Elliott Wave Theory (EWT) gives us a rough map of where we are in the investment cycle. It’s kind of like looking at a globe. You can identify the country and the region and perhaps even find a major nearby city that approximates your location on a globe. However, a globe is pretty useless at pinpointing your exact location. So too is Elliott Wave analysis insofar as precisely pinpointing where you are in the investment cycle. I recently covered Elliott Wave on this blog.

Despite its failings, EWT can offer excellent insight into the market’s macro positioning. Here’s how:

Elliott Wave helps us identify where we are in the investment cycle: Each wave of the 1-2-3-4-5-a-b-c sequence has a characteristic. By noting the characteristics of the current market, you get a good feel for which of the waves the market is in right now. I covered those characteristics in my book Sideways.

Just as a globe doesn’t help you pinpoint the neighborhood and street you are on, Elliott is not very good at pinpointing how much longer a wave will last. Elliott Wave seems to inspire an almost cult-like belief system amongst some market prognosticators. They insist that you CAN in fact predict price turning points by using Fibonacci measurements within an Elliott Wave sequence. But, as I noted in this blog – these Fib. Retracements and targets turn into moving targets as they fail. So I place no weight on such “target practice.”

Here’s a chart with some notations that might help us identify the market’s current wave:

From Wikipedia (who referenced various EWT experts for this definition) “ Wave five is the final leg in the direction of the dominant trend. The news is almost universally positive and everyone is bullish. Unfortunately, this is when many average investors finally buy in, right before the top. Volume is often lower in wave five than in wave three, and many momentum indicators start to show divergences (prices reach a new high but the indicators do not reach a new peak). At the end of a major bull market, bears may very well be ridiculed.”

Does this sound familiar? Note the incredibly tight, low volatility environment over 2017, along with the falling volume on the chart above. The MACD indicator (bottom pane) clearly shows us that momentum is waning even as the US markets make new highs. This is called divergence—another sign of a “Wave 5” environment.

The big question

With this in mind, I pose a problem to you, the good readership: Do you agree we are in a Wave 5 environment, based on this and other evidence of the current investment climate? I’d love your input and reasoning on this. Your comments below will add some discussion to this unanswerable question. I’ll look forward to reading them.