The chart on the left is, of course, from www.chartoftheday.com , readily available to anyone that subscribes, for free. Sometimes they provide you with an insight that you might not have thought of on your own. This is the chart of the Russell 2000, that is the 2000 smallest stocks taken from the Russell 3000, weighted according to the float capitalization. The median cap. size is a little less than 1bln. This makes this index hard to manipulate as there are too many stocks and few are typical “momentum” stocks like the FANG stocks. Facebook, Amazon, Netflix and Google. Arguable, it is therefore the most ‘’accurate” or “true” index.
The shape or structure of the chart is clearly that of a “diagonal triangle” to use the EW jargon. In plain English that is a wedge that gets smaller and smaller as it works its way into the corner. These occur only as a 5th wave if and when it is part of a full 5-wave sequence. That is nice to know as the chart cannot go beyond where the two boundaries intersect and more often than not the peak is reached well before that. Also, once reached the stock/index normally retraces the entire 5th wave and does so rather violently often in just a fraction of the time it took to reach the top, here from the lows of 2003.
To put this in perspective, we have created a much longer chart, also on a semi-log scale, using Bigcharts. It starts around 1987 which is the year in which most EWavers agree that a wave 2 occurred. From that point on we have a wave 3 and a wave 5 which is, perhaps, not quite finished. So far 5 is actually a little shorter in proportion to 3 using log terms. As a diagonal it should follow the 3-3-3-3-3 pattern which it does seem to do. Alternatively there is no diagonal. Instead it is a normal straightforward 5th way as in a 5-3-5-3-5 pattern but starting at the lows of 2009. Either way the next big move should be back down to the level of the 4th wave of previous degree! But do not forget that we are looking at a 14 year developing wave so the timing is more in terms of weeks or even a few months than yesterday or tomorrow.
The “too good to be true” test certainly does seem to support the notion that some big correction should happen soon. 5 times your money in the eight years since the great recession lows certainly fits that criterion if you ask me.
If you draw the trend channel properly, the 2009 point as the start of a normal 5th wave makes slightly more sense. It also suggests that we are pretty close to topping.