Example #4: The 1974 Bear Market LowThe final decline into 1974, ending the 1966-1974 Cycle degree wave IV correction of the entire wave III rise from 1942, brought the averages down to the area of the previous fourth wave of lesser degree (Primary wave[ 4]). Again, Figure 5-3 shows what happened.Our analysis of small degree wave sequences over the last twenty years further validates the proposition that the usual limitation of any bear market is the travel area of the preceding fourth wave of one lesser degree, particularly when the bear market in question is itself a fourth wave. However, in a clearly reasonable modification of the guideline, it is often the case that if the first wave in a sequence extends, the correction following the fifth wave will have as a typical limit the bottom of the second wave of lesser degree. For example, the decline into March 1978 in the DJIA bottomed exactly at the low of the second wave in March 1975, which followed an extended first wave off the December 1974 low.
On occasion, flat corrections or triangles, particularly those following extensions (see Example #3), will barely fail to reach into the fourth wave area. Zigzags, on occasion, will cut deeply and move down into the area of the second wave of lesser degree, although this almost exclusively occurs when the zigzags are themselves second waves. “Double bottoms” are sometimes formed in this manner.
Behavior Following Fifth Wave Extensions
The most important empirically derived rule that can be distilled from our observations of market behavior is that when the fifth wave of an advance is an extension, the ensuing correction will be sharp and find support at the level of the low of wave two of the extension. Sometimes the correction will end there, as illustrated in Figure 2-6. Although a limited number of real life examples exist, the precision with which “A” waves have reversed at the level of the low of wave two of the preceding fifth wave extension is remarkable. Figure 2-7 is an illustration involving an expanded flat correction. (For future reference, please make a note of two real-life examples that we will show in charts of upcoming lessons. An example involving a zigzag can be found in Figure 5-3 at the low of wave [a] of II, and an example involving an expanded flat can be found in Figure 2-16 at the low of wave a of A of 4. As you will see in Figure 5-3, wave A of (IV) bottoms near wave (2) of , which is an extension within wave V from 1921 to 1929.)
Since the low of the second wave of an extension is commonly in or near the price territory of the immediately preceding fourth wave of one larger degree, this guideline implies behavior similar to that for the preceding guideline. It is notable for its precision, however. Additional value is provided by the fact that fifth wave extensions are typically followed by swift retracements. Their occurrence, then, is an advance warning of a dramatic reversal to a specific level, a powerful combination of knowledge. This guideline does not apply separately to fifth wave extensions of fifth wave extensions.
|Figure 2-6||Figure 2-7|