THE WAVE PATTERN UP TO 1978 - The Grand Supercycle from 1789

THE WAVE PATTERN UP TO 1978

The Grand Supercycle from 1789

This long wave has the right look of three waves in the direction of the main trend and two against the trend for a total of five, complete with an extended third wave corresponding with the most dynamic and progressive period of U.S. history. In Figure 5-2, the Supercycle subdivisions have been marked (I), (II), (III), (IV) and (V).

Considering that we are exploring market history back to the days of canal companies, horse-drawn barges and meager statistics, it is surprising that the record of 'constant dollar' industrial share prices, which was developed by Gertrude Shirk for Cycles magazine, forms such a clear Elliott pattern. Especially striking is the trend channel, the baseline of which connects several important Cycle and Supercycle wave lows and the upper parallel of which connects the peaks of several advancing waves.

Wave (I) is a fairly clear 'five,' assuming 1789 to be the beginning of the Supercycle. Wave (II) is a flat, which neatly predicts a zigzag or triangle for wave (IV), by rule of alternation. Wave (III) is extended and can be easily subdivided into the necessary five subwaves, including an expanding triangle characteristically in the fourth Cycle wave position. Wave (IV), from 1929 to 1932, terminates within the area of the fourth wave of lesser degree.

An inspection of wave (IV) in Figure 5-3 illustrates in greater detail the zigzag of Supercycle dimension that marked the most devastating market collapse in U.S. history. In wave A of the decline, daily charts show that the third subwave, in characteristic fashion, included the Wall Street crash of October 29, 1929. Wave A was then retraced approximately 50% by wave B, the 'famous upward correction of 1930,' as Richard Russell terms
it, during which even Robert Rhea was led by the emotional nature of the rally to cover his short positions. Wave C finally bottomed at 41.22, a drop of 253 points or about 1.382 times the length of wave A, and completed an 89 (a Fibonacci number) percent drop in stock prices in three (another Fibonacci number) years.

Figure 5-2

Wave (V) of this Grand Supercycle is still in progress, [as of 1978] and is further analyzed below.

The Supercycle Wave from 1932

Supercycle wave (V) has been in progress since 1932 and is still unfolding (see Figure 5-3). If there were such a thing as a perfect wave formation under the Wave Principle, this long term sequence of Elliott waves would be a prime candidate. The breakdown of Cycle waves is as follows:

Wave I: 1932 to 1937 This wave is a clear cut five-wave sequence according to the rules established by Elliott. It retraces .618 of the market decline from the 1928 and 1930 highs and, within it, the extended fifth wave travels 1.618 times the distance of the first through third waves.

Wave II: 1937 to 1942 Within wave II, subwave [A] is a five, and wave [C] is a five, so the entire formation is a zigzag. Most of the price damage occurs in wave [A]. Thus, there is great strength in the structure of the entire corrective wave, much beyond what we would normally expect, as wave [C] travels only slightly into new low ground for the correction. Most of the damage of wave [C] was time based or erosive, as continued deflation pushed stock prices to price/earnings levels which were below those even in 1932. A wave of this construction can have the power of a flat.

Wave III: 1942 to 1965(6) This wave is an extension, by which the Dow rose nearly 1000% in twenty-four years. Its principal features are as follows:

1) Wave [4] is a flat, alternating with a zigzag, wave [2].

2) Wave [3] is the longest Primary wave and an extension.

3) Wave [4] corrects to near the top of the preceding fourth wave of one lesser degree and holds well above the peak of wave [1].

4) The length of subwaves [1] and [5] are related by the Fibonacci ratio in terms of percentage advance (129% and 80% respectively, where 80 = 129 x .618), as is often the case between two non-extended waves.

Wave IV: 1965(6) to 1974 In Figure 5-3, wave IV bottoms in the area of wave [4], as is normal, and holds well above the peak of wave I. Two possible interpretations are shown: a five-wave expanding triangle from February 1965 and a double three from January 1966. Both counts are admissible, although the triangle interpretation might suggest a lower objective, where wave V would trace an advance approximately as long as the widest part of the triangle. No other Elliott evidence, however, suggests that such a weak wave is in the making. Some Elliott theorists attempt to count the last decline from January 1973 to December 1974 as a five, thus labeling Cycle wave IV a large flat. Our technical objections to a five-wave count are that the supposed third subwave is too short, and the first wave is then overlapped by the fourth, thereby offending two of Elliott's basic rules. It is clearly an A-B-C decline.

Figure 5-3

Wave V: 1974 to ? This wave of Cycle degree is still unfolding. It is likely that two Primary waves have been completed at this juncture and that the market is in the process of tracing out the third Primary, which should accompany a break-
out to new all time highs. The last chapter will cover in somewhat more detail our analysis and expectations with respect to the current market.

