The title of today's post comes from Tony Caldaro, who commented on my pencast Are We In A Bull Market comparing his bull market view with Prechter's bull-oney reply. Ironically, Tony got the phrase from an old Prechter post. In The Yelnick Challenge, Tony rises to the occasion and deepens his argument for a new bull. He gives four requirements for March 2009 being a major bottom, and the Hope Rally the kick-off to a new bull market to, yes, higher highs soon. To counter the bull-oney charge, he comments on the two points I made in the pencast, about lack of alternation between the Jun09 and jan10 corrections, and the lack of impulses in his motive waves (the three upwards move off Mar09, Jul09 and Feb10):
- Alternation: no argument here. In my pencast I mentioned that the lack of alternation was pointed at other wave counts, not his, since I noted that he considered them to be not part of the same five-wave pattern, but of different degree (specifically, the Jun09 correction is of higher degree than the Jan10 correction, meaning the first is a wave II and the second is a lesser degree wave 2 of III up to much higher levels)
- Impulsive motive waves: I remain unconvinced. He agrees that it is hard to see them in the S&P, which he characterizes as a "traders index" as compared with the Dow and Nasdaq, which are more widely watched by the general investor community and track psychology better. Putting aside that the S&P is generally considered a better designed index than the Dow and covers a much more representative range of US companies than the Naz, I encourage you to look at the Dow chart he supplies to support his count and draw your own conclusion. To me it has a series of odd wave counts, such as the small 3 in the first wave up to Jun09, and the teeny high-degree wave iii/iv (purple) which is smaller than the inside waves right before it:
Another issue remains the lack of increasing volume. While at a major turn, volume usually increases (both before and after the turn) as positions rotate in and out, and then increases at the kickoff of the new direction. We saw that around March 2009, which marked it as an important low - confirmed as events have turned out. Yet the continued lag of volume in the whole Hope Rally since the turn is a major concern. Typically a new bull market brings increasing volume, especially in the leg Tony thinks we are now in, wave 3 of III, which normally shows gaps in the direction of trend as investors finally recognize the new trend is here and pile on. The always-interesting site of Doug Short has a chart from a weekly guestblogger on point:
Tony has an explanation for this in his post which I recommend you read, about when different sets of investors recognize the change. He thinks the public is not there yet, and presumably that would explain the lack of the more normal markers of a wave 3 of 3. Yet, objectively, why is it then a wave 3?
Where I think Tony is spot on is his characterization of March 2009 as a major bottom. This doesn't mean we are in a new bull, but may mean it stands as a low point for a while. Here is my view of the three choices we are in - the first two make Mar09 a major low for a while:
- New Bull: 2000-2009 was an ABC flat correction of 1982-2000, and we have begun a new wave up to higher highs
- Sideways Bear: The Hope Rally is a large X wave connecting us to a second flat correction soon. Alternatively, it could be the B of a large 3-wave off 2007 as part of a big triangle. In both cases it need not break Mar09 levels
- Big Bad Bear: We are nearing the end of P2 and are about to commence P3 (with P4 and P5 to follow) to break below the March lows. Note that we cannot fall the same distance again or we go below 0. P3 is expected to exceed P1 in percentage down from wherever P2 ends.
What I respect about Tony is his adding of more rigor to wave analysis. He added to orthodox wave theory what Neely did - more precise rules and guidelines - but kept within the frameworks of Elliott Wave theory rather than pushing to a new wave approach. Just a glance at the myriad of wave counts by the plethora of blogger wave sites shows how orthodox wave theory has too high a degree of discretion and subjectivity. As you may have noticed rather than join the wave amateur hour with my own chart fiddling, I prefer to comment on broader issues using wave theory as a perspective. I applaud Tony for pushing towards an objective approach even as I doubt his current count.
In this regard, he also gives us tests of whether his bull market view is correct. In his Weekend Update, he notes that wave 1 of III (from Jul09) went 281 S&P pts, and wave 3 of III normally would go some Fib relationship of wave 1:
- Short 3 at 61.8%: Sp1219
- Normal 3 at 100%: Sp1326
- Extended 3 at 161.8%: Sp1500
A short 3 (61.8%) would end very close to an Sp1214 end point arrived out from a Sideways Bear perspective. (I will post on this Sunday evening, after the Masters.) If we turn around there, it does not confirm his bull count, but it does causes him a methodological problem. Usually one wave of an impulse extends, typically 3 or 5. Indeed, under Neely rules, one segment must extend. And 3 cannot be the shortest. If 3 is shorter than 1, wave 5 has no room to extend, since it has to be shorter than 3. So 1 would be the candidate extended wave, making his wave III as a whole an odd duck which started stronger than it finished.
A normal 3 at Sp1326 would be close to another Fib relationship at Sp1333, calculated as 161.8% of wave I (the wave from Mar9 to Jun11, 2009). The normal 3 would blast past the 62% retrace level of Sp1229, and past the 2/3 retrace at 1275. It would be close to another relationship, the 70.7% level at 1307. If we get there, the odds of his New Bull increase, and the odds of Prechter's Big Bad Bear decrease. Prechter's P2 count is a wave 2, which rarely retraces more than the range of 62%-67%.
An extended 3 at Sp1500 would pretty well confirm Tony's view. It would have blown by the 78% retrace at 1378. If a wave 2 seldom goes beyond 2/3, when it goes beyond 78% the odds are de minimus of it being the right wave structure. Under wave rules, waves 2 can retrace as much as 99%; but Tony's extended 3 would be followed by a 4th and 5th waves, which would very likely exceed the 2000 and 2007 highs in the S&P. Hence the Big Bad Bear would be dead. Even if a Sideways Bear remained, it would have been a mistake not to have played the rise! Better to make money in practice than be right in theory.
A final perspective on this bull or bulloney discussion comes from Glenn Neely, who is in the Sideways Bear camp. He has been increasing his profile, publishing a series of perspectives in SafeHaven and issuing some audio commentaries. His sees us as in the least predictive part of the wave structure, and uses this chart to explain why. More as well in this audio commentary.