Behavior of Prices on Wall Street

Table of contents :
Behavior of Prices on Wall Street - Binding Strip......Page 1
Bookplate......Page 3
Title Page......Page 7
Printer's Imprint......Page 8
Dedication......Page 9
Contents......Page 10
In Appreciation......Page 12
Quotation from Lord Kelvin......Page 13
1. How can you use this book for profit?......Page 15
2. Can you forecast the market weather?......Page 17
3. When are the best times in the year to buy? To sell?......Page 19
4. When are the best times in the month to buy? To sell?......Page 25
5. When are the best times in the week to buy? To sell?......Page 27
6. When are the best times in the day to buy? To sell?......Page 29
7. Are there profitable seasonal differentials?......Page 31
8. How does the market behave near holidays?......Page 33
9. How does the market behave near income tax time?......Page 39
10. How does the market behave after bad news?......Page 41
11. How does the market behave after margin changes?......Page 42
12. Does the market have trends?......Page 45
13. Are there patterns of behavior in the weekly swings of the Market?......Page 47
14. What is the Dow Theory? Is it profitable?......Page 52
15. What is the Elliott Wave Theory?......Page 61
16. How long should you expect a Bull Market to last? A Bear Market? A Primary Swing? A Secondary Reaction?......Page 67
17. Is the market influenced by earnings?......Page 75
18. Is trend following profitable?......Page 77
19. Are some prices preferable to others for purchase? For Sale?......Page 81
PART IV - CONCLUSIONS......Page 85
A1: Are the Dow Jones Industrials representative?......Page 86
A2: Is the market random?......Page 91
A3: How should turning points be measured?......Page 95
A4: In Elliott's Theory, what are the variations?......Page 99
A5: Can the Elliott Theory be made specific?......Page 113
A6: How should swings be classified?......Page 119
A7: How do swings vary with price?......Page 127
A8: The Dow Jones Averages - weekly bar chart - 1928-1964......Page 129
A9: Dow Theory dates and data......Page 138
A10: Data and charts - Bull and Bear Markets - Primary Swings and Secondary Reactions - 1897-1963......Page 141
A11: Bibliography......Page 157
A12: How to make the Chi Squared test......Page 160
A13: The Elapsed Time Calculator......Page 162
A14: Price / Earnings Calculator......Page 163
A15: 300 Year Calendar......Page 164
About the Author......Page 167

Citation preview

1- 3

1-5

BEHAVIOR OF PRICES

"

ON WALL

STREET

~I'C ARTHUR A.MERRILL MARKET lHELP

INCLINATIONS PREDICTION

LpRODUCE

PROFITS

Published by The Analysis Press. Chappaqua. New York

1-7

All rights reserved including the right of reproduction in whole or in part in any form. Copyright 1965 by Arthur A. Merrill. Printed in the United States of America. Published by Analysis Press, Chappaqua, New York.

©

Library of Congress Catalog Card No. 64-25611.

DEDICATION: To ELSIE Always helpful; always inspiring.

1-9

THE BEHAVIOR OF PRICES ON WALL STREET CONTENTSPART I - INTRODUCTORY Chapter 1. How can you use this book for profit? Z. Can you forecast the market weather? PART II - BEHAVIOR AT CERTAIN TIMES Chapter 3. When are the best times in the year to buy? To sell? (Including the Market Almanac for every day in the year.) 4. When are the best times in the month to buy? To sell? 5. When are the best times in the week to buy? To sell? 6. When are the best times in the day to buy? To sell? 7. Are there profitable seasonal differentials? 8. How does the market behave near holidays? 9. How does the market behave near income tax time? 10. How does the market behave after bad news? 11. How does the market behave after margin changes? PART III - BEHAVIOR IN CYCLICAL SWINGS: Chapter 12.. Does the market have trends? 13. Are there patterns of behavior in the weekly swings? 14. What is the Dow Theory? Is it profitable? 15. What is the Elliott Wave Theory? 16. How long should you expect a Bull Market to last? A Bear Market? A Primary Swing? A Secondary Reaction? (Including Life Expectancy tables. ) 17. Is the market influenced by earnings? 18. Is trend following profitable? 19. Are some prices preferable to others for purchase? For Sale? PART IV - CONCLUSIONS Chapter ZOo Conclusions.

PART V - APPENDIXES FOR STUDENTS: ANALYSES FOR STUDENTS: Appendix AI: Are the D-J Industrials representative? AZ: Is the market random? A3: How should turning points be measured? A4: In Elliott's Theory. what are the variations? A5: Can the Elliott Theory be made specific? A6: How should swings be classified? A7: How do swings vary with price? DATA FOR STUDENTS: Appendix A8: The D-J Averages 1928-1964 A9: Dow Theory dates AIO: Data and charts primary swings 1897-1963 All: Bibliography

- weekly bar chart and data. Bull and Bear Markets, and secondary reactions.

TOOLS FOR STUDENTS: Appendix A12: How to make the Chi Squared test A13:Elapsed Time Calculator A14: P!E Calculator A15: 300 Year Calendar

1-11

IN APPRECIATION The suggestions made by the following friends have been especially helpful: A. Hamilton Bolton, Robert W. Breiling, Dr. Edward R. Dewey, Jack A. Dorland, Dernell Every, Devin A. Garrity, Floyd L. Hogan, Christopher R. Landmann, S. Jay Levy, William D. Merrill, Francis N. Millett, Richard Russell, George Seager, William P. Short, George E. Tener.