Thus, as we read Elliott, the current bull market in stocks is the fifth wave from 1932 of the fifth wave from 1789 within an extended third wave from the Dark Ages. Figure 5-4 gives the composite picture and speaks for itself.

Figure 5-4

The history of the West from the Dark Ages appears in retrospect to have been an almost uninterrupted phase of human progress. The cultural rise of Europe and North America, and before that the rise of the Greek city-states and the expansion of the Roman Empire, and before that the thousand year wave of social progress in Egypt, might be termed waves of Cultural degree, each of which was separated by Cultural degree waves of stagnation and regress, each lasting centuries. One might argue that even these five waves, constituting the entirety of recorded history to date, may constitute a developing wave of Epochal degree, and that some period of social catastrophe centuries hence (involving nuclear war, perhaps?) will ultimately ensure the occurrence of the largest human social regress in five thousand years.

Of course, the theory of the spiraling Wave Principle suggests that there exist waves of larger degree than Epochal. The ages in the development of the species Homo sapiens might be waves of even higher degree. Perhaps Homo sapiens himself is one stage in the development of hominids, which in turn are one stage in the development of even larger waves in the progress of life on Earth. After all, if the existence of the planet Earth is conceived to have lasted one year so far, life forms emerged from the oceans five weeks ago, while manlike creatures have walked the Earth for only the last six hours of the year, less than one one-hundredth of the total period during which forms of life have existed. On this basis, Rome dominated the Western world for a total of five seconds. Viewed from this perspective, a Grand Supercycle degree wave is not really of such large degree after all.

Lesson 28: Individual Stocks

The art of managing investments is the art of acquiring and disposing of stocks and other securities so as to maximize gains. When to make a move in the investment field is more important than what issue to choose. Stock selection is of secondary importance compared to timing. It is relatively easy to select sound stocks in essential industries if that is what one is after, but the question always to be weighed is when to buy them. To be a winner in the stock market, one must know the direction of the primary trend and proceed to invest with it, not against it, in stocks that historically have tended to move in unison with the market as a whole. Fundamentals alone are seldom a proper justification for investing in stocks. U.S. Steel in 1929 was selling at $260 a share and was considered a sound investment for widows and orphans. The dividend was $8.00 a share. The Wall Street crash reduced the price to $22 a share, and the company did not pay a dividend for four years. The stock market is usually a bull or a bear, seldom a cow.

Somehow the market averages develop trends which unfold in Elliott Wave patterns regardless of the price movements of individual stocks. As we shall illustrate, while the Wave Principle has some application to individual stocks, the count for many issues is often too fuzzy to be of great practical value. In other words, Elliott will tell you if the track is fast but not which horse is going to win. For the most part, basic technical analysis with regard to individual stocks is probably more rewarding than trying to force the stock's price action into an Elliott count that may or may not exist.

There is reason to this. The Elliott philosophy broadly allows for individual attitudes and circumstances to affect price patterns of any single issue and, to a lesser degree, a narrow group of stocks, simply because what the Elliott Wave Principle reflects is only that part of each man's decision process which is shared by the mass of investors. In the larger reflection of wave form, then, the unique circumstances of individual investors and individual companies cancel each other out, leaving as residue a mirror of the mass mind alone. In other words, the form of the Wave Principle reflects the progress not of each man or company but of mankind as a whole and his enterprise. Companies come and go. Trends, fads, cultures, needs and desires ebb and flow with the human condition. Therefore, the progress of general business activity is well reflected by the Wave Principle, while each individual area of activity has its own essence, its own life expectancy, and a set of forces which may relate to it alone. Thus, each company, like each man, appears on the scene as part of the whole, plays its part, and eventually returns to the dust from which it came.

If, through a microscope, we were to observe a tiny droplet of water, its individuality might be quite evident in terms of size, color, shape, density, salinity, bacteria count, etc., but when that droplet is part of a wave in the ocean, it becomes swept along with the force of the waves and the tides, despite its individuality. With over twenty million 'droplets' owning stocks listed on the New York Stock Exchange, is it any wonder that the market averages are one of the greatest manifestations of mass psychology in the world?

Despite this important distinction, many stocks tend to move more or less in harmony with the general market. It has been shown that on average, seventy-five percent of all stocks move up with the market, and ninety percent of all stocks move down with the market, although price movements of individual stocks are usually more erratic than those of the averages. Closed-end stocks of investment companies and stocks of large cyclical corporations, for obvious reasons, tend to conform to the patterns of the averages more closely than most other stocks. Emerging growth stocks, however, tend to create the clearest individual Elliott Wave patterns because of the strong investor emotion that accompanies their progress. The best approach seems to be to avoid trying to analyze each issue on an Elliott basis unless a clear, unmistakable wave pattern unfolds before your eyes and commands attention. Decisive action is best taken only then, but it should be taken, regardless of the wave count for the market as a whole. Ignoring such a pattern is always more dangerous than paying the insurance premium.

