Planet Yelnick

Astrological Fireworks in Stocks

Virgina Jim asked a few questions in a comment to the prior post.  They include a crash window from the sky.  You should be aware that I am highly skeptical of any astrological indicators. 

1) Hyperinflation or deflation? You ask: "am I correct that Fibonacciman (Jeff) is on board with the imminent hyperinflation (dollar collapses) scenario?" Fibonacciman thinks we have avoided the deflationary depression and is more worried of inflation. I think he and others who have reached that conclusion are premature. The deflation will not sneak up on us, but follow a series of debt write-offs which haven't really started due to the massive liquidity thrown out by the Fed. It might await the coming OptionARM resets and how they cascade; or it might be sparked by a shock in China as their stimulus runs its course. (They show a turn-up in their economy that seems to be more due to stockpiling of real assets like iron from Australia rather than any increase in real production of say steel. The iron sits on ships and in storage.) 

2) Head & Shoulders? You ask: "I have a pet peve with most the head and shoulders applications. Edwards/Magee never intended it to apply to trends less than primary or secondary and they commented on it in that regard as I recall." H&S pattern is oft-seen and seldom realized. I view it as a subset of a variety of patterns that reflection distribution of stock. The way elliott waves seem to hover in a range from the peak of 3 to the start of C down is a similar pattern (4 and 5, then the a and b down, often mirror each other - look at the S&P from 97 - 03). We see the same pattern from early May until now, with Jun11 as a pop-up outside a two month trading range. These reflect the former bulls getting out, and new bulls getting in (too late). Whether they *always* fall below the neckline as much as they pop up I am sure is more myth than reality. Perhaps the situation you describe shows it as higher odds. In my view the distribution pattern itself, vs a accumulation pattern is key to discerning trend. This trend still points down.

3) Crash Alert due to the Puetz Window? You list the window from before the coming solar eclipse (Jul22) to the lunar eclipse after. (see below the fold.) I have seen the Puetz Window described differently; perhaps I am thinking of Carolan's similar work, or Peter Eliades'. I recall that almost always the major crashes come after a solar eclipse, at around the first or second full moons, especially if one or both are also lunar eclipses. (We should recognize that whenever a solar eclipse occurs, one or two lunar eclipses are likely due to the orientation of solar and lunar positions.) Maybe it also included the prior lunar eclipse before the solar; but the key point is I thought it went two lunar eclipses after, or a window of 2 to 6 weeks after the solar eclipse. If so, the risk extends to the end of August or early September.

Where Markets Go From Here

I am hearing a lot of folk ask whether they stay in or get out right now.  We had about as clear a signal on Jun11 that a top was in: we came out of a trading range (triangle) with a false break and almost immediately fell below the prior trading range.  This is a clear Bifurcation Point.  Since then the market has dropped in a zigzag (535) down, confirming the change of trend from up to down.  It was about at the bottom of that pattern that I began to get the questions.  Of course, almost at that time the market bounced.  

That bounce has left us in an ambiguous situation: the S&P failed to confirm the Dow's new low, and the bounce was larger than the corrective wave b in the zigzag down.  Both are signs that a near term low is in place.  But as Friday's STU makes clear, the trading volume on up days has been "anemic." (They also give additional indicators.)  So watch the Dow Monday to see if it has a jink down to complete the down move, or joins the S&P and Naz in a bounce.  Futures are down right now, but that often is not indicative of how it will perform during the trading day.  

Could Jun11 be THE top?  Possible, but the EWFF thinks not.  (For those of you who don't want to sport for the thrice-weekly STU, the EWFF is an informative and much cheaper alternative.  This month's issue has a lot of good stuff in it.)  Their primary reason is that a typical wave 2 reversal should go more than this one has; more likely to at least 38% retrace of the whole drop, if not 50%, which targets between 9K and 10K on the Dow and 1000 to 1100 on the S&P.  In contrast, Neely has called Jun11 as the top.   Yet he too has expressed concern that the down move has stalled. 

One useful tool that leads to Neely's concern is to draw the up slope from Mar6 to Jun11, and then draw a same-angle downslope off Jun11.  If Jun11 were THE top, we would expect a sharper drop down than the rise up, and be inside that same-angle down line.  We have been below and above that line. As the down movement stalls, the odds increase that a Final Surge up is still ahead.  