"I often say that when you can measure what you are speaking about, and express it in nurnbe r s, you know something about it; but when you cannot express it in numbers, your knowledge is of a meagre and unsatisfactory kind; it may be the beginning of knowledge, but you have scarcely in your thoughts advanced to the stage of Science, whatever the matter may be. " Sir William Thomson, Lord Kelvin

1-13

(p.l-l)

Chapter i. HOW CAN YOU USE THIS BOOK FOR PROFIT? Should stocks be bought today? delayed for a lower price?

Should purchase be

Should stocks be sold now? Should sale be postponed for a higher price? This book will concentrate on these four questions. There are two problems in investment; selection and timing. The latter problem, which is dealt with in this book, is considered by many to be the more important. Poor stocks will rise in a rising market; good stocks will fall in a declining market. There is profit in timing. This book is addressed to both the long term investor and to the short term speculator. All of the conclusions are in the twenty chapters. which are written for the non-mathematical investor. For serious students. the fifteen appendixes will supply analyses. data for research and some tools for further work. A body of folklore has been built up ar-ound the market through the years. Too often this folklore has not been put to the test. This book will try to separate fact from folklore, by the simple but laborious method of consulting the record. It isn It surprising, except to the scientific man in another field, that the material hasn't been thor.oughly sifted, for the size of the undertaking is frightening. But modern methods and the computer are now available.

1-15

(p.1-2)

Chapter s 3. through 11. will deal with the behavior biases of the market at certain specific times. You will find many unsuspected tendencies in the market, and corresponding suggestions for profit. The market will be found to behave with the characteristics of a warped roulette wheel. Sometimes it has a definite bullish or upward bias - at these times you should move with celerity in purchase, and should delay sale. At other times it has a definite bias downward; at these times sell promptly and delay purchase for profit. Chapters 12. through 19. deal with the behavior of the market in swings and trends. There are some suggestions for profit from this knowledge. This book doesn't deal with individual stocks, but with the averages. However, most stocks tend to move with the spirit of the market. The Dow-Jones Industrial Average is used as an index. (An analysis of this selection is in Appendix AI) This is a picture book. To paraphrase the old Chinese saying: One chart tells more than a thousand statistics! To make it easier for you, we have inserted a few blank pages, to bring the charts next to the corresponding text. May your profit increase.

(p. Z-l) Chapter 2: CAN YOU FORECAST THE MARKET WEATHER? The conclusion of this book is that there are certain inclinations or leanings in the behavior of the market. A knowledge of these inclinations is very useful in the improvement of timing of purchase or sale. We will be dealing with probabilities, not with certainties. But these probabilities, if known, can be used for profit. A bent roulette wheel may be biased toward the even numbers; despite this bias it will produce many odd numbers. But the bias is profitable to the acute customer. The casinos at Monte Carlo employ statisticians to check the accuracy of the wheels from the record. They would like to replace a wheel before a customer discovers the bias! The knowledge of bias in the stock market is rarely sufficient, in itself, to justify a short term speculation. However, this knowledge can help the speculator and the investor by improving timing and profit. It is important to consider significance. All of the biases noted in this book could have occurred by pure chance. If you throw a handful of a hundred coins on a table, it is pos si ble to find them all "heads ". However, if this score occurs, you would have some reason to suspect some double-headed coins! To measure the significance of a score, statisticians compare the actual score with the expected score, and ask themselves "How many times would I have to repeat this experiment to expect such a difference by pure chance?" There are mathematical means of obtaining the answer; one of the simpler methods is outlined in Appendix AIZ. In our text, which is addressed to non-mathematicians, we will use the following words: "Probably Significant": The bias would be expected by chance only once in twenty repetitions of the experiment. "Significant"; The bias would be expected by chance only once in a hundred times. "Highly Significant": The bias would be expected by chance only once in a thousand repetitions of the entire experiment.

1-16

(p.3-1)

IS EASONAL --1896 -1963 I 80

(Pere ent ot years in which 0 -J Industrials Increased in the month.)

70

60 48

4S"l.

Feb.

Sep. Oct. Noy. Dec~

Mar. Apr. May June July Aug. 51% 5Z%

55%

50% 68% 10%

55"1. 61"1. 75"1.1

Fig.3A

-- SEASONAL-%

ELECTION

\6 PRESIDENTIAL ~

80

YEARS

I

~

~

70

I--

t. ..... ..... ..... .... ..... ..... l-

60

........... .... .~~~~~.~~:~.8.~

5°~1

1e"l.

44"1.

11"1.

Jon

Feb.

Apr. May

50

June July Aug.

Mar.

-

31"1.

Sep.

