Chart Advisor: Examining XVG’s Structural Downtrend

Articles From: Investopedia
Website: Investopedia

By Jeffrey W. Huge

1/ Behold…The Bull Market of 2023!

2/ The Elliott Wave Principle — Unplugged

3/ Applied Elliott Wave Analysis

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1/ Behold…The Bull Market of 2023!

The Value Line Geometric Index (XVG) is widely regarded as one of the broadest measures of the U.S. stock market. It includes approximately 1,700 publicly traded companies in North America, whose constituents account for 90% of the revenue generated by all publicly traded companies in the U.S. Originally launched in 1961, the daily price change of this equally-weighted index represents the median price change of its components. After peaking on November 8, 2021, the XVG began an steady decline into its October 13, 2022 low. Since then, following a shallow recovery rally, the XVG traded in range before breaching trend support. The index is now in a structural downtrend, holding below prior trend support, its 200-day SMA, and its 200-week SMA. Indeed, its 200-week SMA (red) is also holding below its 200-day SMA (green). In short, the XVG is about flat for the year, and down 22% from its all-time high.

2/ The Elliott Wave Principle — Unplugged

The Elliott Wave principle, developed by accountant R.N. Elliott in the 1930s, is an interdisciplinary framework utilizing concepts from the fields of Behavioral Economics, Mathematics, and Fractal Geometry that can be used to identify self-similar patterns in the price action of most publicly traded securities and broad market indexes in order to make probabilistic judgements about the current and future path of prices. According to Elliott, prices have only two wave modes: Motive and corrective. The motive wave defines the direction of the trend for prices and is labeled numerically [1-2-3-4-5]. The corrective mode is a countertrend interruption, which allows supply and demand to rebalance, and is labeled alphabetically [A-B-C]. There are only two forms for motive waves: Impulse and diagonal. The impulse wave is the most common and always unfolds in five waves [5-3-5-3-5], making it easily identifiable. The diagonal can be of the “leading” variety in wave one, or of the “ending” variety in wave five, and takes on a converging or expanding, wedge-like form. Corrective waves, on the other hand, come in eleven different forms including: zigzags, flats, and triangles, which usually unfold in three waves [5-3-5, or 3-3-3, and sometimes 3-3-5], or in the case of triangles, in five lateral waves of three [3-3-3-3-3]. Five waves in one direction are always followed by three waves in the opposite direction at the same degree of trend. As in life, progress occurs in fits and starts – three-steps forward, two-steps back.

3/ Applied Elliott Wave Analysis

If we apply the Elliott Wave Principle to the weekly chart of the Value Line Geometric Index beginning from the March 2020 low, we can observe five waves up at primary degree of trend [(1)-(2)-(3)-(4)-(5)]. A much longer-term view (not shown) reveals that the November 2021 high also terminated a five wave advance at cycle degree of trend as well [I-II-III-IV-V], and by extension, a third wave at supercycle degree of trend. From the November 2021 high we can then observe five waves down at intermediate degree of trend [1-2-3-4-5] into the October 2022 low to complete primary wave (A) down of a progressing three wave countertrend move of at least cycle degree of trend. The subsequent advance into the February 2023 high likely completed primary wave (B) up. If correct, then the choppy down-up, down-up wave progression since is probably a series of one’s and two’s [1-2, (i)-(ii)]. Under this rubric, the next directional move of significance will be minor wave (iii), of intermediate wave 3, of primary wave (C) down.

Originally posted 22d November 2023

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