Despite the above detailed caveat, there are numerous examples of times when individual stocks reflect the Wave Principle. The seven individual stocks shown in Figures 6-1 through 6-7 show Elliott Wave patterns representing three types of situations. The bull markets for U.S. Steel, Dow Chemical and Medusa show five-wave advances from their major bear market lows. Eastman Kodak and Tandy show A-B-C bear markets into 1978. The charts of Kmart (formerly Kresge) and Houston Oil and Minerals illustrate long term 'growth' type advances that trace out Elliott patterns and break their long term supporting channel lines only after completing satisfactory wave counts.

Figure 6-5

Figure 6-6

Figure 6-7

Lesson 29: Commodities

Commodities have as much individual character as stocks. One difference between the behavior of commodities and stock market averages is that in commodities, primary bull and bear markets at times overlap each other. Sometimes, for instance, a complete five-wave bull market will fail to take a commodity to a new all-time high, as the chart of soybeans illustrates in Figure 6-9. Therefore, while beautiful charts of Supercycle degree waves do exist for a number of commodities, it seems that the peak observable degree in some cases is the Primary or Cycle degree. Beyond this degree, the Principle gets bent here and there.

Also in contrast to the stock market, commodities most commonly develop extensions in fifth waves within Primary or Cycle degree bull markets. This tendency is entirely consistent with the Wave Principle, which reflects the reality of human emotions. Fifth wave advances in the stock market are propelled by hope, while fifth wave advances in commodities are propelled by a comparatively dramatic emotion, fear: fear of inflation, fear of drought, fear of war. Hope and fear look different on a chart, which is one of the reasons that commodity market tops often look like stock market bottoms. Commodity bull market extensions, moreover, often appear following a triangle in the fourth wave position. Thus, while post-triangle thrusts in the stock market are often 'swift and short,' triangles in commodity bull markets of large degree often precede extended blowoffs. One example is shown in the chart of silver in Figure 1-44.

The best Elliott patterns are born from important long term breakouts from extended sideways base patterns, as occurred in coffee, soybeans, sugar, gold and silver at different times in the 1970s. Unfortunately, semilogarithmic chart scale, which may have indicated applicability of Elliott trend channels, was not available for this study.

Figure 6-8 shows the progress of the two year price explosion in coffee from mid-1975 to mid-1977. The pattern is unmistakably Elliott, even down to Minor wave degree. The ratio analyses employed beautifully project the peak price level. In these computations, the length of the rise to the peak of wave (3) and to the peak of wave 3 each divide the bull market into the Golden Section at equivalent distances. As you can see by the equally acceptable counts listed at the bottom of the chart, both of those peaks can be labeled as the top of wave [3], fulfilling typical ratio analysis guidelines. After the peak of the fifth wave was reached, a devastating bear market struck apparently from out of the blue.

Figure 6-8

Figure 6-9 displays five and a half years of price history for soybeans. The explosive rise in 1972-73 emerged from a long base, as did the explosion in coffee prices. The target area is met here as well, in that the length of the rise to the peak of wave 3, multiplied by 1.618, gives almost exactly the distance from the end of wave 3 to the peak of wave 5. In the ensuing A-B-C bear market, a perfect Elliott zigzag unfolds, bottoming in January 1976. Wave B of this correction is just shy of .618 times the length of wave A. A new bull market takes place in 1976-77, although of subnormal extent since the peak of wave 5 falls just short of the expected minimum target of $10.90. In this case, the gain to the peak of wave 3 ($3.20) times 1.618 gives $5.20, which when added to the low within wave 4 at $5.70 gives the $10.90 target. In each of these bull markets, the initial measuring unit is the same, the length of the advance from its beginning to the peak of wave three. That distance is then .618 times the length of wave 5, measured from the peak of wave 3, the low of wave 4, or in between. In other words, in each case, some point within wave 4 divides the entire rise into the Golden Section, as described in Lesson 21.

Figure 6-9

Figure 6-10 is a weekly high-low chart of Chicago wheat futures. During the four years after the peak at $6.45, prices trace out an Elliott A-B-C bear market with excellent internal interrelationships. Wave B is a contracting triangle. The five touch points conform perfectly to the boundaries of the trendlines. Though in an unusual manner, the triangle's subwaves develop as a reflection of the Golden Spiral, with each leg related to another by the Fibonacci ratio (c = .618b; d = .618a; e = .618d). A typical 'false breakout' occurs near the end of the progression, although this time it is accomplished not by wave e, but by wave 2 of C. In addition, the wave A decline is approximately 1.618 times the length of wave a of B, and of wave C.