81%

Ci6%

Oct. Nay. Dec 75% 6S% 63%

63'70 81%

40 '--

-

.......... Fig.3B

(p.3-2)

Chapter 3. WHEN ARE THE BEST TIMES IN THE YEAR TO BUY? TO SELL? Figure 3A summarizes the seasonal tendency of the market for the 67 years from 1896 through 1963. The most favorable month is December. In this month the market increased in 75% of the 67 years. The summer rally months, August and July win the second and third prizes. August rose 70% of the time; July increased in 68% of the years. For maximum profit, of course, one should try to buy before the strong months and sell before the weaker months. Figure 3B presents the record for the 16 presidential ebecti on years from 1900 through 1960. There are some interesting differences between these years and the total in the preceding c ha r t; January, April and September have been significantly weak in election years; March, August and October are notably strong.

1-14

(p.3-3)

Figure 3C applies the microscope to the summer rally. The behavior by days is charted. Two periods are included, to verify the conclusions, and to note changes in characteristics. The principal difference between the two curves is in the middle of July. This period did not appear weak in the 1922-1942 period; it is notably weak in the 1943-1963 period. The agreement between the two curves is more significant than the differences. The strength in the early part of July and in the middle of August is present in both curves.

'I(,

100

THE 90

TWO

21-YEAR (5 Ooy centered

80

average)

1943-1963

10

60

40

30

JULY

AUGUST

Fig.3C

(p.3-4)

The next two charts (Figs. 3D, 3E) extend the microscopic view to the entire year. Here is a Market Almanac for every day in the year, based on the performance on each of 19.253 trading days in the last 67 years. On any day in the year. you can consult the chart and find the average market weather for that time of the year. For example, note January 31. The bar extends to 580/0. which means that the market at that date rose 580/0 of the time and declined 42% of the time. There are many interesting and significant points on these charts. We will highlight some of them in the chapters which follow. Note the summer rally in July and August; note the year-end rally in December. Footnotes for students: (1) The data have been smoothed by a five day centered average. (2) The bars are measured from the 500/0 level. but should also be compared with the average for the entire period (530/0), which is indicated by a horizontal line. (3) The significance levels are marked on the right hand scale (See Appendix AI2).

1-12

(p. 3- 5)

%

70

65 ·0.1%

1%

6

JANUARY

5%

FEBRUARY

-0.1%

70

65 0.1%

1%

60

5%

...

55

50~~~W@lllJ~1llJlD'"~"'"..... !~ I

~

25

20

30 ;

5%

MARCH

APRIL

1%

-0.1"'"

70

65 O.l"l0 1%

6

5%

...

o

z

55

~~

5°f.. . -'t1F[rrIJ1r~~.lfWw-eVJw~11~UJ~TT".J1lJ1wm ..... ... - >

z ...

5

iii

5%

45

MAY

-''I.

JUNE

-0.1%

Fig. 3D

(p.3-6)

(Percent 01 yeors 1897-1963 in increose

lor

the

COPVRIGHT

doy. - - 5

1'84- AATHUft A

which the

doy

D-J Industriols posted

centered

on

averoge.)

MERRILL

-O.lor. - lor. - ,or.

GO

50

45

' 1

'eu "

eo

JULY

es

30 I

-5".

AUGUST

- I'll.

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,

60-

SEPTEM BER

OCTOBER

% 70

65 -0.''''

60

-I'"

55

..

- s...

2

.... ~~

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1-10

->

2

30

NOVEMBER

DECEMBER

..

1-sor. ~~ -1'110

Fig.3E

(p.4-1)

whr

~lIrkrt

iUmlinar --

wh, (Percent

of

mcnr hs on

Silt r k , t

Jon. 1697 - June 1964

rn e re o s s

for

SI (I nth w~ic~

in

the

t~e

O-J

Industrials

posted

day.)

.. .

0/0

-'

>

70 -

.

..

u

z

65-

_ LAST

HALF

OF

- FI RST

MONTH -

HALF OF

MONTH -

62.6

~

. z

;;;

•

50.3

60-

-0.'%

-.%

51.6 56.'3

562. 55.9

1j5.6

-5%

54

49.9

-5% 49.1

-1%

41.0

-

{

-0.1%

16171819202122232425262728

FEB. APR,JUNE, 1 16 17181920212223242526272829 SEPT.,NOV.r-'6 17 18 19 20 21 2223 24 2526272829 3 OTHERS.-IB 17 18 19202122232425262728293031 -- - DAY

OF

I

THE

2

3 4

MONTH

5 6

7

- -

-

8

9

10 II '2 13 14 15

Fig.4A

(p.4-2)

Chapter 4. WHEN ARE THE BEST TIMES IN THE MONTH TO BUY? TO SELL? Does the market have a bias based on the day of the month? The record has been examined - every day from 1897 through June. 1964. The result is presented in Fig. 4A. The chart has been split in the middle. Because of the important beginning-of-the-month behavior. the first of the month has been placed in the center of the chart. The conclusion is clear. There is a definite bias in the market near the beginning of the month. Note the strong market on the first two days. Here is a bullish bias which is highly significant.

If behavior is typical, then, one should try to buy for profit before the last three days of a month, and sell for profit after the first three days of a month.

