Stocks around the globe sold off Monday on fears coronavirus is getting out of control. The virus appears to be spreading from Asia to Europe as Italy announced it is putting 12 towns under quarantine. Dow Jones fell 3.56% in response to the news, while the S&P 500 lost 3.35%.
Now, everyone is wondering if this is the start of a larger plunge in stocks or a buying opportunity. We shared our opinion on the subject back in October 2019, when the coronavirus was far from the headlines. Instead, we based our logic on Elliott Wave analysis of the 4-hour chart below.
Dow Jones’ 4-hour chart revealed that the market’s recovery from 21 713 was corrective in nature. It looked like a simple (a)-(b)-(c) zigzag retracement with a triangle in wave (b). This meant that higher levels can be expected in the mid-term.
On the other hand, triangles precede the final wave of the larger sequence. Hence, this pattern also meant “a long position in the DJIA above 28 000 is not worth the risk.” Once wave (c) was over, a notable bearish reversal was supposed to occur.
Dow Jones Can Tumble Another 25%
Dow Jones reached 29 569 earlier this month, but is now back below the 28k mark. The updated chart below shows that the coronavirus can, indeed, be the catalyst the bears have been waiting for.
The chart above reveals wave (c) has developed as an expanding ending diagonal. It also shows our stance on the slightly bigger picture, namely that the stock market has actually been in a correction since October 2018. The recent new all-time high must be the end of wave B of an expanding flat corrective pattern.
If this count is correct, wave C down has just begun. In 9 of 10 cases it is going to exceed the bottom of wave A. Unfortunately for the bulls, this means a drop to 21 000 or lower is in its early stages. As long as Dow Jones trades below 29 569, this is the Elliott Wave count we are going to rely on.