About two months ago, on Friday, October 10, a friend of mine called me up and said he wanted my opinion on the stock market. “I'm talking to a buddy in New York, and he says it’s one of those moments when fortunes are made. He says the time to buy is now, when stocks are cheap. What do you think?”
If you recall, that week, October 6-10, the DJIA lost 1500 points – fifteen percent, a huge drop – and the idea of going “bargain-hunting" in stocks was popular. When it comes to the stock market, I always tell my friends what I would do if I were them; that’s the most honest piece of advice I can give. And what I told my friend that day was this: wait.
The reason for my caution was the warning that Elliott Wave International’s Short Term Update, a publication I read faithfully, gave subscribers that week. The Update said that despite the 2,400-point drop the DJIA had seen in early October, the declines likely weren't over.
The Short Term Update's bearish stance in early October had nothing to do with the Fed's actions or other "market fundamentals." But it had everything to do with the Elliott wave pattern that U.S. stocks were likely starting to form at the time – a triangle. (There were other possible Elliott wave scenarios at that moment as well, all pointing lower.)
A triangle is a corrective wave formation that appears when the market is “at a loss” for direction. But most importantly, triangles almost always appear in the 4th-wave position of the basic 5-wave Elliott wave structure, an impulse. In other words, what comes after a 4th wave is another push in wave 5 – higher, if it's a bull market, and lower, if it's a bear.
In the case of U.S. indexes in early October that budding triangle formation meant that another push lower was due. Here’s the chart of its idealized path that the Short Term Update showed subscribers on October 13:
On October 13, the day this chart was published, the S&P stood at 1003. Two months later, on November 20, it hit a low of 752 – a whopping twenty-five-percent drop.
Elliott wave analysis is not a crystal ball, and not every forecast works out perfectly. But over the years, I’ve seen Elliott work countless times, which was the sole reason why on October 10 I told my friend to wait.
But he didn’t. Last week, he called and said that in mid-October, he went ahead and sunk $50K of his savings into several “high-beta” stocks. He said he was down about 40%, and was hoping for the market to rebound.