1-8

(p. 5-1)

Fig.5A

(p.5-2)

Chapter 5. WHEN ARE THE BEST TIMES IN THE WEEK TO BUY? TO SELL? The market prior to 1952 was open on Saturdays. The span since that time, with a five day week, has been reported in Figure 5A. The result is interesting. Monday is truly a blue day. The market rose only 43.3% of the time, which is a highly significant amount below the average for all days in the period. Friday, on the other hand, is highly significant in a bullish direction. This is contrary to the lore of the market, since Friday is supposed to be a day when traders "unload to free their minds for the weekend. " These tendencies through the week will be examined hour- by-hour in the next chapter.

1-6

(p.6-1)

-

wq.r Ailarkr.

~lmanac

• ill h r Slarkr. lay anb • rrk (Percent

trod ing

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the

which

preceding

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Jon. 1962

Industrials

posted

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...-' Jun. 1964

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from

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%

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59.1

60

MO N DAY

50

Open

12

II

2

55.2

&-\--.J---------l

I

92 9/4/01

105

9/5

9/6

9/7

9/109/11

91'J

I

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I

9113

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1919 Fig. A3B

(App. A3-p. 4)

The paumg is not difficult. You will find that a turning point can be paired with one and only one other turning point. The 1929 peak, for example, is definitely paired with the 1932 low point; the November 1961 peak is definitely paired with the June 25, 1962 low point. In the case of the most recent turning points, the classification may have to be tentative until the two requirements (above) have been fulfilled.

When turning points are paired and tagged, the swings or waves between them can be measured. It is suggested that the following nomenclature be used: (1) A swing connecting two paired turning points is called "a complete swing." A swing between two nonpaired turning points is called a "partial swing". (2) The amplitude of a swing is considered to be the vertical distance in percent of the lower turning point. This will make upward swings comparable to downward swings. (3) The duration of a swing is the time interval between the two turning points. Figure A3B is an illustration of this proposed method of classification.

4-9

(App. A4-p. 1)

Appendix A4: IN ELLIOTT1S THEORY, WHAT ARE THE VARIATIONS? All of Elliott I s published writings have been reviewed. The notes are summarized in this appendix. An analysis and an application to the movements of the market are included in the next Appendix AS. In Figure A4A and A4B we have summarized and combined all of Elliott's various examples for the period 1929 through 1945. This period spans the time beginning with the first Dow Jones high-low statistics and ending with the last analysis published in "Natur e ts Law, a few months before his death. The nomenclature has been standardized, in order to make it easier for a student to trace through Elliott's interpretation of the wave patterns. In addition to his basic conclusions listed in Chapter IS, he tabulated many variations. which are charted completely on the following pages. He listed some subsidiary conclusions:

(l) No confirmation is required by a companion average. (The Dow Theory requires confirmation of the Industrials by the Rails.) (2) Actual high and low figures are used, rather than the closing prices. Elliott said "in fact it was only with the establishment of the daily range in 1928 and the hourly averages in 1932 that sufficient reliable data became available to establish the rhythmic recurrence of the phenomenon called the "Wave Principle".

4-11

(App. A4-p. 2)

(3) News has little effect on the course of a wave series. It may affect the amplitude and timing. (4) Prices tend to move in channels. useful in the interpretation of waves.

These can be

(5) Elliott listed his names for the degree of waves in the following order: Subminuette (only in the hourly data) Minuette Minute Minor Intermediate Primary Cycle Super Cycle Grand Super Cycle (6) There are many exceptions to the basic pattern. These are described in Figures A4C through A4L.

(App. A4-p. 3)

Waves

IElliott's DATE

11/28/28 17.69 15.27 3/26/29 14. 13 5/6/29 14. 13 5/31/29 851. 92 9/3/29 52. 16 11/13/29 52. 16 4/16/30 5/5/30 10.97 5/14/30 10.97 19.00 6/25/30 9/10/30 19.00 12/17/30 27.52 2/24/31 27.52 10/5/31 39.34 11/9/31 39.34 1/5/32 28.62 2/19/32 28.62 7/8/32 851.92 63.83 9/8/32 12/3/32 18.60 18.60 1/11/33 2/27/33 63.83 7/18/33 34.46 10/21/33 34.46 32.34 2/5/34 7/26/34 32.34 12/6/34 5.36 3/18/35 12.86 11/20/35 8.02 4/30/36 15.22 3/10/37 Ill. 02 6/17/37 16.58 8/14/37 16.58 8/27/37 2.29 8/31/37 2.29 9/13/37 6.73 9/30/37 7.45 10/19/37 21. 91 10/21/37 10.65 10/25/37 10.65 10/29/37 21. 91 11/23/37 19.91 1/15/38 19.91 2/4/38 13.43 2/23/38 13.43 3/12/38 4.66 3/15/38 4.66 3/23/38 2.83 2.83 3/24/38 3/31/38 63.04

DATE

WAVE

T.P. DEG.

