Thoughts for Sunday, May 11...

I think that we have reached a good point to revisit the wave structure that unfolded since the lows of March 2003. There is a great deal of debate over the future course of the S&P 500. The bearish argument asserts that we have completed a long-term corrective wave higher and resumed the bear market cycle begun in 2000. The bullish interpretation sees the decline from October as Wave 4 in a five-wave structure that began with the lows of late 2002 or early 2003.

While there are some elements to this wave structure that support the notion that the last four years were merely a corrective formation, I believe that there are some subtle points that are consistent with the five-wave, motive formation. It is my belief the notion that we have been witnessing a corrective formation up from March 2003 has been invalidated.

One aspect of the longer-term rally appears consistent with a corrective formation. The rally up from March 2003 can be viewed as two primary waves higher. The first wave began in March 2003 and ended in December 2004. The total length of this wave was 370.77 points over a 21-month period. The second wave began after October 2005 and ran until October 2007. This wave assumed a length of 342.37 points as it unfolded over a 24-month period.

If this were a three-wave Zigzag formation higher, then we would expect to see Waves A and C assume a roughly equal length. The two waves higher differed in length by less than thirty points and in duration by only three months. This proportionality is consistent with what we would expect within a corrective formation.

The evidence that suggests this wave is not corrective can be found in the actual structure of the waves themselves. If we strictly count all moves higher and all moves lower using the closing price at the end of each month, then the rally after October 2005 unfolded in nine waves higher. This gives the wave an extended structure.

This point is of crucial importance because R.N. Elliott wrote in his book "Nature's Law" the following: "Extensions occur only in new territory of the current cycle. That is, they do not occur as corrections." If we accept this strict nine-wave interpretation of the October 2005 to October 2007 rally, then we must also accept the reality of this extended structure. If we accept Elliott's observations in their original form, then we must also accept that this structure invalidates the possibility that the rally from March 2003 was corrective in nature. We must also accept that this formation invalidates the assertion that we are in a larger, long-term correction.

Please understand that I write these words with a great deal of respect for Robert Prechter and his entire body of work. Everything that I know of the Elliott Wave Principle comes from his publications. Past clients have laughed at me when I have pulled out one of his texts in the middle of a discussion. I am that much of a devotee to his work. Nevertheless, I became convinced in late 2002 that the cycle had one more wave higher before completion. It is my opinion that we now stand near the beginning of the final rally in that fifth wave higher.