Historically speaking, October is one of the good months to be invested in the American stock market. According to Business Insider U.S. equities have mostly ended this month in positive territory, averaging 0.4% gain in the month of October since 1929. Not this October, though, and not for the Dow Jones Industrial.
Excluding dividends, the Dow is down 4.5% so far this month, which reminds us of the last time the blue chip index was in a tailspin. It was February this year and the index had just fallen by 1175 points in a single session, marking the worst daily decline in its entire 122-year history. But instead of panicking, we decided to take a look at the bigger picture through the prism of the Elliott Wave Principle.
djia elliott wave analysis february 6
The chart above, published on February 6th, was reassuring. It indicated that even though the market was clearly very expensive in terms of price to earnings and market cap to GDP ratios, it was still too early for a bear market.
The Bear Case
We thought so, because the Elliott Wave principle states that in order for a the bear market to begin, a complete five-wave impulse has to develop first. As of February, wave 5 of (5) of the post-2009 uptrend was still missing. This meant “the Dow might even revisit 23 000, but targets near 27 000 remain plausible.” The next chart shows how the situation has been developing during the last eight months.
Dow Jones Industrial Average Elliott wave chart
Dow Jones fell to 23 344 in early-April in wave 4. The following recovery in wave 5 of (5) took it to a new all-time high of 26 952 on October 3rd. The above-shown wave count has been serving us well since February. It suggests that this month’s bearish reversal is the beginning of a major three-wave correction, which has the potential to drag Dow Jones down to the support area between 18 000 and 16 000.
Dow Jones – The Alternative Elliott Wave Outlook
However, the stock market has been postponing the next bear market for years now. Doom and gloom headlines may be great for marketing, but in order to be objective we have to examine the alternative outlook.
Dow Jones 30K – Alternative Elliott wave outlook
It turns out the case for Dow 30K is still alive. The bulls might prevail once again, if we assume the recent top near 27 000 was the end of wave (3) of III. This would mean the current weakness is part of wave (4). If this is the correct count, we should still prepare for more downside towards the support of wave 4 of (3) near 24 000, but it would be just a minor pullback preceding new record highs in waves (5) of III and V.
Experience had taught us that bubbles are extremely resilient creatures. Bitcoin was a bubble at $2000, but it still went all the way up to $20 000. Is the stock market bubble ready to burst? Maybe. But it is too early to bet the house on a short position in Dow Jones, as the bulls can still find a way to turn things around and go for 30K.