It has been almost four months since the last time we examined the Dow Jones Industrial Average on March 29th. The benchmark index was still unable to recover from the sharp plunge to 23 360 in February. And while many hurried to declare the death of the post-2009 bull market, we instead decided to take a look at the charts and see what was the market telling us. The chart below led to a completely different and a lot more positive conclusion.
The decline from 26 616 looked like a simple (a)-(b)-(c) zigzag correction, where wave (a) was a regular five-wave impulse and wave (c) was an ending diagonal. According to the Elliott Wave Principle, the larger trend resumes after every correction. And since the Dow Jones was still pointing north on the daily and weekly charts, we thought that a bullish reversal should be expected as soon as wave “v” of (c) makes a new low.
The DJIA fell to 23 344 on April 2nd and then bounced back up to initially confirm the idea we have been relying on. However, not everything went exactly according to plan. On June 11th, the bulls managed to lift the index to 25 403. The truth is we hoped for a much bigger rally. Let’s see what has been bothering the bulls on the updated chart below.
The odds are good that what we thought was the end of wave (c) of 4 was actually wave b) of a triangle correction in the position of wave (b) of 4. If this count is correct, wave 4 is still under construction as a simple (a)-(b)-(c) zigzag, whose wave (c) down is yet to develop. Wave e) of (b) cannot exceed the top of wave c) of the same pattern, which means that as long as 25 403 is intact, the Dow Jones Industrial Average remains at risk of losing another 2000 points before the uptrend finally resumes. Considering that the index is currently hovering above 25 000, the setup provides a very favorable risk/reward ratio of roughly 5.
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