A

1 2 B 3 1 2 a b

c d

3 e 4 a b

c d

I

C A

5 e

1 2 B 3 C

1 2 D 3 1 2 3 4 II E 5 A B

1 2 3 4 C 5 a b

1 c 2 3 4 D 5 1 2 3 4 IIIE 5

4/18/38 5/27/38 7/25/38 9/28/38 11/10/38 1/26/39 3/10/39 4/11/39 6/9/39 6/30/39 8/3/39 9/1/39 9/13/39 1/15/40 4/8/40 6/10/40 8/12/40 8/16/40 11/8/40 5/1/41 7/22/41 12/24/41 1/6/42 4/28/42 7/15/42 8/5/42 11/9/42 11/24/42 4/6/43 4/13/43 7/15/43 8/2/43 9/20/43 11/30/43 1/11/44 4/25/44 7/10/44 9/7/44 10/6/44 11/16/44 3/6/45 3/26/45 6/26/45 7/27/45 12/10/45

T.P. DES.

14.19 14.19 14.44 14.44 63.04 12.20 12.20 31.43 9.13 9.13 14.30 14.30 31. 43 6.31 6.31 25.69 5.50 5.50 25.69 14.22 14.22 8.95 8.95 Ill. 02 4.78 4.78 4.16 4.16 5.90 5.90 13.55 6.45 6.45 13.55 3.57 4.96 5.86 5.86 2.78 2.78 6.91 6.91 6.00 6.00 4.84

WAVE

A

B

IV C

A

B

V C I

1 2 3 4 5 1 2 3 1 2 3 4 5 1 2 3 1 2 3 1 2 3 4 5

II

A B C D III E A B IV C

1 2 A 3 B

1 2 3 4 C 5 D V E

Fig. A4-A

(App.A4-p.4)

11

I

ELLIOT;r'S --Derived

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'38 FIG. A4-8

(App. A4-p. 5)

ELLI OTT

VARIATIONS - IN

Extension in Wave I, upward trend.

LINE

OF

TRENO-

Elliott found that waves in the line of trend (1,3,5) sometimes elongated into fi ve waves of the same degree - rather than breaking down into fi ve waves of a lower degree. This elongation could Occur in waves I, 3, or 5. but not in waves Z or 4. It us wlly occurred in the last or fifth wave. He called these elongations extensions.

Extension in Wave I, downward trend.

5

!I

;/!

Extension in Wave 1, upward trend.

2

2

.

~ ;J! 4

I

Extension in Wave 3, downward trend

3

5

5

Extension in Wave 5, upward trend.

2

Extension in Wave 5, downward trend.

4-14

FIG. A4-C

(App. A4-p. 6)

I

ELLIOTT

VARIATIONS -

IN LINE

OF

TREND

9 7 8 /

3 4

I

6

2

2 4 6

3 6

8 7

(y)

9

'

y

FIG A4-0

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e

3

II

a d

e

4 _ Ell ten.ion of Mlnuette Wove

- - - - - . Eaten.ion

of

~..- - - - - - - - - _ . ElIten,ion

,+------------------+~

at

Intl!rmediate

Minute

Wove

Minor WOVl!

Wave

FIG. A4-E

5

..

I,

1

'~

t.Extention [First

~seeond

Retrocflllint

RI tr Deem.nt

Fig. A4-F

4-13

(App. A4-p. 7)

Since extensions are comparable with the other waves in a series, they may be equal to them and the entire movement may seem to be nine waves of about equal size. (Figure A4D) At the end of a major move, there may be a series of extensions of extensions in the fifth wave. The move comes to an end finally on the last minuette wave of the last minute wave of the last minor wave of the last intermediate wave. (Figure A4E) Elliott found that extensions tend to be "double- retraced" i , e. by a downward and then by an upward move. (Figure A4F) This is interesting only in an extension of the fifth wave, since an extension in the first wave is retraced by the second and third waves and an extension in the third wave is retraced by the fourth and fifth waves.

4-12

(App. A4-p. 8)

I ELLIOTT

VARIATIONS- OORREOTIONS

I ZIGZAGS I b

'y\c

N

Elliott recognized corrections of five types: zigzag. flat, irregular, triangular, and complex. Thev will be illustrated by Figures A4-G through A4- L

MINOR

c MI NORb

INVERTED

INTE R M EDI AT E

INTERMEDIATE

Three sizes of "Zigzags" are illustrated by Figure A4-G In the minor size, each wave is single; in the intermediate size the distribution is the usual 5-3-5 found in the "Basic Elliott" chart Figure 15- A In the major size the two longer waves are doubled. Note that the "inverted" versions are included. These are corrections of a downward trend.

INVERTED

MAJOR-

A

DOUBLE

ZIGZAG

c C

c c

MAJOR INVERTED

FIG. A4-G

(App. A4:-p. 9)

I ELLIOTT

VARIATIONS-CORRECTIONS

I FLATS I B

~

MINOR

In a zigzag the pattern is 5-3-5; in a flat it is 3-3-5. This gives the "flat" correction a level appearance - and its name.

C

MINORINVERTED

Examples of this correction are in this Figure A4-H An example is marked in Figure 15- A with a "zigzag" also marked for comparison.

B

INTERMEDIATE -

c

c

A

~ INTERMEDIATEINVERTED

MAJOR

5 C

C

5

MAJOR INVERTED

B

FIG. A4-H 4-10

(App. A4-p. 10)

VA R I A T ION 5 - COR R ECTI 0 N S

ELLIOTT

I

IRREGULAR] B

)\I\T. ,"

"Irregular corrections" are distinguished by the height of the "8" wave, which advances to another top higher than the orthodox top ("0. T~').

