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An A.J. Frost Follow-up By Jeff Walker

While Robert Prechter was grabbing headlines for “Dow 3686″ and posing with miniskirted models in People Magazine three and-a-half months before the debacle of 1987, Jack Frost was quietly sitting on what may yet turn out to be one of the great forecasts in stock market history. On September 21, 1985, with early September”. Frost was not rattled by the subsequent drop that corrected 60 percent of the third wave advance from 1984. After all, he had foreseen a 50 percent drop that would have taken the Dow down to within 62 points of the October 19 close.

After the crash he predicted that the next sell-off on the Dow would hold above that October close, which it did in early December, and that the Dow would yet record that when it came to calling the ’80’s bull market, the celebrated Robert Prechter was not playing in the same league as his senior co-author A.J. Frost, who wrote the first draft of the Elliott Wave Principle.

With an accuracy that is almost obscene, Frost also told the Canadian analysts back in September 1985 to expect a complete collapse in oil prices in 1986, to $16 from almost double that figure. The average price in 1986 did turn out to be about $16 and oil prices have oscillated around that number ever since. Why the collapse? Because, “Any extraordinary margin of profit is a golden bone that the ravenous dogs of competition will pounce on,” not exactly your standard Elliott wave explanation. At the same meeting, by the way, Frost called for the Toronto Stock Exchange to surpass 4,000 in 1987. It hit 4,100 in 1987.

For those trying to make sense of the Dow 1090 to 2722 rise, A.J. Frost counts nine waves with peaks in July 1985, May 1986, April 1987, June 1987 and August 1987 – corresponding to waves one, three, five, seven and nine respectively. He views Dow 2704 (52 squared) as the “orthodox top”, with the B-wave of an irregular correction providing the August 25 high. Frost is more interested in slopes than in waves, and he notes five distinct ever-more vertical slopes underlying the above impulse waves, all bounded by an exponential curve extending from the summer of 1984 low.

A possible Frostian wave count from the B wave peak of 2722 is a C-wave way out of proportion to the preceding A- wave, with its unusual internal fourth wave followed by a fifth wave downside failure. More precisely, wave C’s wave one ends at Dow 2515; Wave two rebounds in irregular fashion to 2640 on then rise in the fifth wave of a still intact 1980’s bull market to over 3,000.

This prospect appears a lot less farfetched now that the Dow and many other indexes have surpassed their .382, .5 and .618 crash-retracement levels, with some going beyond the 2/3 mark or even to new all-time highs. History may the Dow around the 1300 mark, Frost told a meeting of Canadian technical analysts that the Dow would double to 2600, crash to 1,800, and then double again to 3,600. Months before the melt down, he recast his Dow prediction in terms of time. He advised the same group to, “Step aside in late August or October 2; Nightmare wave three finally ends at 1747 December 4 (not penetrating the October 9 low of 1738, as a fifth wave downside failure within wave three); Wave four is an A,B,C with a diagonal triangle in the A wave position (a formation added to the 1985 edition of Frost & Prechter’s Elliott Wave Principle on page 48) ending in April ’88, and its C wave ending in July 1988. The fifth of this C wave from Dow 2722 is a spectacular failure stopping 237 points short of the bottom of its third, which had also been a failure.

Frost’s big fifth wave of the 1980’s bull market began in late August 1988, a year after its third-wave peak. It then corrected severely into mid-November 1988, making a wave one and two internally. It took off again into February 1989 in a wave three, and pulled back into late March in a wave four (or was this was another one and two?). The recent wave up into the high 2300’s can be interpreted in a number of ways. Frost expects the Dow to top out near 3250 (57 squared) by the spring of 1990.

Most of Frost’s preconditions for a top were dealt with in the last issue of G&EW. An additional one concerns the Tokyo market. Frost believes the Nikkei Dow is in the middle of its bull market, not at the tail end. He doesn’t see much danger of the U.S.Dow falling out of bed until it’s pushed by panicked Japanese investors repatriating assets to cope with a collapsing Nikkei Dow.

In the gold department, Jack Frost’s wave count leads to a forecast dramatically different from Robert Prechter’s. Prechter regards the $850+ top in early 1980 as the top in a five wave structure from the mid-sixties. This analysis makes it very difficult to label what has come after as a completed correction. So, Prechter goes with the highest probability scenario implied by his preferred wave count and that scenario is bearish. Frost; though, counts Prechter’s B-wave in late 1980 as a fifth wave failure in a five-wave structure rising from 1970. This way, the corrective action between late 1980 and early 1985 could be counted as a completed A,B,C – and subsequent action could be abetted as waves one and two of a new five wave bull market, with wave two just completed. Frost would expect quite a strong move on the upside now, where as Prechter expects only bear market rallies along a slippery. slope to much lower gold prices.

Another contrast between Frost and Prechter is their degree of adherence to Elliott rules. Frost subscribes to Elliott only as a principle, not as a theory: If a market moves higher in five-wave patterns and lower in three-wave patterns, you know you’re in a bull market. Switch ‘higher’ and ‘lower’ in the preceding sentence and you’re in a bear market. Frost will allow exceptions to the rule that the third of five impulse waves cannot be the shortest and the rule that the waves one and four cannot overlap except in diagonal triangles. He doesn’t have much use for Elliott’s triangles, finding them overly handy in rationalizing erroneous wave counts. He doesn’t even have a lot of use for dear old Mr. Fibonnaci. For Prechter’s cycles and contrarian indicators he sees no use at all, except perhaps as filler for an otherwise brief newsletter. As for the Kondratieff wave, he would invoke it only as a minor prop for a forecast determined by more important factors. So far in the post-crash recovery we have seen the Dow industrials lagging behind a number of other indexes. According to A.J.Frost, the Dow will be outperforming the rest during the last stage of its fifth waveascent. Current under performance simply means that we have a long ways to go on the upside.

On a personal note, Jack Frost is more impressed by the aging bull market than he is by the aging human body. Clearly fed up with the physical limitations imposed by octogenarian status, he advised me, “Jeff, don’t ever live to be 81.” May this period be only a correction in Jack Frost’s life, and may it be followed by the same kind of 80’s revival he correctly forecasted for the stock market.

  • An A.J. Frost Follow-up By Jeff Walker
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