Figure 6-10

Thus, we can demonstrate that commodities have properties that reflect the universal order that Elliott discovered. It seems reasonable to expect, though, that the more individual the personality of a commodity, which is to say, the less it is a necessary part of human existence, the less it will reliably reflect an Elliott pattern. One commodity that is unalterably tied to the psyche of mass humanity is gold.

Gold

Gold often moves 'contra-cyclically' to the stock market. When the price of gold reverses to the upside after a downtrend, it can often occur concurrently with a turn for the worse in stocks, and vice versa. Therefore, an Elliott reading of the gold price has in the recent past provided confirming evidence for an expected turn in the Dow.

In April of 1972, the long-standing 'official' price of gold was increased from $35 an ounce to $38 an ounce, and in February of 1973 was again increased to $42.22. This fixed 'official' price established by central banks for convertibility purposes and the rising trend in the unofficial price in the early seventies led to what was called the 'two-tier' system. In November 1973, the official price and the two-tier system were abolished by the inevitable workings of supply and demand in the free market.

The free market price of gold rose from $35 per ounce in January 1970 and reached a closing 'London fix' price peak of $197 an ounce on December 30, 1974. The price then started to slide, and on August 31, 1976 reached a low of $103.50. The fundamental 'reasons' given for this decline have always been U.S.S.R. gold sales, U.S. Treasury gold sales and I.M.F. auctions. Since then, the price of gold has recovered substantially and is trending upward again [as of 1978].

Despite both the efforts of the U.S. Treasury to diminish gold's monetary role, the highly charged emotional factors affecting gold as a store of value and a medium of exchange have produced an inescapably clear Elliott pattern. Figure 6-11 is a price chart of London gold, and on it we have indicated the correct wave count, in which the rise from the freemarket liftoff to the peak at $179.50 an ounce on April 3rd, 1974 is a completed five-wave sequence. The officially maintained price of $35 an ounce before 1970 prevented any wave formation prior to that time and thus helped create the necessary long term base. The dynamic breakout from that base fits well the criterion for the clearest Elliott count for a commodity, and clear it is.

Figure 6-11

The rocketing five-wave advance forms a nearly perfect wave, with the fifth terminating well against the upper boundary of the trend channel. The Fibonacci target projection method typical of commodities is fulfilled, in that the $90 rise to the peak of wave [3] provides the basis for measuring the distance to the orthodox top. $90 x .618 = $55.62, which when added to the peak of wave III at $125, gives $180.62. The actual price at wave V's peak was $179.50, quite close indeed. Also noteworthy is that at $179.50, the price of gold had multiplied by just over five (a Fibonacci number) times its price at $35.

Then in December 1974, after the initial wave [A] decline, the price of gold rose to an all-time high of nearly $200 an ounce. This wave was wave [B] of an expanded flat correction, which crawled upward along the lower channel line, as corrective wave advances often do. As befits the personality of a 'B' wave, the phoniness of the advance was unmistakable. First, the news background, as everyone knew, appeared to be bullish for gold, with American legalization of ownership due on January 1, 1975. Wave [B], in a seemingly perverse but market-logical manner, peaked precisely on the last day of 1974. Secondly, gold mining stocks, both North American and South African, were noticeably under-performing on the advance, forewarning of trouble by refusing to confirm the assumed bullish picture.

Wave [C], a devastating collapse, accompanied a severe decline in the valuation of gold stocks, carrying some back to where they had begun their advances in 1970. In terms of the bullion price, the authors computed in early 1976 by the usual relationship that the low should occur at about $98, since the length of wave [A] at $51, times 1.618, equals $82, which when subtracted from the orthodox high at $180, gives a target at $98. The low for the correction was well within the zone of the previous fourth wave of lesser degree and quite near the target, hitting a closing London price of $103.50 on August 25, 1976, the month just between the Dow Theory stock market peak in July and the nominal DJIA peak in September. The [A]-[B]-[C] expanded flat correction implies great thrust in the next wave into new high ground.

Gold, historically speaking, is one of the disciplines of economic life, with a sound record of achievement. It has nothing more to offer the world than discipline. Perhaps that is the reason politicians work tirelessly to ignore it, denounce it, and attempt to demonetize it. Somehow, though, governments always seem to manage to have a supply on hand 'just in case.' Today, gold stands in the wings of international finance as a relic of the old days, but nevertheless also as a harbinger of the future. The disciplined life is the productive life, and that concept applies to all levels of endeavor, from dirt farming to international finance.

Gold is the time honored store of value, and although the price of gold may flatten for a long period, it is always good insurance to own some until the world's monetary system is intelligently restructured, a development that seems inevitable, whether it happens by design or through natural economic forces. That paper is no substitute for gold as a store of value is probably another of nature's laws.