“Market moves at extreme pessimism at the bottom to extreme optimism at the top from series of psychological steps”
One of the most interesting topics that Elliott explained in Elliott Wave Theory is the psychology of the waves and beginning point of the sequence. So let’s see in the bigger picture, what led us to here and where we are right now. For that we must have a guide line to work with. I am going to analyze the DJIA market and the psychology behind it then we compare it to the recent events and condition. Note that because of the high degree of the wave that we analyzing here, I need to talk about the background of the market for better understanding of the situation. Please bear with me.
Zero point or Beginning Point: The Great Depression
This stage is where every piece of news every economic data every fundamental aspects of the market is negative. In Aug 1929 when the Great Depression began we saw that kind of environment. Where the unemployment rate was high, poverty, low profits etc… .The result was a sudden and general loss of confidence in economic future. People in US started to emigrate to the other countries. Even in Europe situation was bad. They was badly hit in industrial and rural areas.
On the EWP text books and tutorials, Elliott defined this point at large degree as a question of existence, whether or not that particular market will survive. We can name this point the 0 point where everything began. To better understand the situation I used DJIA monthly chart to analyze every step. This chart is inflation adjusted.
From May 1932 to March 1937 was the first bull move. Economy started to heal from Great Depression and people had more jobs meaning unemployment rate declined to 14.3% during this bull market. People started to recognize that the worst has past. Elliott define this stage as rebound from depression and recognition of survival.
In 1937 American economy fell suddenly. Unemployment rate rose to 19 % in 1938 and Fed started to tightening monetary policy. In 1939 WW II began. US hired men and women to work in military and military factories in order to push the unemployment down. Government paid companies whom had contracts with government in full plus profit and the companies started to train the workers at government expense.
Elliott categorized the wave II as a partial retracement of wave I. A severe test of condition in regards of depressed bottom. In this stage fundamentals shows the things are worst from 0 point. World was in war and people starved to death condition was bad but the market did not go beyond the 0 point.
World War II ended in 1945 and military forces that government hired came back and market entered to a mild recession in May 1946 again, until June 1949. Where people realized that things had changed.
Elliott called that stage point of recognition. This wave usually is the strongest movement in sequence. For Ten years from 1949 till 1959, where the wave III ended, market gone higher and higher in the rapid movement. People get optimistic about a future.
US and NATO on one side (Socialist countries) and Soviet Union and other Eastern Europe countries (communist) entered the Cold War and series of Proxy wars began at those years. US was supporting the South Vietnam Republicans and entered to a war with Vietnam. Soviet Union were secretly installing missiles and weapons in Cuba which it was near US, after Cuban Revolution made Cuba a communist country. China declared their own version of communist adding the 3rd dimension to the cold war. During 1959 to 1962 and market reacted to those news.
Elliott categorized the Wave IV as the surprising disappointment. As a guide line in EWP, if the wave II was the complex correction, it is most likely for wave IV to be a sharp and simple correction.
Wave V is the last wave of the impulsive waves and the alert of the biggest correction since the beginning of the sequence going to happen. Elliott explained that wave V is weaker than wave III in both fundamental and technical aspects of the market. It is going to be weaker in speed of price movement and volume and you can find every problem behind the wave V that didn’t existed in wave III. From 1962 until 1966 the average inflation rate rose nearly three times greater than which it was from the end of wave IV. US was still in the war with Vietnam and the Communist China detonates a third nuclear device.
When five waves are counted finally it’s the time for correction waves to unfold and correct these impulse waves before continuing the trend. It is kind of disruption during the main trend. They are going to correct the entire sequence. This correction began in 1966 and ended in 1982. During the correction inflation gone from 2.9% in 1966 and reached its peak at 13.5% in 1980.
If you remember the zero point of the sequence, they also has the same characteristics which could be found in the end of correction waves, the question that particular market will survive in future. If you name the entire sequence as a 1-2 or count the entire sequence as separate movement that has been began in 1932 and ended in 1982. The next movement is obvious, we are going to have the upward movement. You can find my preferred count in the picture below.
I am going to analyze the rest of the chart in other parts. As we getting close to the current area I will explaining in more details.