IRREGULAR TOPS

A

C

I

I

Since the correction makes a new top, it is also called an "irregular top". An example is the 1929 peak.

~\

B

O.T. 5

~ c

a

b

e

I

Normally "C" terminates below the bottom of "A". Liquidation in the third or "C" wave is usually more intensive than in the first wave.

4

3

6 C

B

Y\

MINOR

c

B

c

~ a

13 A

2

b I

4

INTERMEDIATE

3

5

B

C

c

MAJOR

5 C

(In the larger and mo r e important corrections the "c" wave may consist of three smaller five-wave sets. )

FI G. A'4:I

(App. A4-p. 11)

[ ELLIOTT

VARIATIONS -

CORRECTIONS TRIANGLES

I

Triangular corrections have five waves or legs each of which has no more than three lesser waves. In the small triangles the legs can be single waves. Triangles are found in the fourth wave of a five wave movement - exclusively. They form the base for the fifth wave or "thrust". One of the boundaries of a triangle may be horizontal. The fifth leg may terminate within or outside of the bounda rie s . Triangles have been as short as seven hours (a short example is in (Fig A4-K) and as long as 13 years. A. Hamilton Bolton has outlined a 21. year triangle in his analyses.

"'-

(I)I

--.

:;'1 ~I

~I

•

1

1

a

•

\ \

\ \

---~

\

-

-- - -d - ---':;4\S \~

\~

FI GURE

4-8

A4-J

(App. A4-p. 12)

- Dow Jones

Industrials -

Hourly

Data-

40 "A small triangle a in October 1937 (it acceleration and ext movement; the dyn followed." R.N.

peared in th hourly record signalled a immediate nsion of the downward mic Octobe 18-19 'panic' lliott 6/28/39

-

35

THURSDAY

10/14/37

FRIDAY

SAT.

10/15/37

10/16/37

FI GURE

30

A4-K

(App. A4-p. 13)

I ELLIOTT

VARIATIONS -

CORRECTIONS

I COM PLEX I / ,,

2

4

6

/'VVV\" ,/

I

3

5

/

" DOUBLE

THREE

7

This group includes some final complex variations. In the words of Elliott: "The rhythm of c o r r e c ti ve movements is the most difficult feature of the wave principle. "

/ /

2

4

6

8

10

,,'VV\;/\!\./\.,,, "

"

I

3

5

3

2

7

9

4

' TR I PLE

THREE

II

6

\,' / "~ ~ : . 1 I ~ 3 5 7 '

DOUBLE

THREES

,/

I

I

I

3

2

4

MIXED -UPWARD

a

6

, 0t!

DOWNWARD

3

\

I

" \

I

'.

\ \

2

x

2

, \

\

FIGURE

4-6

A4~L

(App. AS-p. 1)

Appendix A5: CAN THE ELLIOTT THEORY BE MADE SPECIFIC? Elliott had some problems in the application of his principle. Many of his turning points were debatable; his wave patterns tend to proliferate into variations. The s election of turning points is crucial. You can identify almost any pattern IF you select the proper turning points. A method of measuring turning points has been developed; it is described in Appendix A3. When Elliott's turning points are put to the test, some will be found to be rather light. No doubt he had his reasons, and could give them to us if he were alive. He skipped over some very important turns, and included some that are rather puzzling. (Compare Figs. ASA and A5B with A4B) Another problem is the division of waves into subwaves. You can divide a wave into almost any number of subwaves, if you make the subwaves small enough. We have tried to read Elliott's mind, from his limited writings, in order to develop a basis for a measured analysis: Waves and Subwaves: (1) In the breakdown of waves into subwaves, the first and most promising line of attack is a study of Elliott's own examples. These have been charted from his writings in Figures A4A and A4B in the preceding Appendix A4. The turning points that he used were tabulated and evaluated, and the average wave amplitude was measured.

4-4

(App. A5-p. 2)

(2) A second line of attack is a study of the "basic Elliott" chart Figure 15A in Chapter 15. This chart outlines a complete cycle. If you will count the number of waves of major degree, intermediate degree, and minor degree, you will get the following; Major Degree: 8 waves Intermediate Degree: 34 waves (4.25 times as many) Minor Degree: 142 waves (4. 18 times as many as in the intermediate degree.) Using this as a guide, we counted down the rank of turning point degrees: Degree: 80% 400/0 200/0 100/0 50/0

Number of turning points:

4 10

44 170 540

The frequencies in the Basic Elliott chart of 8, 34, and 142 are similar in proportion to the actual count in the selected groups of 10,44, and 170. (3) A third possible approach is based on Elliott's statements that "a wave is divided into waves of the next smaller degree." If waves (or turning points) are ranked in any given period of time, from the highest degree to the lowest, and the rank is scanned downward, you will find at a certain point that the waves are parts of preceding waves. This is evidence that you are moving into a subwave classification. For example, the ten most important turning points in the period 1928-1962 are the following: (1) 851. 920/0 9/3/29 (2) 851.920/0 7/8/32 (3) 111. 020/0 3/10/37 (4) 111. 02% 4/28/42 (5) 63.830/0 9/8/32 (6) 63.830/0 2/27/33 (7) 63.040/0 3/31/38 (8) 63.04% 11/10/38 (9) 52.160/0 11/13/29 (10) 52. 160/0 4/16/30

(App. A5-p. 3)

You will between (3) (9) and (10) subwave. A groupings.

find that numbers (7) and (8) are, in time, and (4), and evidently form a subwave. No. are between (1) and (2) and evidently form a similar method was used to check the other

The three approaches outlined above were combined and cross-checked to yield the following proposed classification: Degree: Nomenclature: I, II, Ill, IV. Cycle 800/0 Primary

40%

A, B, C, D .....