The next two days are end of month & end of quarter.  And a pretty good quarter it has been!  We have seen a pattern of sharp rises on the last couple of trading days in a month and the first few of the next month.  This time, however, money managers may want to lock in their quarterly profits and lighten up for a few days.  If the market trends up, I expect them to stay with the trend, but on a downtick they bail. So be prepared for a downish end of June and then a sharp run up in early July.

A possible head & shoulders pattern is forming in the S&P. if the right shoulder forms (an up market) then fades, look out.  I hope that Yves will comment if this is what occurs.  

The USD seemed about to make a run, and then faded.  It might retest the recent lows first, and this may come with the Final Surge.  Weak Dollar, strong Dow pattern.

If we do run up in July and exceed the Jun11 high, a lot of bulls will come out of the woods and proclaim a new bull market!  In another clear insight from the EWFF this month, we can summarily dismiss that scenario.  Volume has decreased as stock prices have increased, a classic bear market rally pattern. If this were a new bull, volume would increase on the rise in stocks.  

A Look at the Longer-Term Wave Structure

Upstart asked a question about whether the 2002-07 period was a wave 5 or a B wave.  EWI has also been asked similar questions, including whether the 2000-2009 period could be considered a wave 4 flat that is almost over.  Wave 5 to come!!  New highs!!

This month's EWT takes a stab at this question.  They note that the flat structure looks best in the S&P, but less so in other indexes, including the Dow.  Further, the whole formation looks long and huge for a wave 4 of the bull run since 1974 (nominal) or 1982 (real), especially compared with wave 2 (76-82 nominal, 87-91 real).  Also, the bull had such a disproportionate run up in time (26 years from 74 to 00 compared with 5 years in the last wave 5 from 1925-29), for this to be still in that wave 5 seems low odds.  An the killer is that the exigent circumstances are the worst economic debacle since the Great Depression; hardily the set up for a minor degree wave 4 and a continuation of a bull market.  So, no.

To me a more interesting question is whether the 2002-07 move was wave B or a final wave 5.  It is more reasonable in time and structure to make the 2000-2002 drop a minor wave 4 of the bull, and 2002-07 the final wave 5, then for the whole move from 2000-09 to be a minor wave 4.  One way to distinguish a B from a 5 is sentiment.  Fifth waves (unless they extend) are not as strong across the board as third waves, whereas B waves tend to have more extreme sentiment.  On that score, this seems much more like a B fake-out than a 5th wave whimper.  

In the short run, it doesn't matter; the wave down off 2007 has more to go whether it is wave C of a large bear market or wave A of the beginning of a bear market in 2007.  In the middle term, it could matter, as to how long until this secular bear ends & how low it could go.  More on that below the fold. 

How Low Could It Go

The prior post has several questions relating to the count - specifically, if Prechter (and Hochberg of the STU) see the coming wave (5) as merely ending a wave 1 of a much larger five waves down, how low can this go?  I believe the Prechter view (which he has kept close to his vest) is we will most likely end in the range of the prior 4th wave (4th of the 3rd), which he counts as the 1987 crash:  Dow fell from 2700 to 1700; S&P from 336 to 220.  But they have not pushed this view, since it seems extreme; and they have kept their options open on when such levels could be reached.  Let's take a deeper look. 

Are Small Cap Value Stocks the Way to Play the Rally?

Small cap stocks led us out of the recessions of 1980 and 1982.  Value stocks are in vogue today ala Warren Buffet.  Today the NYT commented on whether the right play is to combine the two: small cap value stocks.  They have fallen less (31%) than the market, and since 1963 they have outperformed the market, especially in the first year off a market bottom, and very much in the first three months off a bottom.  In a nutshell, they lead the market before the herd realizes we are coming out of a recession.  Comments welcome.  Timing discussion below the fold.

The Prechter Predictions

Back in 2003, Bob Prechter put out his longer term predictions for the secular bear market - not stocks so much as the overall change in social dynamic.  He is now publishing these predictions and I thought it worthwhile to pass them along.  It starts with the general change in social mood of bull to bear markets, and then makes 100 specific predictions that should come true by the end of the bear market, which in 2003 he thought would be around 2014.  I highlight a few of the interesting ones.  Enjoy.

