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DJTA: Putting 50 Years of Data in Elliott Wave Context

What will the S&P 500 bring next week? That is the subject of discussion in our next premium analysis due out late Sunday!

Just six months ago, it felt as if the world was coming to an end. People in Europe and the USA were stockpiling necessities in preparation to isolate themselves for an unknown time period. The coronavirus panic had dragged stock market averages down 35-40% in just a month. It was the fastest plunge into a bear market in history. With travel almost non-existent, the Dow Jones Transportation Average (DJTA) wasn’t spared, as well.

Between February 20th and March 18th, DJTA fell from 11 072 to as low as 6481. In other words, the oldest index in existence, older even than the DJIA, lost 41.5% in less than thirty days. It was a selloff for the history books. It was in that hopeless, scary environment when we posted “Dow Jones Transports Ready for a Rebound?

Ahead of the 70% Recovery in DJTA

In the middle of a crisis that threatened both the jobs and lives of millions, there still was a silver lining. Of course, our cautious optimism didn’t derive from the gloomy media or bleak economic forecasts. Instead, we relied on the Elliott Wave analysis below, published in the above-mentioned article on March 21st.

Elliott Wave Ahead of the Rebound in DJTA

The weekly chart of the DJTA revealed that the entire bull market between 2009 and 2018 was shaped as a five-wave impulse. According to the theory, this pattern, in our case labeled I-II-III-IV-V, is always followed by a three-wave correction. On March 21st, the COVID-19 crash appeared to fit in the position of wave C of an A-B-C flat retracement.

Another important postulate of the Elliott Wave principle states that once a correction in over, the larger trend resumes. So, just as it seemed everything was going from bad to worse, the chart above was pointing up. Believe it or not, six months later now the DJTA is at new all-time highs.

The support of wave IV turned out be very strong and the bulls returned almost immediately. From 6838 at the time of writing in March, the index closed at 11 552 yesterday for a 69% gain in just six months. Not a bad return in such an otherwise extremely bad year.

An Impulse Pattern 50 Years in the Making

Now, you may have noticed that we’ve labeled the 2009-2018 rally as wave (III) and the following retracement as wave (IV). This means the current recovery to a new record is the final wave (V). The monthly logarithmic chart below explains why we think so.

DJTA Historical Chart Reveals 50 years of data

This chart allows us to put the entire progress in the DJTA since the year 1970 into Elliott Wave perspective. It looks like the new high the index just reached is part of the fifth wave of a larger impulse pattern that began 50 years ago.

It is marked (I)-(II)-(III)-(IV)-(V), where wave (I) took 37 years to develop. Wave (II) coincided with the Financial Crisis of 2007-2009. The rest of the chart, which we already examined in more detail, shows waves (III), (IV) and (V). If this count is correct, another major decline can be expected once wave (V) is over.

Just as waves (II) and (IV) retraced back to the support levels of IV of (I) and IV of (III), respectively, it makes sense for the anticipated decline to drag the DJTA down to the support of wave (IV). Judging from the weekly and daily charts, the bulls should be able to reach 13 000 from here. Once there, however, a 50% bear market back to ~6500 would be around the corner.

What will the S&P 500 bring next week? That is the subject of discussion in our next premium analysis due out late Sunday!

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