The Quantified Elliott Wave Theory: OEW

In the coming months, and for some it has already started, many market pundits will be calling for a monumental crash. Some will proclaim it to be the largest crash in our lifetime. There will be various reasons. Extremely high debt levels, high market valuations, leverage in managed funds, prolonged low growth without a recession, rising interest rates, Quantitative Tightening, and even Elliott Wave patterns. The latter is the reason for this report.

The Elliott Wave Theory has been circulating in technical market analysis circles for 80-years. On the surface, it is easy to understand. There are five waves up during bull markets representing growth, and three waves down during bear markets representing contraction. Since the economy moves from growth to contraction it makes sense. Historically, one can even look at a chart of the DOW, over an 80-year period, and actually see the five waves with three advances and two intervening declines. From the 1932 crash low: 1937-1942-1973-1974-2007. Simple, right? In theory, yes. In real time practice no.

Any experience in life that offers an opportunity for a decision is always perfect in hindsight. Let’s face it. We all make wrong choices. Some may be because of insufficient information, and others because of emotional/intellectual bias. The same applies to the Elliott Wave Theory. If one bases their current decisions on an incorrect view of the past, their future expectations will have a low probability outcome. As one improves their accuracy of past events, the probability of an expected future outcome increases. How does one do this with the Elliott Wave Theory? Mathematics.

Without quantifying long-term and medium-term waves, mathematically, the Elliott Wave Theory is nothing more than one’s interpretation of the past. Much like when art experts attempt to interpret the intent of an artist’s painting. You see it, and you think you understand what it is displaying. But unless you can ask the artist it is only one of many interpretations with varying degrees of probability. Let’s review some examples starting with the present.

From the SPX 667 low in 2009, two of the longest and nearly two of the deepest corrections occurred in 2011 and 2015/2016. An interpretation of this market activity would be, and nearly all Elliott Wavers are using it, Primary waves I and II ended in 2011, Primary III ended in 2015, Primary IV ended in 2016, and Primary V (to end the bull market since 2009) is currently underway. This interpretation would imply, when Primary V ends, a bear market declining to at least the Primary IV low at SPX 1810, or even to the Primary II low at SPX 1075, will follow. Some interpretations, based on longer term charts, call for an even greater decline.

Some Elliott Wavers are counting five Primary waves up from the 1974 low at SPX 61. Primary I ended in 1980, Primary II in 1982, Primary III in 2000, Primary IV in 2009, and Primary V is about to conclude to end a 40+ year bull market. This interpretation would imply, when Primary V ends, a bear market declining to at least the Primary IV low in 2009 at SPX 667, or even to the Primary II low in 1982 at SPX 101. A bear market decline to the 1982 low would be the greatest market crash in history. As outrageous as it might sound, some Elliott Wavers and others, are, and have been, calling for this type of event for years. A chart, like a painting, can be interpreted in many different ways. Do either of these two interpretations have a high probability? Quantitatively speaking, no. They are merely interpretations of what the charts look like in Elliott Wave terms. Not in mathematical, quantitative, Elliott Wave terms.

After dealing with this interpretation problem some 35-years ago, I set out to prove, or disprove, the Theory using mathematics. Using all the DOW data available at the time, 1885-1982, I attempted to quantify the waves in mathematical terms. If the waves are easily seen on the charts, I thought, there must be a mathematical method to determine the beginning and end of every single wave. And, anyone knowing this method should be able to duplicate the same exact interpretation. It only took a few months to solve. And, I have been using this quantitative method, quite successfully, ever since.

Let’s look at the first chart presented: DOW 1900-2017. After the 1929-1932 crash, when the market lost 89.2% of its value, the market advanced with 5 quantified waves to a 1937 high, then had a quantified 3-wave decline until 1942. After that the market rose for three decades with 13 quantified waves until 1973. This was followed by a simple, quantified, decline into 1974. Then another three-decade advance with 9 quantified waves into a 2007 high. At that point we had three advances, separated by two declines, to complete five large quantified waves.

