September 2020 Issue

© August 31, 2020

THE DJIA JUST CLOSED AT A TARGET SET THREE YEARS AGO

In December 2017, December 2019 and January 2020, The Elliott Wave
Theorist determined three ideal long-term target areas for the daily closing
high of Dow Jones Industrial Average. The Dow is beyond the first cluster of
28,084, 28,282, 28,272 (28,178 + or – 94 pts). The last remaining cluster, and
the best target, is:

28,639, 28,657 (28,648 + or – 9 pts).

In January-February 2020, the Dow slipped past this level and topped at
29,551. As we have since determined, that high was not an orthodox top (the
end of a fifth wave) but an intra-correction peak that ended wave B of (4) of 5.

The market topped on February 12 and fell hard into March 23. That decline
was wave C of (4) of 5. Since then, the S&P 500, the NASDAQ indexes and
the Wilshire 5000 have risen in wave (5), and they have reached new all-time
highs. I think the DJIA is in wave (5), too. (For reference, see Figures 4 and
5.) That does not necessarily mean, however, that the Dow will achieve a new
all-time high.

A truncation—whereby a fifth wave falls short of a new high—is a rare

occurrence, yet there is a highly relevant precedent. At the peak on December
31, 1976, the Dow completed the orthodox end of wave (5) of 5. That high
was above the high of wave (3) in March 1976 but below the highest price
within wave (4), which occurred in September. The setup today could yield
precisely the same result. The Dow is above its wave (3) high of 26,828,
which occurred on October 3, 2018, but it is below the highest price within
wave (4), which is the 29,551 level recorded on February 12. A truncation
here at the orthodox end of wave 5 would match the experience at the end of
Primary wave 1 in 1976, producing a fitting parallelism between the first and
final Primary-degree waves within Cycle wave V.

The intraday high need not occur on the same day as the closing high. An
intraday high, and even a marginally higher close, could well occur in the
coming week. It would be ironic if the stock market were to top around the
time the Dow's keepers jigger the Industrial Average's components, an event
scheduled for tomorrow (Monday, August 31).

The reason I offer this train of thought is that the Dow just met its narrow
target of 28,639/28,657. It closed on Friday at 28,654.

Figures 1 and 2 show the calculations EWT offered for those two numbers.
Observe in Figure 2 that the two previous times the DJIA turned near a
Fibonacci number, it exceeded it by about 1%. That is also the maximum
leeway evident in the charts in Beautiful Pictures. If this year the Dow were to
overshoot the Fibonacci number 28,657 by the 0.83%-1.11% of 1966 and
1929, it would reach 28,895-28,975.

The highest target previously offered in EWT is 29,174. Figure 3 reiterates the
reasoning behind it. A top at that level in coming days would push the
overshoot of the Fibonacci number in Figure 2 to 1.8%.

To many, such exercises might seem frivolous. Yet as illustrated in Beautiful

Pictures, the DJIA has achieved several long-term Fibonacci price multiples to
a stunning degree of precision. I think such relationships are a function of
natural growth patterns in living systems, of which human society is one. We
are trying to see if we can identify such a juncture in advance.

A top at either target would complete a truncated wave (5). It would mark not
the highest point of recent months but rather the orthodox top of wave (5)—
and therefore waves 5, V and (V)—which is the true end of the wave and the
point such targets address.

The Multiples of Waves I and V are Fibonacci Multiples of Wave III

Figure 1 shows that at Friday's close, the three advancing waves' multiples
are related as ϕ2, 1 and ϕ3, where ϕ = 2/3 and 5/3, respectively. Observe that
we have 1 in the center with ϕ2 on one side and ϕ3 on the other. In a
harmonious expression, the Fibonacci ratio basis for the multiple of wave I is
2/3, or 0.66666… and that for wave V is 5/3, or 1.66666…. Friday's close was
less than 15 points past the target indicated by this set of relationships.
Figure 1
Major Peaks Within Grand Supercycle Wave * Have Occurred Near
Fibonacci Numbers

Over the past two centuries, daily closing highs at Supercycle-degree peaks in
the DJIA have approximated Fibonacci numbers. As shown in Figure 2, the
advance began from a price of 2 in 1784. In 1835, wave (I), according to the
rough figures available, topped at 22.37, near the Fibonacci number 21. In
1929, wave (III) topped at 381.17, 1.11% above the Fibonacci number 377. In
1966, wave III of (V)—which also marked the orthodox top (i.e. wave (V)) of
the Dow/gold ratio—topped at 995.15, 0.83% above the Fibonacci
number 987. Friday's close is 28,654, bringing wave (V) to within three points
of the Fibonacci number 28,657.

