The Elliott Wave Pattern in the Dow Industrials and S&P 500

By: Robert McHugh | Sun, Apr 30, 2006
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We are seeing the final thrust up in the Dow Industrials to complete the multi-month Rising Bearish Wedge, a.k.a. Ending Diagonal Triangle. That final thrust higher is labeled below as wave e up.

The first leg up of e, {a}, completed Friday, April 21st, at the 11,405.88 intraday high. Then prices fell into the afternoon, the start of {b} down, which completed a zigzag pattern Tuesday, April 25th at 11,260.84, just about at the Fibonacci .382 retrace target we identified in the weekend issue no 314 (that calculation was 11,266). Wave e is a three-wave set, and the final thrust higher, wave {c} of e up is underway, a five wave rally. The parallel trend-channel targets about 11,500 for this top, but that is merely a reasonable target. Being so close to the all-time 11,750 mark, it could decide to top there (giving us a huge six year double top) or it could truncate around the 11,350 to 11,450 area where the DJIA topped four other times over the past eight years and represents formidable resistance.

Any way we cut it, we are approaching a very significant historical top here. The first two of five waves for {c}, wave {i} up and {ii} down have completed, as have the first two sub-waves of {iii} up. There is the possibility of a short-covering rally for 3 of {iii} of {c} up, the timing of which is interesting, coming during the normal beginning-of-month bullish bias early next week.

While the e wave up of the final rally Minuette wave c up to a top is an overlapping triangle within a parallel trend-channel in the Dow Industrials, clearly in the S&P 500 we see a more traditional Rising Bearish Wedge. In both cases, the Elliott Wave count is completing perfectly on cue, the patterns are finishing up nicely, and this should be the final rally to a top. Once it tops, there should be a huge decline starting that we will all be able to identify when it arrives. We will rely upon our proprietary Stochastic and Purchasing Power Indicators to identify this coming turn. Our preference is to let our trading be guided by those indicators, rather than the Elliott Wave labeling, which is subject to influence from liquidity intervention short-covering rallies that can morph the labeling.

We missed getting a fifth straight Hindenburg Omen Friday, April 28th, by a thread, due to NYSE New 52 week Highs being slightly more than double New Lows. All other criteria were met, meaning the old definition was satisfied. NYSE New Highs were 180, and New Lows were 78. The McClellan Oscillator was minus -8.21. But we are interested in observations that tie to reliable probabilities, so we sit this weekend with 8 observations since April 7th.

Here's the color coded, legend we use for our Elliott Wave count symbols, starting from the largest degree waves to the smallest:

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Luke 12:4-9



Robert McHugh

Author: Robert McHugh

Robert D. McHugh, Jr. Ph.D.
Main Line Investors, Inc.

Robert McHugh

Robert McHugh Ph.D. is President and CEO of Main Line Investors, Inc., a registered investment advisor in the Commonwealth of Pennsylvania, and can be reached at The statements, opinions and analyses presented in this newsletter are provided as a general information and education service only. Opinions, estimates and probabilities expressed herein constitute the judgment of the author as of the date indicated and are subject to change without notice. Nothing contained in this newsletter is intended to be, nor shall it be construed as, investment advice, nor is it to be relied upon in making any investment or other decision. Prior to making any investment decision, you are advised to consult with your broker, investment advisor or other appropriate tax or financial professional to determine the suitability of any investment. Neither Main Line Investors, Inc. nor Robert D. McHugh, Jr., Ph.D. Editor shall be responsible or have any liability for investment decisions based upon, or the results obtained from, the information provided.

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