To confirm this quantified count was correct, the market should then have had its largest percentage decline since 1932. And, it did! Five quantified waves up from 1932-2007 and then the Great Recession. Fortunately, not another Great Depression, which is what occurred the last time the market completed five very long-term quantified waves. At the 2009 low the market started another very long-term bull market, which should be similar in length to 1932-2007. This doesn’t just look correct on the chart. It is also confirmed mathematically. Therefore, with a new multi-decade bull market underway there is a very low probability the market will return to the 1982 SPX 101 low, or even, the 2009 low at SPX 667.

The quantified, and most probable, interpretation of market activity since 1980 is as follows. Primary II did end in 1982, as many suspect, after several years of choppy sideways activity in the DOW. Which was the dominant US index at the time. Primary III topped with the dotcom bubble in 2000, and Primary IV was a result of the dotcom bust into 2002. Primary V then topped in 2007, with five quantified Major waves, reaching an all-time high of SPX 1576. This completed the very long-term multi-decade bull market from 1932-2007 and is labeled Super Cycle 1. A Super Cycle 2 bear market then followed along with the Great Recession. When the Great depression bear market ended, (1929-1932), Super Cycle 1 began, (1932-2007). When the Great recession bear market ended, (2007-2009), Super Cycle 3 began, (2009-xxxx).

After the 2009 Super Cycle 2 low the market progressed in five Major waves to a bull market high of SPX 2135 in 2015. Major waves 1 and 2 occurred in 2011, Major waves 3 and 4 occurred in 2014, and Major wave 5 ended in 2015. This completed a Primary I bull market from 2009-2015. A Primary II bear market followed into early-2016 bottoming at SPX 1810. Primary I (2009-2015) was one long-term trend, so it cannot quantitatively be counted as three waves of any degree. It may look like three waves, but mathematically it is not.

After the 2016 Primary II low, Primary III began. Historically, Primary III waves are quite long in duration. The previous two Primary III waves took 17-years, (1949-1966) and 18-years, (1982-2000). You can view the last two on the monthly chart above. When they unfold it is the best time to own equities. Certainly, they do not rise without some bear markets along the way. Each of the last two Primary III’s had five bull markets with four intervening bear markets. The general market gains over the nearly two-decade advances were both outstanding. As noted on the chart.

Is this the only possible outcome? Not at all. It is the most probable outcome based on quantified market patterns covering over 130-years of verified market data. The future is not set in stone with some pre-ordained outcome. The future is created by the multitude of choices we make collectively. Certainly, there are somewhat predictable secular cycles that impact this decision making process. These cycles are separated by the green vertical lines on the above chart. From generation to generation the market alternates between an extremely strong period in equities to a generally sideways period. Probabilities suggest we are currently at the early stages of one of those strong periods. The early stages of what is known as a secular growth cycle. This fits perfectly with what the quantitative Elliott Wave charts are suggesting. Over the next decade or so, we will find out if this is indeed the most probable outcome. Best to your investing!

About tony caldaro

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58 Responses to The Quantified Elliott Wave Theory: OEW

  1. vivelaamo says:

    Brilliant Tony. Many thanks for this. I couldn’t agree more that now for the long term is the time to own stocks.

  2. Jack LeSar says:

    Tony, my first visit to your site. I like your thinking. Regarding your $SPX analysis since 1980, would your mathematical approach allow that primary wave 1 is just ending now and primary wave 2 just starting? In my own analysis of >100 stocks/ETFs, most are in intermediate wave 4 or 5 now which suggests to me that an important down primary wave is imminent. PW 2 is a fine candidate for this.

    jwl20815

  3. Mary773 says:

    Thank you, Tony. This is truly great scholarship and for you to share it is extremely generous.

  4. fotis2 says:

    Oil getting hammered Bears dancing.

  5. T J33A says:

    Love the analysis Tony and appreciate all the effort you put in sharing your views and analysis on the markets. This is an interesting take that you have put forward here and one that has got me thinking. Perhaps my only issue is that the 2015-2016 correction is too short and too shallow for a wave 2 correction and that perhaps we are still in wave 5 of a wave 1. According to my charting tools the correction comes in around the 23.6 fib retracement point. Is this “big” enough for wave 2?

