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Tuesday, April 2, 2013

Elliott Wave Update ~ 2 April 2013

Per Prechter's Elliott Wave Principle, he mentions that oftentimes counting waves is not clear at all timescales. He makes the point that if uncertainty exists, then just count what you can that does make sense at the moment. I'll give you 5 examples on differing timescales. Some cases are stronger than others, but the point is they all fit the most rules and guidelines of the total Elliott Wave Theory.

1. SUPERCYCLE TIMESCALE
I was just as surprised (maybe disappointed)  as most bears that the market has managed new highs under such deteriorating fundamental conditions.  Yet being an EW theorist at least I can accept that the market is certainly capable of producing wave forms and patterns that explain this behavior.

There exists a long term peak-to-peak chart line that has connected three times in 13 years. This line, at least for the moment, is important. How the market reacts to this line will be telling and likely for the long term as a result.  We have a potential EW count that accounts for this trendline - the mega expanding Supercycle triangle. However, this is not our primary count.  Yet even so, the expanding mega-pattern exists and we need to respect its potential next wave move which would be a viscous downward [E] wave.

The other pattern that is valid is our primary count of a cycle wave b within what is shaping up to be a large Supercycle wave expanded flat pattern. This wave count actually has more bearish implications than that of the large mega-expanding triangle.   Its downward potential is much greater in price than the mega-triangle count. However the cycle wave b has been a difficult count yet we can count it validly (triple zigzag for now)

But both counts imply the same thing: This 4 year rally is nearer the end then the beginning because in both long term counts we have enough waves in place (cycle wave b) and a valid trendline hit (for the mega expanding triangle alternate count) to consider them nearly finished.  And both projected waves that follow these top two counts both also imply the same thing: a nasty downturn and historic collapse in prices.

Yes this rally since 2009 has been indeed impressive. And yes I was quite wrong on the strength and durability of said rally. But I still firmly believe the next wave is coming and its not upward. Yes it may be later than expected, but the wave counts suggests it will be of historic price drop in proportion to everything that has come before.  For in both counts, the next projected wave in cycle wave c expanded flat takes prices well beneath the 666 SPX low of 2009 (most bearish). And even if its a swift and sharp in the form of an [E] wave of a mega expanding triangle, then by EW rule, the [E] wave must finish beneath where wave [D] started which is again below 666 SPX.

Hence, both counts in this chart takes prices below 666 SPX by EW RULE.
2. CYCLE OR PRIMARY TIMESCALE
The most difficult count has been the rally since the 2009 low if your using Prechter's rules and guidelines.  I don't want to discuss all the other EW counting "systems" that exists out there. I am simply not interested and  find them impossible to follow (as they seem to make up their own rules) nor do they incorporate fully the underlying social mood elements of EW theory.

The rally since 2009 low does not - at least not yet by far - count well at all as a large 5 wave impulse pattern. Yes it has impulse patterns in its subwaves but that is how the subwaves of a large series of zigzags is supposed to behave.

The largest major "corrective" period has clearly been in the "middle" of the pattern in both time and price. If this was an impulse we must assume that the "middle" of the impulse is occurring now implying another mega-year rally to complete the "other half topside" of the impulse. This suggests that yes DOW 20,000 wouldn't be out of the question.   And this assumes that the market cannot correct deeply from here again. In other words, if you believe we will hit DOW 20,000 in a large impulse that needs YEARS more to complete, you ain't going to see another mega-correction like the one that occurred in 2011 until much further up in price. This is simply using EW rules and guidelines in trying to predict an impulse pattern,

As you can see, that is a large stretch to take the position of "still developing impulse since 2009". For this and other reasons, I simply reject the notion that the rally since 2009 low is and impulse that is not yet complete.  For it to be properly completed 5 wave impulse pattern by EW rules and guidelines, it has already busted all the guidelines and rules for the beginning waves 1, 2 and 3!  Hence the pattern is rejected outright.

Do the subwaves support this impulse notion? No.  There is no classic "wave 2" deep retrace from the 2009 low.  There is only shallow (B) wave type corrective activity on the rally up.  Where would the "third of a third" be?  This would be my "virgin wave space" where there is no overlap in prices prior or after the virgin spot.   Was there a large wave 4 somewhere?  No. Just a bunch of large corrective-looking zigzaggy megawaves. Yes a great rally, but its form belies the fact that it does not count as an impulse nor does it project to be a completed impulse just from a review of the previous 4 years.