Does the Neely Diametric Provide Better Insight?

I have mentioned a number of times how wave approaches work best during impulses when a direction is clear, and poorly during corrections.  Prechter has 11 different corrective structures, but only two impulse structures, reflecting the normal behavior of a corrective process to unfold in a complex fashion.  This should not be surprising since corrections reflect market uncertainty around direction, and markets show a push-pull bounce between perspectives until a direction emerges.  In normal times these unfold slowly enough to enable an investor to catch the upside.  In volatile times as now, the move in the new direction is often rapid - consider the whipsaw day yesterday.  Hence the need to have a better method to ascertain when the break really occurs. 

Glen Neely has extended Elliott Wave with several new rules and forms, including the Diametric, a seven-wave corrective pattern, and blended into this form time, which is a key to picking a bottom or top.  There has been a robust discussion of this in the comments, including here, here and here.  In addition, as pointed out by an astute reader here, since they both map the same market moves, the Diametric and other new forms can be mapped back into traditional Elliott.  Question is which approach gives better guidance? 

Let's see what Neely himself says about how to apply time to a correction, how to use the B wave to predict the corrective pattern unfolding, and how to distinguish various corrections from his Diametric using time.  Finally, given the recent triangle, a little Neely wisdom on triangles.

The Hope Triangle

Pretty solid STU tonight, giving good explanation of why this is developing as a triangle and not their flat or truncated fifth counts.  This type of analysis is very helpful to subscribers (such as myself!) who wish for more analysis beyond the prognostication.  The triangle means a meander with some positive news jinking the falling d wave into a final upwards e wave, then the sharp drop down below the Oct10 bottom.  In contrast, Neely thinks it time to short again, expecting in the next 1-2 trading days the S&P will retest October’s low.  Both of them would then expect a fairly good bounce followed by an even deeper drop to greet the new President. Let's explore why the STU thinks this has a ways to go before the retest.  

Are the waves working?

After Neely's emergency bulletin, where he said govt intervention was affecting waves, Prechter came back with today's EWT saying the waves incorporate govt intervention and are working. This morning Neely sent a new bulletin and a chart (available to his subscribers), saying he "figured out how to properly adjust S&P wave structure to get it "back on track" and maintain the longer-term structure and perspective."  His view: next week we will see a panic sell-off and hit the lows for this year.  Then (presumably) The Surge commences - in my wave count, a b wave of an abc zigzag from Oct07 to ~2010, which is the C wave of an ABCDE triangle from 2000 to ~2014.   

I am not calling The Surge yet - let's see how next week develops.  Both the STU and Neely agree that softness on Mon/Tues will spark a panic rout downwards.  Whether it ends quickly (Neely) or drives deeper than anyone imagines (Prechter) remains to be seen.  Some of my readers have pointed to the next turn date of Oct2, which coincidentally is the night of the Palin-Biden debate.  The race could be decided then, given the continued inordinate attention to Sarah Palin - gaffer or gipper in one night.  So let me suggest that we have a two week period to see where this is going, 

Next Thurs Sep25, Yves will chime in on Bloomberg TV at 17:00 ET.  We should have good visibility whether we are in the STU Cliff down, ending the Neely Panic, or amidst the Yves Buy. 

Neely River Not Overflowing Yet

One of the indicators Neely uses much more than Prechter is whether a change of direction goes faster than the previous trend.  In this case, the drop off the late May top has been fairly steep, much steeper than the rise off Mar17, but it is starting to stall.  Neely compares it in a fractal sense to the drop into Mar17.  If it continues with that sharp of slope, it would confirm confirm the change of trend.  Zoran was a fan of this (which I gather came from Gann), and the Elliott Fractal site also watches such fractals, a modernization of Gann.  In a simple sense, it shows whether the impulse waves down are continuing, broken up by plateaus/corrections.  This now requires the S&P to break 1300 within a few trading days, and that is looking improbable. 

