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Dow Jones Index not yet Oversold According to Elliot Wave Analysis

market analysis

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- US equities continue to paint screens red

- Warnings they may be oversold only valid short-term

- Elliot wave analyst argues longer-term outlook is bearish

With key global stock markets erasing their 2018 gains over the course of the past 24 hours it is little wonder dip buyers are loading up and looking for an entry point.

Determining an entry point can be done via a number of studies; perhaps the most popular of which is buying into an oversold market and we are hearing that U.S. markets in particular can be considered to be at such a point.

Claims that U.S. equities are oversold and due a bounce are only really valid on intraday time frames such as the 4 hour chart of the Dow industrial average index below, which shows momentum in the oversold region.

dow jones

On the daily chart of the Dow, however, the index is not oversold according to momentum and more downside is, therefore, quite possible.

daily chart

That is not to say there is absolutely nothing bullish about the daily chart.

One feature which does suggest the pair may be about to start a bullish renaissance is the shape of the pattern formed by the market in the last few weeks after the November 8 peak, which looks like a complete three-wave ABC pattern and, therefore, suggests the possibility of more upside.

Nevertheless, we have not seen a big enough bounce yet to confirm a reversal in the short-term downtrend.

Although the pair is arguably now in a short-term downtrend the longer term the uptrend looks intact as illustrated on the monthly chart below, which puts the recent corrective period in context with the much longer term uptrend.

Dow Jones monthly

The monthly chart, however, does show one feature which is a sign of potential weakness, and that is a possible double top reversal pattern at the highs. This is the m-shape at the peak of the rally.

If the neckline of the double top at 24,008 is broken it will be a very bearish sign for US equities, and suggest substantial further downside to a target at roughly 22,000, or the height of the pattern extrapolated down.

As long as the Dow remains above the neckline however there is still a strong possibility of a resumption of the up trend, and the advantage still lies with market bulls.

One analyst who is very bearish US stocks, however, is Enda Glynn, an Elliot wave analyst and founder of bullwaves.org.

Glynn argues that the Dow still has a long way lower still to go.

According to his wave count analysis, which we have already covered in previous articles, the Dow is only at the beginning of a much deeper sell-off which could take it all the way down to an initial target at 17,048 and perhaps even lower thereafter.

Read: Dow Jones Going all the way back down to 15000-18000 says Bullwave's Glynn, U.S. Dollar Tipped to Benefit

Dow Jones Elliot wave count 

For Glynn we are at the start of a correction of the whole of the rally since the 2009 great depression lows.

Elliott waves are composed of 5 trending waves and 3 corrective waves. This 5-3 cycle repeats over and over again.

Elliott waves are also what is known as ‘fractal’ which means smaller waves fit into larger waves which themselves fit into even larger waves ad infinitum.

The Dow has completed the 5th small wave of the 5th medium wave of the 5th larger wave of an even larger wave since the 2009 lows, and is now in the process of outlining a correction.

According to Glynn the fundamental basis for the sell off will be an extreme contraction in credit conditions.