Investigations - Part 3

Note: It may help to refer to the previous postings in this series.

     If one were following along with the Quarterly chart they would have seen a sell setup bar #18 in 1999.2 (2nd Quarter 1999). Any multiple of nine should be of interest to the analyst as weakness (in the case of a sell setup) may appear within the next five price bars (by 3Q2000).  Is this a sign of the exhaustion that actually materialized just three bars later at the March 2000 high? It would seem so.
     Also keep in mind that on the next higher time frame (the yearly) we saw a sequential sell countdown bar #13 in 1998.  This was the first indication that the risk of a top was very high.  Note that the yearly warning came before the quarterly.
     Another question is whether the trend exhaustion at the 2000 high would result in just a correction (pullback or consolidation) or a trend change. Can D-Wave analysis help to answer that question? If one assumes that the yearly D.3 wave (an impulse wave) should be composed of FIVE quarterly waves then the answer would be 'just a correction' since the quarterly chart was itself in a D.3 wave and not D.5. The implication is that the trend change would not occur until after the full five wave sequence at the quarterly level. However ... this assumption rests on the hypothesis that the waves nest in this fashion (five waves compose an impulse wave), and we haven't conclusively shown that yet.
    So let's examine quarterly D-Wave 3 a bit further. It began at the 1982.3 (3Q1982) low and ended at the 2000.1 (1Q2000) high. The question: Does the monthly chart show a five wave D-wave sequence within that block of time? The answer: Yes. You can start a monthly sequence because the 1982 low (102.2 in August) is a 21 period low. The analysis then reveals D1 at the 1983.10 high; D2 at the 1984.7 low; D3 at the 1987.8 high; D4 at the 1987.10 low; and D5 at the 2000.3 high. The monthly cash SP500 chart (from 1983) is attached to help visualize this sequence. It also shows where the quarterly sell setup bar 18 and the yearly sequential bar 13 occurred.
     Again it appears as if the higher level, impulsive, D-wave (Quarterly D3) is constructed by a five wave sequence at the next lower time frame (Monthly). Still, we have only seen a couple of examples, and that is not a big enough sample size. However, the point I want to make is that with such an assumption one would have only expected a 'correction' on the Quarterly chart since a fourth wave was expected to be followed by another (wave 5) impulse. I will explain this further next time and then look at how the first Quarterly wave (D1) in the sequence from the 1974 low played out on the monthly scale.
     To Be Continued ....