We may now find the rally up from Mar17 is not over, and it may break as a larger ABC upwards, with the last few days the end of the B wave.  Even more bullish, it supports the view that the wave down into Mar17 was an X wave of a complex correction since Jan22, rather than wave 5 of an impulse down.  If so, this correction may meander for several months before we know the trend: the Big One down or the Surge up.  In the meantime, Dollar seems to be *really* rallying, as the Euro has continued down, sharply in the last two days.  Next week is options expiration, and usually we see a market rise into the third Friday at the end of the quarter.  Enjoy the summer, and watch GOOG and other tech leaders for an early indication of the trend. 

Bubbles and the Line of No Return

About every line in the sand has been washed away with the recent rally - EventHorizon's Dow12528, the recent Feb highs, the hedging of Hochberg (he still expects a decline to start shortly), Dow Theory (Friday's close above 12,743 got us back to a buy signal so quickly), the Google surprise, etc. etc.  A close above SP1400, and then a run above Neely's final line of SP1475, and game over.  So, expect a pullback next week!

How can the Fed survive the last decade?  Greenspan bails out LTCM in 1997, and causes the Dot-Com Bubble.  Greenspan kills it in May2000 with a 50 bp rate increase, and Congress over-reacts with really terrible attempts to 'fix the problem' that have had the effect of killing the golden goose of the US economy - tech jobs, the last bastion of high-value jobs against the Chinese onslaught of cheap manufacturing.   Then he re-inflates in 2001 and creates the Housing Bubble, inducing a generation of Boomers to stop saving and bank on their home equity for retirement.  Oops!  Then Bernanke reinflates after the July credit crunch, and the hedge funds have rushed into commodities to deleverage from subprime debt and the Dollar.  Up 40% across the board in 6 months, to the unintended effect of a huge spike in food, especially rice, and now perhaps 1 Bilion (yes Billion) people under threat of food shortages. 

The Next Big Bubble, the Commodities Bubble, is being recognized as such. Let's take a short look at bubbles. 

Election Year Pattern - May Bottom?

Great chart on election years being choppy until May (or perhaps more precisely, until the contours of the coming election are clear).  We might have a clear pair of candidates by early Wed morning (John Wayne McCain and Barack "Yes We Can" Obama), but we may have to wait until the early-election dirt is exposed in the late Spring (Clinton did a number on Dole in 1996; Bush did a similar job on Kerry in 2004).  Patterns come and go and have no predictive power unless based on underlying causality.  Like the Four Year Presidential Cycle, which is driven by interference in the economy to get elected, this pattern is apparently driven by removal of uncertainty.  My thanks to Deacon (see reader comments here) for pointing this chart out. 

Hop on the Hochberg Hedge

Lots of good comments to the prior post.  I decided to bring this to the front due the importance of the next few trading days.  Please check the prior post comments.  EWT Trader makes a great observation.  Mark Lytle sees a broader bearish pattern, and in an email exchange Tony Caldaro essentially agrees that his count is showing overbought.  (Check out Tony's blog).  In tonights STU, Hochberg says the slowing momentum means this counter trend rally could be over, but leaves open that the coming options expiration Friday is a wildcard for possibly delaying his Little Big One down.  Similarly, I still expect the next downturn to begin at or after Feb19 after the coming three-day weekend in the US. I remain doubtful that it is the Little Big One. Keep reading below the fold for a Zoran View as to why.

Read This Book

Fibonacciman has written his book, and it is a darn good one: Breakthrough Strategies for Predicting Any Market: Charting Elliott Wave, Lucas, Fibonacci and Time For Profit, by Jeff Greenblatt (Marketplace Books, 2007).  Jeff attempts to boldly go where no Elliottician has gone before: timing.  He also rediscovers Lucas Numbers, a complement to Fibonacci sequences.  The book is well written, has loads of charts and examples, and has enough depth that a scholar of Elliott will find himself going back to it over and over for insight.  I have had a copy since the summer, and have taken my time to understand Jeff's arguments and examples before committing to an opinion about the methodology and the book.  Let me provide some perspective on recent Elliott history to put Jeff's achievement in context.

Mother of All Margin Calls

Prechter Explains All today in a his July EWT.  I have previously posted that he would have to modify his long-standing count of the Big One down, and he has:  the next major bottom is either 2010 or more likely 2014.  You can read the EWT to see the historical patterns that lead to those dates, but they are consistent with many previous posts here - and astute comments from readers, several of whom have shown themselves to be better wave analysts than the commercial services.  We now are entering the set-up for what a recent pundit (I have unfortunately lost the link) has called the Mother of All Margin Calls.

