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Saturday, June 27, 2020

Anatomy of a Bear Wave, 2008 vs 2020 [Update Sat 10PM]

[Update at end of post]

This blog (me) has been a bit unfocused lately. An 87.3% rally in the Wilshire 5000 was unnerving to bulls and bears alike. I expected 62%. We got that with wave A. Still, the rally best counts as 3 waves.

Is the market working on wave 4 and then wave 5 to challenge all-time highs? For many reasons that have been presented over the last few weeks on this blog, that is a much lower probability.  I'll list the top reasons here why proposed wave (2) has likely peaked:

1. Its a very fractured market. The NASDAQ made a new all-time high (twice) and all its subwaves count as complete. We have a wide range of indices in between. From the banks showing serious weakness, to the NYSE also showing weakness, The DJIA lagging, these things are not bullish when viewed through the lens of a 3 wave rally that has peaked. The NYSE has already overlapped multiple times with its wave "A" peak and shows no signs of strengthening after topping in 2018.

2. Retail is very much involved. People have insisted that needed to happen and it did. So you cannot go back on that after beating that drum for 10 years!

3. Total volume on the Wilshire 5000 (total market) has exploded in 2020. This points to a market peak having occurred and now its in a viscous struggle to maintain a bull market. This is not normal. This is very bearish. Ask yourself this question, "Just what's going on?"

4.  We had a proposed "kick-off" day for Intermediate (3) down.  The internals were very bad and a 90%++ down day in an impulse move from peak occurred all-around. If this is Minor 4, an intense 90% down day probably should not have occurred as its probably too difficult to overcome within a Minor wave 4 context. Plus, the move down counts nicely as an impulse, not a 3 wave corrective.

5. The market tried for six days to close the island gaps created at (2). It could only manage making the NASDAQ another all-time high, thereby  fracturing the market even further.  Then it lost a lot of price ground in heavy down trading over the past week on impulsive, heavy volume internals (big red candles) . There are now multiple layers of resistance between here and the (2) peak. These resistance layers were produced by signs of heavy selling. Simply put, the path of least resistance is probably down. The primary count is down.

6. Anecdotal evidence. I have been doing informal sentiment checks on family, friends, neighbors and co-workers who have significant amounts in their 401K's and near retirement. They all show signs of greed that is to be expected at a Grand Supercycle peak and in wave (2). Here are some testimonials that I am paraphrasing:

a. 60+ year old manager. Wants to retire at 62.  Uses a Fund Manager option. I asked if he considered cashing out and go to cash (money market) considering all that is going on and evidence economy is unravelling.  He was indifferent and said he had 2 more years and anyway he wasn't quite back to where he was in prices after his nest egg took a hit in March.

b. 65 year old. 401K all in company stock (which did well last 10 years). Self manages. Quote "got out" on wave (1) down, went half back in somewhere in wave [b] of B (60% fib retrace or so).  Says "If the stock drops a bit lower, I'll go 100% all in if it happens". These fund transfers have 90 day holds. So once your all in, yes you are.

c. 62 year old. Big 401K. Uses fund manager.  Also says, "I need it to get back to where it was."  Indifferent otherwise.

d. 57 year old. Doesn't care, he lets his wife handle the money.

I could go on and on but you get the picture. Can they all be correct?  Is there truly nothing to worry about? These people cannot see the danger of having their entire life nest egg at the mercy of the market with all the bad social mood evidence glaring all around? Granted, at some point even the money markets will likely go wobbly, but not at first.

The same theme over and over was 100% pervasively greedy and surprisingly indifferent. Either they trusted some fund manager (who probably does worse than a simple SPX index fund) or they really didn't have a clue. Mostly they were downright greedy.  They all have been ingrained for 10 years that the market only goes up. They all did very well, but yet they refuse to take safeguards. That is amazing, but expected.

I think if you were to bet me $100 if I could convince even just 1 in 100 to "cash out" of the market, I am sure I would lose that bet!

Is this evidence? In the context of everything that is going on in 2020, in my opinion, yes its evidence. But everyone has their selling point. Everyone.  The market has a way of finding out where that is for each and every person. That will be fascinating to watch.