Dow action between these levels offers no indication that the index respected
any other numbers in the Fibonacci sequence. The relevant numbers are in
bold: 1, 1, 2, 3, 5, 8, 13, 21, 34, 55, 89, 144, 233, 377, 610, 987, 1597, 2584,
4181, 6765, 10,946, 17,711, 28,657. The jumps between bold numbers are ϕ5,
ϕ6, ϕ2 and ϕ7. If the market turns down from here, the leaps between
Supercycle-degree peaks will be ϕ6 and ϕ9.
Figure 2
In Terms of Multiples, Wave I x Wave III = Wave V

In late December 2019, EWT observed that wave I was approximately

a 5x multiple, wave III was approximately a 10x multiple, and wave V was
approaching a 50x multiple. A 50x multiple projects a top at 28,880, fitting the
1% overshoots recorded in Figure 2.
Calculating the precise product of the multiples for waves I and III yielded
4.716157205 x 10.70975032 = 50.508866 for wave V. Multiplying the wave IV
low of 577.60 by that product projected a peak for wave V at 29,174. The
Dow's high of February 12 occurred at 29,551, which is a
Fibonacci 377 points, or 1.3%, past that level.

Figure 3
Wave (5) in the DJIA
The August issue showed the wave labeling for the S&P Composite index, in
which wave (5) has been underway since March. The S&P has gone to a new
all-time high, confirming that interpretation.

The same labels apply to the DJIA, as shown in Figure 4. If the Dow stops at
one of the targets cited above, wave (5) will end in a truncation. If it keeps
going, its fifth wave will join the S&P, the NASDAQ indexes and the Wilshire
5000 in achieving a new all-time high.

Figure 4
 Figure 5

Look closely at the wave labels within wave (5), as depicted in Figure 5.
Observe that wave 3 is shorter than wave 1. Because the third wave is never
the shortest impulse within a five-wave sequence, wave 5 will have to be
shorter than wave 3. Using daily closing figures, wave 3 covered 4324.47
points, and wave 5 so far has covered 3638.32 points. The difference is
686.15 points. The current price is an excellent place for the market to stop.

From Friday's close at 28,653.87, another 686.15 points is 29,340.02, which is

the outside boundary for wave 5 under this labeling. If the Dow were to
exceed that level, the count shown for wave (5) would be invalidated, and we
would conclude that wave 3 is subdividing and that wave (5) will carry on for
another few months. But with wave structure, price targets and investor
sentiment all in agreement, it seems a good bet for now that the stock market
is at the end of wave (5) of 5 of V.

A Thin Market, Like That of 1929

Our price targets and the staggering degree of optimism toward financial
markets—especially those for equities and debt but including even the
precious metals—are compatible with a top occurring now. What about the
next-most attractive option, discussed in the August issue, which is that the
Dow continues rising until 2021?

Figure 6 shows the bull market of the 1920s along with available data for the
advance-decline line, which dates from January 1926. This line, long used by
technicians, is constructed by adding the net issues up on each day to a
cumulative total. So, if there are 2000 stocks up and 700 down, the number
added is +1300. If there are 700 stocks up and 2000 down, the number added
is -1300.

Figure 6
 Figure 7

The a-d line topped early in the rise of the 1920s, then trended sideways
through November 1928. Then it began to plummet. Yet the DJIA kept rising,
on the strength of a few issues. Does that sound familiar? The Dow rose for
nine full months while the a-d line crumbled. Then it topped on a spike and
crashed.

In recent days, the a-d figure has been negative even when one or more of
the major averages has closed up on the day. This is 1929-type action. The a-
d line, however, has not been in a steady state of multi-month decline. Must it
replay the final months of the Roaring Twenties bull market before it reverses?
One would think so, because this top is of one higher degree.

On the other hand, it has been nearly eight months since the secondary stock
indexes topped out, and they are lagging the S&P and the NASDAQ indexes
by a huge amount (see Figure 7). Is that not the equivalent of a lagging a-d
line? Some seven stocks account for huge percentages of the rises in the
leading blue-chip averages. Is that not a replay of the rising months of 1929?
Every top is different. It is never the case that all technical indicators are
identically aligned at market turns. The weight of the evidence is always one-
sided at such times, and that is the case at present. A top now would blindside
nearly everyone, and that's what the market does best.