Howling at the Moon

It's a full moon, and the end of the quarter, when funds do a little portfolio pruning.  Don't read too much to last week's market moves.  What gives in the first few days this week should be telling.  Prechter's monthly EWFF sees the top as in, and the Big One commencing in a C wave that should go deeper than the A wave from 2000-2002.  Neely sees a developing triangle and upside afterwards.  The Elliott Bulls see us in a large five wave pattern where any correction right now is but a 4th wave with a big wave 5 to follow.  All three views can be held unless the wave down goes too deeply, or reverses too quickly, so any clarity this week is but short lived.  How to make sense of this?

Bull Flu Disease

A roundup of analysts beyond Prechter show a convergence of views from different starting points, indicating a serious correction in 2006 but a delay in the Big One Down until after 2008.  This is consistent with the Yelnick view that 2006 will be a down year under the four-year cycle, but the downturn would not begin until late May/June - this is why last year's call of a top by Prechter was called a Wolf! Wolf! call - and that the real downturn will be delayed until after the 2008 Olympics because the Chinese will spend what they have to to keep it going until then, their Y2K moment. Let's take a look.

Zoran's Unfinished Symphony

I received a sad email today, that Zoran Gayer had passed away.  The Elliott community has lost a great one.  For those who have been reading this blog for several years, you know how much I respected Zoran and his analysis.  We occasionally discussed issues in both his theory and its application.  I had been encouraging a friend to help Zoran commercialize his thinking.  Based on comments and emails, I know a great number of you were fans of Zoran, and were eagerly awaiting the synthesis of his thinking in what we expected would be a ground-breaking book.  My condolences to his family, friends, clients and admirers. As a fitting summary of how I feel, let me share a post of a good friend and colleague of his, Richard Williams: 

With great sadness I have to inform you that Zoran Gayer passed away Monday night in Australia. He was a great friend and teacher. One who will be missed greatly.

Zoran was unusual in his willingness to share any discovery or knowledge, thinking that it was just part of being human. His work on EWT and behavioral aspects to trading have greatly assisted many, many people who knew him and fell under his tutelage.

His brilliant mind and enormous curiosity made it possible for him to look at the same things that most of us do, but to discover aspects that no one else that I have ever known has done. His latest theories of how mass psychology works to shape market behavior were remarkable.

He joked with me that he had another lifetime of work to pursue. And that wasn't far from the truth. He intended to die with his boots on, having lived a life that was full and rewarding.

Zoran, may you find the answers to all the questions we pondered in the next life; and some great waves too!

Prechter Trends Towards Yelnick View - Then Predicts Crash!

Prechter's current EWT is fascinating.  This is another Free Week - check to see if it is available, for those of you who do not subscribe (yet).

He faces the possibility that the Dow will go to new highs, and this will blow his count, at least in the Dow (the S&P and Naz remain below their highs - the Naz waaay below).  Yet he remains an indubitable bear, now calling for a crash in the next 18 months - see below for the rationale.  In preparing for this, he begins to adopt some of the core Yelnick Views on the market.  Now, Yelnick in general does not add yet another count to the countless Elliott Wave counts, but tries to extract a consensus view from the babble; yet at times, when the dissonance is high, Yelnick proffers at least a point of view.  As EN points out, this is more an intellectual curiosity than a traders' mantra.  With that in mind, it is quite intriguing to watch the Great Man himself begin to shift to an alternative set of positions.  Let's take a look, below the fold.

Beyond the Planet of the Wolf! Wolf!

I do not normally drop in personal notes but after all the comments recently on Prechter I feel it is time to give a perspective. 

I encourage readers to also read and contribute to the comments. We have some readers who follow Elliott Waves fairly closely, and others new to it, and others just out to have a bit of fun; but there is a lot to be learned by following the comments and in particular the more astute commentators. I read the comments and incorporate their analysis & questions into subsequent posts.

