In May 2015 we witnessed a new high in the equity market, as can be seen in the S&P 500 (SPX) chart, below. This high is unlikely to be surpassed in a decade or more. Consequently, I have labeled this high, “The Generational Top” to distinguish it from other highs that occurred in 2000 and 2007.

According to Elliott Wave (EW) principles, a progressive cycle consists of 5 waves. These 5 waves are made up of 3 impulsive waves (in the direction of the trend) and 2 retracements (against the direction of the trend).

The cycle that we will be focusing on in this article, is a major cycle that has been widely accepted as having begun back in 1929. The high we saw in 2000, based on my application of EW principles, appears to be the end of wave 3.

The price action seen between 2000 – August 2011 is a contracting triangle that forms wave 4 (this type of triangle is typical for wave 4). Taking this into account, it follows that “The Generational Top” that occurred in May 2015, exhibited all the characteristics that would be associated with the end of wave 5 of such a major cycle.

The frequent, choppy price action that has followed the end of wave 5, namely moves of over 200 points per day, could be an early development of major bearish cycle. If this is the case then there is a potential for the market to drop, over time, to the low seen in 2009. Should this scenario play out then this could be devastating for the general economy and individual wealth. Having said that, those that are suitably prepared to take advantage of such a cycle, it could offer immense opportunities.

Going back in time a little, the period leading up to the 2000, S&P 500 was lagging the Dow Jones Industrial (DIA). The reason for this is that from the early 1980s, interest rates were very high. This meant that smaller companies (such as those included in the S&P 500) would have struggled more with high borrowing costs than larger corporations.

By the turn of the millennium, interest rates had fallen significantly. This created a positive environment, in which smaller companies could prosper and outperform larger corporations in the rising market. These observations can be noted in the chart below.