Intermediate

20%

I, 2, 3, 4 .......

Minor

10%

a, b, b, c, d ....

Minute

5%

Figures A5A and A5B chart all of the 10% turning points from 1928 to date. The waves and subwaves are marked with the nomenclature in the above table. The same classification formed the foundation for the tables in Chapter 15 on page 15-4.

4-2

(App. A5-p. 4)

.001---r-----r---~----i----t~~ x -TURNING POINTS== 10%

DIGRItIt Ik

1--3/10/37

--1--- - -

--,--+--,·-+1+1

2

~ ---V

--

50

r--------

f--.----

7 9

A

--

f-.---------t..-----4-1

- --

I-3 B

Fig.A5A

I

90 0

(App. AS -p.S

I

BIGBIR

I (10%

I Dow

a:

10% DIGal1

pOllns

I

80 0

I

I

I TURNING

CLASS

I

,

r

IndustrIals· 3-10-37

Jo nes

IIII

WAVES)

,

10

A

9

date -

1

.---

70 01-----

'\~

60 0

A

~

8

A~

500

I

l

-- 6

40 0

----

m A I

2

C

B

A

3

12 34 234 I 5 abcabcde c e e e e abc abcobcobcdefgtl iabcdeobcabc

6

5

1

I

B9

ef90bcdeabcabc

obe

300

250

.-.

~-----

r

II

.8. _ _ 2 _

-- - - -

150 2

A~A VV

h\r-:- 4 -

V

I

---100 --_.-

!

A-

-_.

--

1937

5-1

--

---

--

--

- --

_.

-

- --- - -

II

1IT

- - f - f---.-

--

-

_._- ._--

f-f--

,_._--

--

----

._---

--

--

-- -_.

._--

m

-'38

'L

- -f---

f-----

- --

2

_.

I

A

---

4

\

3

90 1----.

--

'--

\ti 1

'~ A

V

--

-- . __ f .

1\

------

~

200

'39

40'41'4243 '46

I

I,

I

'41 4849' 5053'55 '56 '57 '59 'CO '61 -62 II I

"" FIC A50

I

1111

-MEDIAN

110%

III

I

3.5

5 4.5 4.0

6

7

8

10 9

12

14

20 I 16 16

25

30

40 I 35 r - - - 3 5 %

50 45

60

70

12 I 100 II 90 ., 60

160 II 140

ABOVE 180 Iii

PERCENT AMPLITUDE

of

--

27 'II.

cases

50%

eo%

of casee

- Middle - -Middle

340Y.

PRIMARY MARIlETS

II II

III

II

"rt+I-1II1

1tI+ III

1114ill

_,

_tttt

III ntt _

11+1-

ttI+ I

'II

-

111I

I

I

I

- Middle -

15%

10.6%

of case,

-Medion- -50% - -

Ttt+

40%

62-4

--

ot cou.

eo%

r-Middle

SUE

PRIMARY SWINGS

=. DISTRIBUTION or

III

II

II

111I

1111 111+-1 1111

1M 11I1

17%

8.4 -14

_M.dlon -

11I+_

nit 11I1 tilt 1111

III

III

I

I

I

I

26%

Fig. A6A

6%

• of co ... _ _ot ca •••

50% - - ·80%-

_Mlddl. _

REACTIONS

Middle -

SECONDARY

--

-...

I

'tl

> 0-

'tl

i

(App. A6-p. 2)

Appendix A6: HOW SHOULD SWINGS BE CLASSIFIED? The Dow definitions in Chapter 14 are not specific enough for our purposes. They require "interpretation". We are fortunate in this analysis. for one of the most authoritative of the Dow Theory experts, Robert Rhea. has set down dates and classifications. These are tabulated in Appendix A9. We have summarized his turning points and swings in Figure A6A. A tick mark method of scoring is used. There is quite an overlap between the size of the three types of moves. However. if you will concentrate on the middle 500/0 of the cases, you will find very little overlap. Consider the primary markets. There are seven swings with a magnitude below 500/0 which have been classified as bull and bear markets. Some of these have been qualified because of their duration. However, when we consider duration alone, Robert Rhea clas sified fi ve swings as "major" which lasted less than a year. If we balance duration against swing. we have picked up all but two of Rhea's major swings with the definition "All swings greater than 40% or more than one year in duration. " The great primary move in a bull market is considered to be broken up into "primary swings" in the upward direction. which are interrupted by "secondary reactions"in the downward direction. In a bear market. the primary swings are downward and the secondary reactions are upward. Still smaller moves are called "minor movements". In the preceding paragraph we have set up the qualifications for the largest classification. What is the qualification for the next sized move?