As an aside, I do not do Elliott Wave analysis. Doing it right takes rigor and discipline - and interpretation.  Even The Elliottician with their Refined Elliott Trader software need to interpret the possible wave patterns. Instead I report it, and try to suss out a consensus. Having watched Prechter and others going back to the '80s, I have developed a certain feel for the pattern, and can more easily see the miscalls than the correct calls. I started the Wolf! Wolf! series because I thought Prechter's initial Wolf call was off the mark. So far, way off.

That said, at the end of this post I will give my current view of where we are with wolves (or bears or bulls), but first wanted to discuss Prechter.

Kondratieff Winter and the Greenspan Indian Summer

When Greenspan made his recent remark that he knew how to beat the Kondratieff Winter, it brought to the forefront what had been an obscure problem in economics.  The Kondratieff Winter is the deflationary depression that follows a speculative bubble.  Every major bubble in US history has led to Kondratieff Winter: 1837, 1873, and of course 1929.  Fortunately, they don't happen very often - about once a generation.  Unfortunately, it is our time.  Greenspan's prescription is to provide massive liquidity, which he certainly has done since the dot-com bubble popped in 2000.  Has he staved it off?

The mainstream business press is beginning to focus on this issue.  The Wall Street Journal ran a front page report at on the conundrum that Greenspan faces: by providing such liquidity, he may have staved off the Kondratieff Winter (for the moment), but he has created distortions elsewhere, in the real estate bubble, increasing trade deficit and massive US borrowing from overseas.  The New York Times Sunday Magazine ran two pieces the same week, perhaps unintentionally connected, one on Gold Bugs patiently waiting for a return to a gold standard following a Dollar collapse due to excessive debt, which is the cause of the Kondratieff Winter; and the other one about semi-luminaries in Silicon Valley still striving to make a killing, having not made enough during the bubble ("$10 million is but chump change") - they still believe another bubble awaits their good fortune. Since then we have had so many real estate bubble stories that one could say that there is a real-estate-bubble STORY bubble.

This is a high contrast issue for investors.  In a Kondratieff Winter, cash is king, and one needs to conserve it to survive the period.  In a Kondratieff Spring, a rising tide lifts all boats, and an investor should be "all in."

Muddying the issue is that every crash has a bounce, a wave 2 or wave B, before continuing to drop.  Investors who were confident at the prior top are even more convinced during the bounce that they caught the bottom. Normally the bounce comes quickly, and ends quickly; but this drama has unfolded in an unnerving slow-motion for the past five years.  This makes it even harder to discern the onset - or the end - of the Kondratieff Winter. Which is it?  Investors remain bullish, and the Cassandra's are dismissed. (As a living example, check all the comments to the recent Wolf! Wolf! posts; the uber-Cassandra, Prechter, has called the top prematurely so many times his opinion is now a contrarian indicator.)  Yet we must remain cautious about whether 2003 marked the bottom.  The normal markers of a bear bottom were not present - low P/E ratios, lack of interest in equities, and a burst of new investment based on fundamentals.  Instead, we have the disturbing trend of massive US borrowing to keep the economy afloat, a truly unprecedented occurrence.

Clearly Greenspan's efforts, combined with Bush's fiscal profligation and the expense of the war in Iraq, have all contributed to smooth over the brief recession after 2000 and pave the way for a slow-motion unwinding of the excesses of the bubble.  We have experienced few of the types of problems that we went through in the three prior K-Winters.  Even the mildest of them, from 1873-1896, was a worse deflation, and in the final three years, 1893-96, a much steeper recession (they called it a Great Depression at the time).  Are we past it?  Did Greenspan stave it off?  Or is it awaiting us in the next ten years?

In the middle of the Greenspan Indian Summer, it is time to consider this issue. 

Son of Wolf! Wolf!

Prechter's Wolf! Wolf! prediction last week was back in the kennel after the first few hours of trading Monday. Nevertheless Prechter's analysis as of Friday showed a thrust out of an ascending triangle, which he sees as an ending pattern. Hence he expects a down week, maybe starting Monday after one *possible* final thrust up at the open. So he doggedly sticks to his analysis, and might be back in the doghouse after Monday once again.

In contrast, Eric Noel (a sometime Yelnick commentator) reports that Neely sees us as about to continue a bull thrust that began at the recent May lows (not the April lows), and Eric expects bullish sentiment to become higher than at either the 1987 or 2000 tops.