The DJIA/SCB Is Lagging

Figure 8

It has been some time since EWT showed the DJIA in terms of our Stable
Currency Benchmark (SCB). The SCB comprises the U.S. dollar, the Swiss
franc, the Singapore dollar and the New Zealand dollar. These components
represent desirable currencies in each of the four financial regions of the
globe: the Americas, Europe, Asia and Oceania. The SCB substantially
corrects stock indexes for relative currency fluctuations.

Figure 8 updates the DJIA/SCB. I continue to be impressed by the clear wave

structure in this index. It displays five waves up from December 1974 to
February 19, 2020. This index is much like the secondary stock indexes in
depicting a bull market that is over. The slide in the value of the U.S. dollar in
recent weeks has coincided with the new highs in the S&P and NASDAQ
indexes. The corresponding strength in the other three components of the
SCB, however, has kept the DJIA/SCB well below its February high.

This index is compatible with a top now. It will be compatible with a rise in the
Dow into next year only if the U.S. dollar were to continue to weaken relative
to other currencies. With sentiment toward the dollar extremely pessimistic, it
seems more likely that stocks will turn down and the dollar will reverse upward
soon rather than that the two trends will continue along their recent paths.
Then again, the history of the stock market is a history of extremes, and it
would be foolish to insist that these trends cannot continue for another five
months.

In conclusion, the stock market has reached an ideal point for reversal. We
have described the boundary for this opinion, which, if exceeded, will imply
further rise into 2021. Let's see how it plays out.

Major Change at EWI

In mid-February, when the COVID-19 pandemic was barely on the radar, I met
with our head of IT, and we immediately began setting up office-based people
to work remotely. The company was already long accustomed to supporting
home-based workers, because most of our intraday analysts post their work
from home. We acted swiftly, passing out masks on March 2 and directing our
employees to work from home. To date, only one employee has reported
contracting the virus.

Paying rent on two floors of office space with almost no one in it became a
huge waste of money. Figuring most people were looking forward to returning
to the office, I polled everyone in late July and asked how working from home
had been for them. To my surprise, 85% of them reported preferring home to
office. Commutes had ranged from ten minutes to an hour each way. Saving
all that time plus the money for gas and auto repairs were major benefits. So
was not having to dress well or figure out where to eat lunch. Single parents
were thrilled that they could keep an eye on the kid and save daycare costs.
Some people reported feeling more connected, because instead of small
groups hashing out strategies, online meetings assured that they were always
included. The biggest surprise was that nearly everyone reported being more
productive, and our directors confirmed it. People were interrupted far less
during the day, and they spent mornings and afternoons working instead of
commuting. I gave up my office and completed a move to a stripped-down
home office. It's great. No more eating lunch at my desk or getting stuck in
traffic on the way home when there is a wreck up the road.

After a day's deliberation, I decided to move the company out of half our office
space. Since July 29, we have been engaged in the biggest company
relocation since 1987, when we moved into these offices in the first place.
Vacating offices is a huge job. Our people took home desks, chairs,
bookcases, file cabinets and personal effects. We got rid of old papers, stacks
of books, excess office furniture, a break room and a soda machine. Some
employees moved from the floor we are vacating to the one we are keeping.
We are in the process of trading office pc's for home laptops. We still have
plenty of space for the dozen or so people who prefer coming into an office
environment, and IT has been perfecting a network over which those working
remotely can communicate internally as easily as before.

I caught the downsizing bug three years ago. Over the course of a year, my
wife and I removed a dozen van loads of stuff from our house to give away
and hauled out another dozen piles of stuff for trash pickup. Having to make a
new office at home has triggered another home makeover. We turned unused
guest bedrooms into an office and a music room; we reorganized several
areas, giving away superfluous books, furniture, pictures and knickknacks.
The house is still plenty full of stuff, just a lot less extra stuff.

Our office lease ends in June 2021. I am not sure how much space we will
want after that time. We may keep all or part of the space we have now, or we
may go 100% virtual.

After feeling compelled to make this change, I realized that when our lease
ends, we will have occupied that space for a Fibonacci 34 years. That office-
based period began after an initial 8 years (1979-1987) of being home-based.
Do we have another 13 years in us to make a total of 55? That's up to the
gods.