This is why the Fed wants to keep the markets goosed.  Pension and 401K Funds, period.  And they need bonds goosed because rising interest rates will blow everything up. Its not necessarily to keep the rich "rich", its to keep our entire economic system from imploding. But implode it will, the Fed will soon be pushing on a string.

So going forward, this blog will spend more effort in the proposed primary count of (3) down starting with the rest of this post. Yes, the NASDAQ made it to new all-time highs, but that's vast evidence of the retail presence in the market.

Perhaps we get a big opening come Monday (primary count actually suggests a possible down open). If so, we'll deal with it and see how it would fit into the overall count. If the market produces strong evidence that Minor 4 should be the primary count, I'll be the first to tell you and why.  So far that hasn't been the case, its been the opposite. Evidence is mounting that 1 of (3) down is starting to unfold. Once price overlap with wave A occurs, the Minor 4 count is eliminated. Price overlap has occurred on the NYSE and Russell 2000.

Onto the bear waves portion of the post, that's what this blog likes to do anyway.

BEAR WAVES
The 2007 - 2009 bear wave is very instructive. Its a textbook 5 wave nested Elliott Wave bear move.

One of the themes is about how the end of bear wave one's form a tiny trendline which can be used to project prices for wave three (Kenny taught me this).  The current market has evidence of these trendlines in place already.

Additionally, the first sub waves of a 5 wave move form what's known as a "base channel" by drawing a trendline from the peak market price and the top of wave two, then make a parallel trendline under wave one low. That's your base channel. This is where most of your slow-rolling "ones" and "twos" form. Then the "acceleration channel" blasts through the bottom of the base channel and this is where you get to the middle or "third of a third". Once this gets rolling, panic sets in and then you get all your subwave "threes" lows, "fours" peaks, and "fives" lows until the complete nested 5 wave move is done unfolding.

That is basic anatomy of a true impulsive bear wave.

Currently, we have the base channel "set" formed by [i] and [ii]. We have a potential trendline pointing to a Minute [iii] low in prices, and now we have little "ones" and "twos" occurring from recent minute [ii] peak.

Also note that subwave ones always strive to take prices lower than the previous higher degree wave one. The reason last week isn't labeled as pink (i) down is because it likely hasn't occurred yet. Once prices are under [i], we can look to label (i).
Proposed base channel for Intermediate (1) and (2). Also note that 1 of (3) is proposed to be lower in price to (1) as its the first subwave 1 of (3).
Now for the 2007-2009 chart.

Note, the 2 spots on the chart of where we are in relation to the current 2020 bear wave market. 

The first spot is the "true" spot. We are just coming off of (2), but not yet under [i] and headed toward (i) of [iii].

The second spot is where we are on how we may "feel" since everything is magnified in 2020, your going to get a tinge of the plunge that occurred in 2009. (Our real plunge in the current market is in 3 of (3) down, not 1 of (3) down although that's kinda scary also). Get it? Hope no one got confused.

Note that in 2007, there was a proposed trendline created but it did not pan out! This indicated higher market highs were coming. Same applies to the current market. If the proposed trendline becomes impossible to achieve, then something else is probably going on and it'll have to be reevaluated.
Well, there ya go. This was a good time to roll out this post since we have proposed that the base channel of [i] and [ii] of 1 of (3) down may now be set and we have a proposed nifty little trendline pointing to where prices may be heading. Good luck!

[UPDATE SAT 10PM]

Here is a reworked wave (1) down based on principles outlined above.  Looking back, it originally got a lot of things right after the wave broke at the correctly identified "virgin space". This blog confirmed wave (1) low on March 26th, much earlier than anyone else. Was too much in a hurry to finish wave (2). But who honestly thought at the time the market would have new highs in the NASDAQ and the total market retrace of 87.3%??!! in 3 months no less....

Now we can't seem to get anyone to say its headed back to March lows (for starters).  Babbling about "V's" and "W's" and "L's" and such.  As if the March low is a floor never to be tested and broken through. When will we hear some talking head say we are headed back to 2007 peak prices? Is that out of bounds? My gosh it was only 13 years ago, surely we can't be so fragile can we?

Notes on the chart. If prices backtest the broken base channel, label it the main wave four peak. - In this case Minor 4.

Also see how the wave one lows bounced along the lower base channel. Yes I cheated and used (ii) of [i] but it was nearly same price so it works better.






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