Zoran sees this as likely part of a larger Rising Wedge since Jan04, which is bearish; but possibly the whole pattern is a Running Triangle, like we saw from 1987-1994, which broke decisively to the upside (ie. the dot-com bubble started!). He sees us coming off the Iraqi War Triangle of the triple bottom in Jul02/Oct02/Mar03 with a clear Bifurcation Move up to Jan04, followed by an extended trading range until quite recently. Like Neely, he marks the recent low as in early May not April: even though the April bottom was lower, the wave pattern that followed looks like an overlapping, corrective triangle that ended in May with a clear Bifurcation out of the triangle range. That thrust stalled in the June trading range, but as of last week has decisively broken out of the trading range into a new Bifurcation upward. Hence he expects continued upside next week. Time will tell if this is a bearish rising wedge or a bullish running triangle. If you review his most recent report, he includes some slides explaining his concepts, which apply Chaos Theory to Elliott Wave and seem to give clearer guidance as to where we are.

Thus Monday provides a clear test of differing wave approaches.

Diogenes the Cynic once listened to Zeno's complex analysis of why motion is impossible. Diogenes stood up and walked away. A simple refutation! So for you cynics out there, since Friday was an options-expiration Quadruple Witching Day, the thrust that has caused all this complex Elliott analysis may be simply anomalous.

The Zoran View - "Dow 100K" is attention seeking and useless

Zoran views these sensationalist predictions of Dow40K or Dow100K as nothing more than marketing ploys.  His contribution is to apply Chaos Theory to Elliott Wave.  Prechter, Neely and moist other Elliotticians are determinists.  (So was Elliott himself, but he did his work during the early days of Quantum Theory and well before Chaos Theory, and hence can be excused.  Not so the others.)  Chaos Theory says the market seeks order, but there are many possible futures that are ordered, and hence long-term predictions have little value.  Markets go through periods of chaos (corrections) followed by periods of order (impulses), split by the Bifurcation Points where disorder is maximum.  In that sense we ride along at the edge of chaos in the market.  This is no different from other natural systems.  Chaos Theory is showing that all natural systems self-organize. This propensity for self-seeking order will always look predictable and orderly in hindsight.  The trick is to use those patterns to find the near-term direction of markets. 

Zoran provides more on this in a comment to the recent Neely post.

The Dent View - Dow 40K and the Double Bubble

Harry S. Dent caught dot-com fever early, published The Great Boom Ahead in 1992, and called the subsequent mania - all at a time when the punditry was largely negative and Prechter was positively Armageddic. He then wrote The Roaring 2000s, and was a bit taken aback by events, but undaunted he wayed in again in 2003 with The Next Great Bubble Boom, predicting a final wave 5 from 2005-2009 that should bring the Dow to between 35K and 40K, and the Nasdaq to 10K-13K. This is nowhere as high as Neely's Dow 100K, but then, Neely gives the market 50 years; Dent gives it 5.

He uses trendlines to make his target predictions. His view is that we finished 82W4 in 2003, and have begun 82W5. (His comes up with the same result if this is 74W5.) Currently we would be in wave 2 down of 82W5, with a very strong wave 3 up soon to come. The trendlines in the Dow are constructed by drawing a line from the bottom in 1982 through the bottom in Oct02/Mar03, then drawing a parallel line through the top in 2000. In the Nasdaq, the trendlines are drawn from the bottom in 1991 through the bottom in Oct02/Mar03, then doing the parallel line through the top in 2000. It is not hard to see how very high numbers result; these analyses essentially assume that the mania will continue through the end of 82W5. Would that the world worked that way! A scathing critique of Dent's views was done by John Mauldin, and expanded on here. 

Dent combines a variety of analyses, including demographics, spending patterns, S-curves and Elliott Wave. More can be found at his website. Once we get past his self-promotion (why else make such an outlandish prediction?), there are some things to extract from his work.

The Great Wave Debate - Neely vs. Prechter

Guestblog from Eric Noel:

There is not much debate among technical analysts that the 2000-2015 time period has been and will continue to be a secular bear market in stocks. Elliott Wave Theory aside, the stock market has been following a sequence of alternating 15-20 year secular bull and bear markets for decades.  The real debate begins when the question is asked: "How low will the market go before the next secular bull market is born?"