  6. filipozze says:

    Hi tony, great tips. as i’m a classic elliottician i make always 2 or 3 scenario and wait price to confirm one scenario ( i don’t sell when i see 5 wave on charts) Is that a process of quantifidied?
    an example of quantifidied could be this one:
    1) when stocks will complete this first cycle whe can expect a shallow retracement for wave 2 and 2140 previous top should be a great support (resistance became support)

    thanks

  7. Tony great work much appreciated a the best

  8. 123 abc says:

    Tony et al, thank you for sharing a most appreciable analysis of OEW versus other methods of EW theory.

    The charts posted below have been tracking the NYSE count as defined by OEW which has been superimposed on to the SPX index. This composite count may offer a ‘best-of-both-worlds’ scenario bridging the popular EW interpretations with OEW, or it may be a ‘Frankenstein’ count.

    Perhaps this is a balance between a subjective populous interpretation with an application of a quantitative method?

    At a crossroad with this composite count; consequently feel its time to end the experiment until further clarity and observations.



    For anyone interested, the above overall count continues to be tracked by OEW on the NYSE index here:
    —http://stockcharts.com/public/1269446/chartbook/91996818;
    —http://stockcharts.com/public/1269446/chartbook/203707002;

    • chrisk44342 says:

      It’s interesting because in this case, there is no chance that Tony’s OEW count can be right and the traditional EW count be right as well assuming one of them has a miss to one degree. EG we can’t even go to 1800 as that would damage Tony’s count. If you are talking the prechter crowd, they can be wrong indefinitely and keep their count (:

    • tony caldaro says:

      good point
      both counts are quantified
      but since the SPX/DOW/NDX/NAZ all align, the NYSE is the outlier.

  9. Joe Longwill says:

    Hi Tony
    I want to thank you for explaining your OEW.
    now i understand at least the basis behind your wave counts.
    So…..If i understand you correctly, is it safe to say we are in wave 1 of 3 of 3 now ?
    this would imply that once we do see a completed 5 waves up from the jan 2016 lows
    we should expect a wave 2 ?
    lastly and this is what concerns me on a shorter term basis .
    is it possible that the high in the year 2014 was the wave 3 high and the sideways
    correction into either jan 2016 or june 2016 was 4 wave triangle of sorts ?
    if so then wouldn’t it make sense that we are topping in wave 5 of wave 3 ?
    instead of in wave 1 of the larger 3rd wave as you have labeled ?
    OEW tutoring being put on the list of to do’s .thanks for the info tony
    Joe

    • tony caldaro says:

      correct
      the long term uptrend ended in 2015
      the double bottom in 2016 ended a flat
      see no reason to try to fit anything else into that pattern

      • ewmarkets says:

        Tony, thanks for a well-reasoned and informative piece. The only doubt I have is counting a flat as Primary II. Flats usually appear as a 4th wave, right? How prevalent are flats as a 2nd wave, especially at the Primary degree?

  10. Hi TC, it seems you left out the really important part – what exactly does “mathematically quantified” mean? I didn’t see any definition of that in your article here. What exactly is it? How exactly are you quantifying waves? Is there a formula, a function, a series of conditions to be met, a confluence of indicators perhaps? Could you please maybe give us a real-world example, with real numbers, that demonstrate how OEW comes up with a different count than traditional EW analysis, with calculations shown?

  11. ariez5 says:

    Tony, here is what I cannot wrap my mind around. You say that PIII “is the most probable outcome based on quantified market patterns covering over 130-years of verified market data.” So based on OEW, betting against PIII is betting against 130 years of data. But by so many measures – median price/revenue, market cap / GDP, etc. – we are already close to or at the most overvalued the market has been in those same 130 years. If we are just starting PIII, we will break the valuation norm of the last 130 years. So PIII or no PIII, this time is bound to do something improbable.

