A Labeled Long Term Wave Count of the HUI
Readers may recall that we mused about the long term wave structure of the HUI index in our last update. Specifically we wondered whether all the activity since 2008 may not be best regarded as a giant second wave. As we noted, we cannot prove that this hunch is correct, but there is at least one major factor that speaks in its favor: the wave structure prior to the 2008 high is clearly impulsive, while the action since then, including the giant rally from the 2008 low to the 2011 high, looks like a corrective mess.
Our reader and occasional contributor of E-wave counts, Bernard from Quebec wrote to us that he sees the index in a similar light, with the move from 2008 to today representing a corrective structure in the shape of a big A-B-C expanded flat of the form 3-3-5.
Bernard notes: “Many stocks are almost at their 2000-2002 level, this can only be a second wave. And the B wave of the expended flat was clearly not impulsive, while wave C clearly is.”
One point he also makes is that it is possible that waves 4 and 5 of C are still missing (which would imply a new low below the recent one will eventually be made before a long term turnaround can begin). It can however not be ruled out that the low is already in. Either way, if the interpretation of the long term picture is correct, then the next major move (measured in years) could be quite a scorching rally. Without further ado, here is the chart as labeled by Bernard:
HUI index, long term: is the action since the 2008 peak an expanded flat wave 2 correction? – via Bernard P. – click to enlarge.
It should be immediately obvious why Bernard states that waves 4 and 5 may still be missing – there is a slight overlap between waves 2 and 4, which is not conforming to the rules. In addition there is the fact that the wave labeled 5 of C is very long relative to wave 3 (however, this does conform to the rules – it is just not very satisfying. Usually the third wave tends to be the longest). In that event, wave 4 would have to be relabeled 2, and wave 5 would have to be relabeled 3. However, from a short/medium term perspective, this would still entail a wave 4 rally as the next move of significance, prior to a final decline in wave 5.
If a short term rally does unfold, it will also provide information on which version of the wave count is the more likely one. E.g. a rally that looks impulsive in all time frames would increase confidence that the low has been seen (and conversely, if the rally is clearly of corrective character, one would have to expect one more decline to a new low).