Examination of Two Major Bear Markets

The US stock market  declines  from 1929 to 1932 and 2000 to 2002 reveal clues  that could be helpful in determining  stock actions in 2022.

The basic  principle of Elliott wave theory is  that progress  is made in five -waves and corrected in three waves.  There are three types of corrective patterns, Zigzag, Flat, and Triangle.  This blog is  focusing on the Zigzag  type.

The following illustrates  Zigzag  corrections of  bull trends.

The simplest form is  three-waves labeled as “A, B, C.” 

Each of the three sub waves  further sub divide into a five – three – five patten.

Sometimes the corrections can be more complex, in which the “A” and “C” waves  subdivide into smaller Zigzags – these are called Double Zigzags.  Occasionally, these patterns could become even more complex. In those situations, the “A” and “C” sub waves of the smaller  Zigzag also subdivide into Zigzags.

When you see a choppy market correction its probably Zigzags subdividing into smaller Zigzags.

The Weekly Dow Jones Industrial (DJI) chart courtesy of  Trading View illustrates the colossal 1929 to 1932 bear market in US stocks.

This  is  a nearly three-year example of a simple  Zigzag  bear market. 

Please closely examine Cycle wave “A” and you will be able to see the five-wave subdivision of the September to November 1929 movement.

The subsequent Cycle wave “B” took 22 – weeks to complete and retraced more than 50% of the prior bear move.   At the time  many market participants  thought it was the start of a new bull market. They would soon receive  a  rude awakening.

The next Weekly DJI chart illustrates  the January 2000 to October 2002 bear market.

This is  a nearly three-year example of a complex Zigzag  bear market.

Primary wave  “X” took the form of an Elliott wave – Expanding Flat correction lasted 31 -weeks and was 71 – weeks after the final bull market peak made in January 2000.  

Note that the subsequent Primary degree “A,B,C” decline subdivided into a Double Zigzag.  Another Elliott wave interpretation has the entire 2000 to 2002 bear market as a Triple Zigzag.

The daily DJI chart shows the 2022 decline. 

Note the choppy action of the bear move which Intermediate wave (X) separates  two double Zigzags.  This  is  an example of a very choppy decline.

 The powerful bullish action of US stocks since the 05/20/22 bottom strongly implies  higher prices  during the next several weeks.

Here are three scenarios.

1. The 05/20/22 bottom was Primary wave “4” of the secular bull market that began in March 2009.  One or all of the three main US stock indices could make new all-time highs. The monthly momentum evidence illustrated in the 05/21/22 blog “Relentless Stock Market Decline”  suggests  new highs are  a low probability. 
2. The 05/20/22 bottom was  Primary wave “4” however Primary wave “5” fails  make a new all-time high.   This  is called a truncated wave in which wave “five” fails  to exceed the termination point of wave “three”  typically truncated waves retrace between 90% and 99..9% of the prior move down/up.
3. The DJI – Primary wave “5” top was  made in January 2022 and a complex bear market similar to the DJI  – 2000 to 2002 decline is underway. This  is the most likely scenario. The current rally  could retrace between 50 to 90% of the January to May 2022 decline.

Blogs  next week will closely examine the powerful post 05/20/22 rally and possible termination points.

The next blog will look at the UK 100 stock index.