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DJIA Transforms Optimism Into Mania

The last time we wrote about DJIA, the index was just breached 18 700. In the article we published on November 10th, we examined the weekly chart of the Dow, which appeared to be showing a bearish pattern called an ending diagonal, which could have spelled the end of the bull market, which began in March 2009. But in the last month the DJIA has gained over 1000 points more and unless this is an extremely large throw-over, the diagonal scenario is no longer valid. This is precisely why we always advise our clients to wait for a breach of the lower line of the diagonal, in order to confirm a reversal. As Dow Jones demonstrated, the trend could simply continue.
Yesterday, the market closed at 19 754 after its fifth positive weekly session in a row. What does this mean for the overall count? Is this a “new era” economy, where infinite progress is possible? The chart below could provide some answers.
The weekly chart above allows us to take a look at the DJIA’s entire uptrend since 2009. Most of you have already seen this chart. The only difference now is that instead of an ending diagonal, wave (5) is likely to be a regular five-wave impulse. According to the Elliott Wave Principle, every impulse is followed by a three-wave correction in the other direction. Since DJIA is still in its wave (5), once it is over, a major bear market should begin. However, it looks like we will have to wait a while for it, because if this is the correct count, wave (5) is only halfway there. The sharp rally during the last month can be nothing else but a third wave. To be more precise, we believe it is part of wave (iii) of 3 of (5). This means even higher levels could be seen as wave 3 progresses. Then wave 4 down should follow, before wave 5 of (5) completes the whole sequence somewhere around the 22 000 mark. It is very important to keep a cool head and be cautious, because the bull market is entering its 8th year. Such a long period of steady gains could easily transform the current state of over-optimism into a mania. And we all know what happens after that…

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