    • tony caldaro says:

      Valuations are all relative. PEs do not drive markets.
      Nevertheless let’s look at recent history.
      The highest SPX GAAP earnings PE (not adjusted earnings) since 1990 was 35.46 in 1999. 10YR rates in 1999 peaked at 6.8%.
      The current SPX GAAP PE is 24.03, with rates at 2.4%.
      Plus, GAAP earnings have increased 6.1% for 2 quarters in a row.
      As a result the SPX GAAP PE has dropped from 27 to 24 since January.

      • ariez5 says:

        Appreciate the reply. I will try to stay open-minded. I’m totally on-board short -term.

  12. chrisk44342 says:

    Tony, regardless if I agree with your analysis completely or not, I must tell you again how much I appreciate your candor and logic when discussing your view of the indexes. As you know, there is so much bias built into the financial press that it has become difficult to read without throwing up in your mouth afterwards. I really respect what you are doing and look forward to reading another 10 years of your commentary.

    • tony caldaro says:

      thank you Chris
      not sure I have another 10 years, but will do my best =)

      • chrisk44342 says:

        One fundamental thing I can point to that supports your thesis is my own personal view on money printing/velocity. I have family members who are Chinese and who have benefited directly from the Chinese financial regime so I feel like I know a little something about this. China has an advantage in the way they monetize. Their big banks are government controlled, and the monetary conduit is more direct. Bank>Company>People. Of course there is a tremendous amount of corruption but that’s another story. Our monetization scheme is slightly different and the velocity slower Fed>Bank>Equities. As long as China can monetize so directly and indiscriminately, the US has no choice but to be monetize and that’s beneficial for equities

  13. It seems mind-boggling that we could be in a Primary III. By most measures, the market is more overvalued then anytime in history, except for 1999-2000. At the end of Primary III, in 2033 if it lasts 17 years as the other Primary waves have, we would have the most grossly overvalued market in history.

  14. Pingback: OEW tutoring | the ELLIOTT WAVE lives on

  15. Jack Sparrow says:

    Good analysis – one point which may bring everyone together is that perhaps the first wave of SC 3
    (starting 2009) hasnt completed yet and is in the process of completing nowadays and next few months

  16. Hi,thanks Tony
    But the primary V of C1 still is an alternative by OEW,correct?
    https://invst.ly/4b7qq

  17. Tim M says:

    Or maybe just a normal bear market will do just fine. 1600 S&P500 by 2020 would be a hard reset for most

  18. gtoptions says:

    Thanks Tony
    Great work, much appreciated!

    “Everything should be made as simple as possible, but not simpler.”
    – Albert Einstein –

  19. Of course I hope these two possibillities don’t occur,but the path to an SPX 100 or 666 level are extreme,unpleasant and has at least in my mind a fair chance of happening.
    1)Depending on how crazy the NK leader is,and what weaponry he has developed,a launching of a nuclear missile into the atmosphere,exploding over the United States,causing an EMT event–would do the trick.A desperate dictator is capable of any action.If we attack NK,we better be sure Kim cannot launch such an attack.
    2)Been reading about increased earthquake activity around a long dormant volcano near Yellowstone Park.Some experts are concerned that a destructive eruption could be in the beginning phases.This process could of course take 10,000 years or next week.A reignited volcano would end life within 1500 miles of the volcano.
    The reports I read don’t examine whether this activity is possibly caused by fracking or any other reasons.
    Obviously, #1 is much more of a risk,short term,than #2.But the point is,a 100 SPX is not out of the question.At that point,the stock market would be the least of our problems.
    http://www.foxnews.com/science/2017/06/21/supervolcano-in-yellowstone-experiences-highest-number-earthquakes-in-5-years.html

    • fotis2 says:

      Underestimating the United States is highly self destructive as in the words of a captured Wehrmacht General when asked when did he know the war was coming to an end he answered ”When we came up against the US Army.”

      • Are we as competent now as we were in WW2?

