NEWS ALERT

ELLIOTT WAVE - BIRDS OF A FEATHER?

By Peter Goodburn – Elliott Wave Analyst – WaveTrack International - copyright 2011 ©

The Elliott Wave Principle is a powerful deterministic model of pattern repetition that also incorporates other disciplines such as geometric & fractal (chaos) theories whilst expounding the concepts of hierarchies and interdependencies. Getting to know any of these can awaken the imagination to a wonderful technicolour of understanding of price behaviour because each compliments the other. This is also why we place a lot of emphasis to comparison studies of complimentary indices that are traded internationally. Each has its own rhythm, vibration frequency and although the exercise is to pair off or group differing ones into positive or negative correlations, the real insights gained are from examining their subtle differences and finding out what their common denominators are in terms of pattern. In other words, discovering what Elliott Wave pattern sequence fits each individual index whilst it simultaneously conforms to a common denominator of synchronised price development. This provides a unique perspective in the task of price-determination, price-prediction as it helps to eliminate certain possibilities through discrepancies whilst highlighting those with the greatest probabilities of coordination. We tend to use this method on a day-to-day, top-down basis to any Elliott Wave analysis that we publish. If you'd like to get some insights on how this works, read ahead at the comparison made between the S&P and the CRB indices. We have also just published a bonus report that is available to EW-Compass subscribers – this is the EW-Navigator report that discusses such comparisons between U.S., European and Asian stock indices and the results are quite amazing and cannot be found anywhere else.

Positive Correlations between the S&P 500 & the CRB Index

Probably the most discussed topic following the asset collapse of 2007-08/09 is that of quantitative easing (QE) and its effect of inflating prices. Although equity markets were the principle beneficiary, this also fuelled a commodity resurgence following devastating price declines of more than -50% per cent across the board. After the current round of QE expires and is replaced with a more austere approach to the economic stabilisation process, it is time to examine whether the positive correlation between stock indices and commodities remains constant?

Viewed from an Elliott Wave perspective, the concept of pattern repetition unfolding in a continuous, seamless non-linear process of alternating progress and regress offers assistance in determining the location of a particular markets trend/counter-trend and its relationship with its peers. The S&P 500 and the CRB-Cash indices are our benchmark subjects of comparison.

S&P 500 – Flock Together?

The S&P's orthodox conclusion of its super-cycle bull market that began from the Great Depression lows of 1932 is marked at the highs of (year) 2000, at price levels of 1552.87. Now mainstream Elliott Wave consensus agrees to this point, but our analysis differs afterwards when adjudging how the long-term counter-trend adjustment/ decline that follows is set to unfold. We anticipate some (definitely not all) global stock indices are yet to make new record highs sometime late 2012, early 2013 before entering the last stage of an expanding flat pattern that forecasts an historical collapse that dwarfs the two previous sell-offs that unfolded during the last decade. At this point, I place emphasis on the new record high because it is this sequence of the expanding flat pattern that is the subject of our comparison with the CRB-Cash index.

A higher high is expected as super-cycle wave B with measured upside targets towards 1833.22 because the initial advance from the March 2009 low of 666.79 unfolded into a five wave (price-swing) pattern into the April '10 high of 1219.80 and it is the amplitude of this advance that must be replicated from the counter-trend adjustment that completed afterwards at 1010.91 (July '10) – see fig #1. This would duly end a zig zag into the 1833.00+/- area for the completion of super-cycle wave B of this ongoing expanding flat pattern. In isolation, this measurement is not enough to qualify a forecast to higher highs, but such an outcome is significantly increased when comparing the S&P to other global indices, especially those of Asia and in particular Hong Kong's Hang Seng that has also unfolded higher into a five wave pattern post 2008 that must ultimately be repeated once a counter-trend correction has completed late this year, early 2012.

fig. #1 S&P 500 Index - Monthly

CRB-Cash – Breaking the Tether?

Commodities outperformed the western stock index recovery from their corresponding lows of Dec.'08, so much so that the CRB-Cash index (not the Reuters/Jefferies index) has since traded into new record highs. Its orthodox Elliott Wave completion of the long-term uptrend (from the 1933 low of 27.06) is located at the preceding high of 615.04 so that the subsequent up/down swings are labelled cycle waves A & B of a developing expanding flat pattern that is designated the counter-trend phase – see fig #2. The zig zag contained in the 2008-2011 upswing to 691.09 does measure waves A & C equally, almost exactly (log scale) and subsequent price-rejection is adequate to suggest a major top has completed. Now if the positive correlation between the S&P and the CRB-Cash is to be maintained, then a marked underperformance for commodities will occur into the foreseeable future. Both suggest a 6-8 month decline is due (from mid-2011), but then turning around and heading back higher. During this period, the S&P is expected to trade into higher highs, but the amplitude change and the resulting underperformance of the CRB-Cash based upon the current wave location of the pattern will most likely cause just a secondary rally, setting up a classical divergence that occurs prior to major directional price changes.

fig. #2 CRB Index - Monthly

Naturally, it is also possible that the commodity components of the CRB-Cash will break the existing positive correlation, but for the moment, basis pattern synchronicity, this seems unlikely, with only price amplitudes creating these slightly differing outcomes of performance.

Summary

Hopefully, this comparison sheds some light into how price movement is generally synchronised between positively correlated indices whilst each retains certain pattern nuances due to amplitude changes – and how this translates and provides valuable insights into the overall directional price changes that can occur in the future. If you have any interesting experiences or observations on this subject you'd like to share, don't forget to contact us.

Sincerely,

Peter Goodburn

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