5-3

(App. A6-p. 3)

= SUMMARY= PERCENT SWING· • Middle

50% of Percen1 :.

150

100

80

70 60 50 4

(High -Low) (Low)

.100%

140

1

9 6 (M)

15 Bear

Markets

'--v---' 90

1 t

67(M)

60

I

P RI MARY

In Bull Markets ~

26

1

20

1 6(M)

15

t

II I

SWINGS

In Bear Markets

SECONDARY REACTIONS

~

24

f

In Bull Markets

In Bear Markets

'--v---'

~--'

17(M)

t

II

17

14

1

t

II(M}

9(M}

9

8 7 6

Medions (M) -

-15 Bull Markets

35

3

coses ond

011

DATA-1897-1964 (JUNE)

! 1

G

7

5

Fig. A6B

(App. A6-p. 4)

The Dow Theorists set up the general description for the secondary reaction to be: Duration three weeks to three months; Amplitude sufficient to retrace one-third to two-thirds of the preceding Primary Swing. However, this definition first requires a definition of the Primary Swing. We can kill two birds at once by specifying the lower limit of a secondary reaction. The primary swings are the remaining pieces in the bull and bear markets. To this end, we have measured the "secondary reactions" tabulated by Robert Rhea, and have set up the following definition for our analysis: "A secondary reaction is any reaction exceeding 50/0 in amplitude and more than one week in duration." Robert Rhea included five secondaries which were less than 5% in amplitude; however, he did not include 55 swings which exceeded 5%. Our definition, therefore, includes almost all of Robert Rhea's "secondaries"; it also includes a sizable number of swings that did not qualify under hi s definition. (Some of these, no doubt, were not qualified because of a lack of confirmation by the Rails. ) With these specific definitions, we are able to proceed with the work of counting and measuring. All of the movements are dated and charted in Appendix AI0. In Figures A6B through A6E we have summarized the size of the movements. For an example of the use of these charts, consider the 1962 slide. It was a swing of 40.03% and lasted 222 days. The amplitude qualifies it as a bear market under our definition. In Figure A6B you will see that it is within the middle 50% of the swings of the 15 bear markets. The swing is far above that of the typical secondary reaction.

5-5

(App. Ab-p. 5)

=

SUM MAllY

- .,. Mid d Ie 50°4

0

f

a II

=

DUIlATION

cas e san d

- - D urafion = Calendar

DAYS 1500

1000 800 600 500 400

=

M ed ian s (M 1

Days --

15 Bull Markets J

1480

1

794(M)

j 365

15 Bea r Markets 800

•

GGO(M)

1

3G5

300

PRIMARY 200 150

SWINGS

In Bull Markets ~

123 100 80

SECONDARY In Bear

t

Mar kets

!

68

77(M)

60 50

43

40

t

44(M)

REACTIONS

In Bull Mar kets ~--49

! 1

30

26

25(M)

l

20

15 DATA - JAN 1897-JUNE 1964

10

Fig. AbC

In Bear Markets

62

t

38(M)

t 18

(App. A6-p. 6)

In Figure A6C, the duration is found to be short for a bear market and long for a typical secondary. On the basis of duration, it is in a gray area. The amplitude however, is sufficient to qualify it under our definition. In Figure A6D, the range of "legs" is tabulated. It's interesting to compare this table with Elliott's wave theory. His basic bull market had three primary swings, plus two secondaries. The average in Figure A6D is seven primary swings, interrupted by six secondaries. In the case of a bear market, Elliott specified a typical two primary swings and one secondary. The record shows a typical fi ve primary swings (interrupted by four secondaries.) Elliott's count seems to have understated the situation. In Figure A6E. the "per cent retracement" by secondary reactions is charted. Hamilton set the size of a secondary as "40 to 60% of the preceding primary". Rhea set the size at "one-third to two-thirds of the preceding primary". Our chart suggests the r ang er "usually one-third to seven-eighths of the preceding primary swing. "

5-7

(App. A6-p. 7)

2

SUMMARY

NUIIBER 0' 15

Bull

Markets:

Middle of

LEGS = 15 Bear Mar kets:

9

9

••d;o.- 7

5

5

5

50%

all

{

cases ---

Fig. A6D

=

SUM MARY (Secondary

=

PI RC I NT IlITRACIIiINT

Reaction Retracement, in

Preceding

Primary In

Middle of

all

cases --

Percent Of preceding

Swing) Bull

In Bear

Markets

Markets

80.67.

50%

=

86.3%

Median -+ 56.1 'Yo

59.0%

37.1 %

39.5%

{

Fig. A6E

5-9

(App. A7-p. 1)

.

iCH NGED

MONTHLY 800

ON S

DC W

.

"

700

,

,

e

·

600

I ,1 S +--

=

921· OC

f-----

II"

.

,

... .. ·

· ·,

500

I [DUST

,

e

d, •

, · ·.

:

,

D,' 00

·

~

· ·

.

0

0

0 0..

s

e

400

0

°

d' ~

300

8

.

r--'°

i

· ·.

J' 0

..

0

--

0

0

,

,0

.

0

00

;p

..:l