        • Scott anon says:

          Is that why all of our “wars” (that we started by the way) since Vietnam last over a decade and end in the complete devastation of the country like Syria? Syria is like the surface of the moon now. How do you live knowing that YOU and YOUR army and your Patriotism created THAT? People that used to live somewhat civilly with physical expectations of some safety now live in complete chaos because of the U.S.. Underestimate indeed. Lets fracture more nations and drone more children. As Albright said, it’s worth the price of 500,000 dead kids. Small change to Clinton, Albright and Cohen and apparently the American people. No wonder we have to practice genocide to protect ourselves. Endless enemies…

          • tony caldaro says:

            Scott
            hate to rain on your party but
            we do not criticize others here, that’s for social media
            we express our market opinions and leave it at that
            if you have a problem with that, as you have been attacking others since you arrived, please leave the site
            thank you

        • fotis2 says:

          Just as, if not more then WW2 the USAF has extensive experience in the battlefields around world your Army never stopped fighting since the end of ww2 whereas everyone else has been sitting on their laurels.The sun never sets on USAF bases 😉

          • Scott anon says:

            Living in peace is “siting on your laurels”? that is a fiction as well given the interventions of NATO and the “coalitions” of the last few decades of endless war. No surprise as the organizing principle of this nation is war. We, the NEW PRUSSIANS! Bomb them all!

            • fotis2 says:

              ”If you want peace prepare for war”If it was not for the US half the world would be eating sushi and the other half bratwurst.

              • Scott anon says:

                If you want wisdom avoid bromides. Oh and war. Learn the origins of WWII and our part in it. Live comfortably in your genocide and globalist slavery. And thank you for telling me what I’ve been saved from. Maybe if I protest too much you can save me from myself by bombing me.

              • Scott anon says:

                by the way, what child have you offered to the greater good of endless war, er, I mean, vigilance? what tears have you shed as you’ve seen your children and home torn into
                unrecognizable fragments? what blood have you given to protect life and the dignity of all people? words, patriotism with no direct experience of the gift of life. It’s all just a video game now anyway. 500,000 children then. 2 million lives now. What’s the diff as long as you have your computer and McDonalds…

        • fbender7 says:

          The American people are always competent. It’s the leadership you have to be concerned about. Under Obama, the country was grossly incompetent. Trump, however, has changed all that. Those who are paying attention will have noticed.

    • vivelaamo says:

      Lerned this doom and gloom view is a sure fire way to endup broke. It’s good to be cautious but there will be plenty of warnings before the type of crash you talk about would occur. It will not happen overnight.

  20. ultimard says:

    Great Analysis, jibes with philosophy of existence as well. Existence and all events within are expanding spirally following fibonacci patterns for growth and retracements.

  21. J.Wenger says:

    Great piece of work Tony. Thanks for sharing!
    So we should expect also expect a massive increase in activity within the comments section as well? 😉

  22. hooloo1957 says:

    Tony, thanks for your work. When we look at these long-term charts we assume that commoditys go up and down but stocks go up forever and ever and ever in some type of Elliott wave. Why do we make this assumption about stocks? Do you know?

    • tony caldaro says:

      Inflation and economies grow over time.
      Commodities are more cyclical. They rise when supply does meet demand, then decline when more supply comes on line.

      • ljjmartin says:

        Don’t forget that thing called “survivorship bias” as an explanation for the discrepancy between stock averages and commodities: the weak stocks get weeded out and replaced with the strengthening ones.

  23. lunker1 says:

    Excellent work!
    Thanks Tony

  24. blackjak100 says:

    Very informative report! I really respect your work. I will not argue with anything you said. However,

    • blackjak100 says:

      Sorry will finish my one point…However if P3 is underway, generally a much greater retrace than 22% would have occurred in P2. Often times a big move in one direction (in this case up), is preceded by a swift move in the opposite direction. Recent example is the crash from 1576-667 followed by a big move up. Not a requirement. Fundamentally, I do believe the Fed will continue to raise 3 times/yr as long as unemployment remains below 5%. This should slow market gains in the coming years.

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