so that’s where we want to be.

Thanks for reading, and thanks for your comments over on the Buy High Sell Higher Forum. Your comments on why gold stocks have lagged the price of the metal were quite illuminating, so thanks to all for your contributions. For the record, yes, I agree, the ETFs and hedge funds have put a damper on share prices, but that damper can’t last forever.

Thanks, and see you next week.

{ 1 comment… read it below or add one }

rapid1 March 5, 2011 at 8:35 am

thanks a LOT rapid1