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Surfing the Elliot wave

November 16, 2013

Elliot Wave

This week has been marked by record equity prices in the US, once again. As I have written in previous weeks, the short-term technical picture of the equity market is robust and continues to point to higher prices in the future. Furthermore, designated Fed Chairwoman Janet Yellen  testified before the Senate Banking Committee on Thursday and reassured the world that continued monetary stimulus would be provided for as long as necessary. For additional information, please read Message From Yellen Is Full Speed Ahead on the Stimulus from the NY Times.

Clearly, the current Federal Reserve’s monetary policy is extreme and unsustainable. I can only scratch my head in worry when looking at the chart below that shows the fact that the central bank currently purchases 70% of all US Treasuries and Agency Debt with newly created money. Nonetheless, this monetary expansion supports equity and real estate prices with no end in near sight.

Fed Monetization

Elliot Wave

One of the most respected long-term technical methodology to identify and chart financial market movement is called the Elliot Wave(on top). So far, the pattern displayed in US equity prices since 2009 follows the Elliot Wave model very accurately(for further analysis and explanation please click here). We are currently in the beginning of the final wave (4-5, look at top image) of the up move and the model suggests a peak of around 2000 in the S&P500 and 20,000 in the Dow, most likely within 12-18 months. I think this prediction is well in line with the typical psychological pattern of market cycles depicted below. I find the prevalent psychology best described somewhere in between “Media attention” and “Enthusiasm”. Stock tips, IPO’s and high fliers have become fashionable, once again. Historically, this is the time when the biggest gains are made as the market rises in a near parabolic fashion as we are starting to witness today. It is also the most exciting time to be in the market but you have to know when to get out.

Market cycle

My goal is to ride the wave and hopefully be out of harm’s way by the time the wave comes crashing down. Feel free to surf along with me but make sure you understand the inevitability of the end. Caveat emptor!

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