LOGIC OF EW THEORY IN ACTION:
If one concurs that the rally since the 2009 low is not an impulse than one MUST count this rally as a corrective pattern. Herein lies the difficulty many Prechter rule EW theorists have encountered (such as myself)   Corrective patterns (yes even mega-patterns such as this 4 year rally) can be complex affairs. A triple zigzag count is not a great count nor a very predictive count by all means. I admit, I can poke holes in it too. However at the moment it matches the most rules and guidelines of EW counting and that's what matters.

Additionally our subwave counts support the notion of a primary triple zigzag rally from the 2009 low.  This form is the most logical here in a fundamentally deteriorating situation.  Price and time (social mood) had a need to go this long from the 2009 low especially if it needed to be a cycle wave.  I cannot question that. I must accept it and count for it.  The market is always right.    Therefore the triple zigzag is the perfect wave vehicle to get us there.  The freedom to zig and zag where it must to get us here. And that it did.

(I will make it a point that in real money terms of taking account for inflation or the price of gold the actual social mood rebound is much more bearish and weak as compared to "nominal" prices. Yes stocks have nominally bested the 2007 high but real money prices have not.  And your food bill has certainly doubled also. No problem if your in the 1%.  Big problem if your Joe Sixpack.)

3. INTERMEDIATE TERM TIMESCALE:
We'll use the SPX for the next three timescales.  For all intents, the SPX counts are always the same as my Wilshire 5000 counts. I use the Wilshire for superior wave form (it is the entire market after all) and trendline/channel mapping.

This is a perfect example of taking a slice of wave patterns and "counting what we can count".  The rally since the 2009 low may be a difficult count to plot and predict, but the rally since the November 2012 low has clearly  traced nearly five perfect waves that match a high degree of EW guidelines and rules. Hence we can say that a corrective of some size to at least these 5 waves are near. And that is useful in and of itself.  And if a corrective comes, we can then glean information from that and make even more outcomes to the larger counts that we need to validate.

4. MINOR AND MINUTE TIMESCALE:
The SPX chart below shows the last 2 timescales on 1 chart. In the medium term there is 5 Minute waves nearly complete from the February 2013 low to form the final Minor wave 5.   The subwaves very much support this. All the elements are there: a beginning wave [i], deep pullback wave [ii] and then "third of a third" of wave [iii] followed by wave [iv] corrective.

Finally in the Minute timescale, prices are behaving in an overlapping "pushing" waveform that appear to be a goodly-sized ending diagonal triangle forming the final Minute wave [v]. This count also is the best count available for these past couple of weeks.  The impulsive pattern of 5 waves has broken down and instead of prices advancing in clear impulse 5 wave patterns the "push" has broken down into a series of zigzag patterns (sound familiar?) that are "pushing and prodding" prices up in an ending diagonal triangle pattern. This is indicative of exhaustion. And what follows exhaustion is rapid price collapse. This is an ending pattern at least for the 5 Minor waves since the 2012 November low. So this too strongly implies a corrective is coming for starters.

In fact I called for the final a-b-c on yesterday's update and so far it has traced almost what I expected.
THE ONE THING IN COMMON ON ALL FIVE CHARTS:
Did you guess the one thing in common on the above 5 charts? They all imply a corrective is soon forthcoming for each chart. That is what I call serious wave chart synergy. When 5 charts (of differing timescales no less!) strongly suggest that each requires a corrective, one must stand up and take notice!

When one sees a multi-week ending diagonal to top it all off for the final Minute sized wave, then one REALLY needs to be paying heed to the overall bearish potential.

CROWDED TRADE:
The crowded trade I suggest is FED WORSHIP. Perhaps the most dangerous of times is when both bulls and bears are all on the same sentiment page.  That is whats known as a "crowded trade".  Bulls love and believe in the power of the Fed whereas the Bears despise yet still believes in the power of the Fed to keep prices from falling. Heck even Prehcter has shown signs recently of Fed Worship from a bearish stance.

I say the trade sooner or later will take a sharp turn against the Fed.  And I don't think that time is too far off in the future. For those Fed worshippers out there, I believe their days are numbered.


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