From an Elliott Wave perspective, two very divergent camps of thought have emerged: 1) Robert Prechter and his followers; and 2) Glenn Neely and his followers.  Prechter practices traditional Elliott and has applied it to the social sciences in the fascinating 2 volume book "Socionomics".  Neely has extended Elliott's original work into a discipline he calls "NeoWave".  Both Prechter and Neely are highly creative thinkers.

The Neely View - Dow 100K

Yelnick readers have been pointing out that much of Zoran's approach is borrowed from Glen Neely, an Elliottician who split from the Prechter school in the 1980s, and made a bold prediction in 1988 that the 1987 crash was not the end of history (as Prechter predicted back then, as now) but merely a blip on the path to a spectacular Dow 100K.  Neely laid out a 70 year view, seeing the 100K peak in 2050-2065.  He was roundly ridiculed at the time, although his view looked a little more prescient (but just a little more...) around Dow10K in 1999. Neely is back, holding to his prediction, and laying out a near term scenario that is similar to the Yelnick View: the peak in 2000 was the end of a wave 3, and we are in a wave 4, with new highs ahead in a coming wave 5.   But to make it clear, Yelnick differs from Neely in how he gets there and how far he gets - Yelnick does not subscribe to Dow100K in anything like a reasonable investment horizon! 

More on Neely's view can be found in a recent interview, reported here and discussed below. 

Triangulating on the Wave Count

This wave 2 has subdivided into a more complex correction.  A bit of a relief, actually, as the call of Prechter and others a little over a week ago that this wave 2 had ended after an anemic 38% retracement was a bit aggressive and did not fit the larger pattern seen by Yelnick.  Normally wave 2s go back 50-61%.  We are now right at the 50% retracement for the Dow.  If it keeps going up the 61% level is 10609.  As Yelnick first expected, it might even go back as far as 78%. The next turn window is next week, around May31, so watch for it hitting 61% or 78% during that time period. 

Loyal Yelnick readers have begun commenting or emailing with alternative counts. 

Zoran Fall Line

Yelnick has been watching Zoran develop his approach.  We have noted how normal Elliott does poorly during corrections.  So we watch for a Zoran Bifurcation Point - a run up or down that breaks out of the trading range, as happened off the Mar7 top.  How do we know the break is continuing? Another tool Zoran uses is the Expected Rate of Fall (or rise), which for convenience we will call the Zoran Fall Line.  In general the move off the break should run faster than the prior move, and usually twice as fast; hence a line can be drawn with the same slope as the rise - the Control Line - and a second line with a 2x steeper slope - the Fall Line - and we can watch how well the drop does against it.  Staying within the Control Line means the break is continuing. 

Zoran has done this for us, and reports that last week the S&P moved slightly above the Control Line, then promptly dropped down to the Fall Line.  The Dow touched the Control Line, then dropped down to the Fall Line. Hence whatever manipulation may have been attempted by the Fed when they changed their announcement, or Kerkorian when he bought into GM, has been laundered by the larger downward momentum of the market. 

Zoran sees the next test as the lows of a month ago (Dow10k), and believes we will have a fast run down Mon and Tues this coming week.  Similarly, the STU expects a drop next week as well, down to test Dow 10K.  Last week the Dow hit its 200 DMA and dropped, and overall the bounce from the April bottom has only gone 38%, a fairly anemic wave 2.  Other Eillioticians expect a bounce early this week.  Hence the first two days should clarify if we are indeed in the wave 3 of 3 down, or still putzing around.

In Search of the Bifurcation Point

A famous piece of sage advice is no one ever got rich by selling at the top. The bulls make money, the bears make money, but the pigs get led to the slaughter.  Yet the desire to predict the top goes on.  Given the coming Last Chance Saloon to bail out of the market, how do we know when it arrives?  To put the question the way a loyal Yelnick reader did: how can we predict the Zoran Bifurcation Point?

The backstory is that this week we had a fairly clear end of a little wave 2 and were beginning the wave 3 down when on Tuesday the market turned and shot up at the end of trading. Did this mean the wave 2 had legs, or was it a typical short squeeze that would be quickly retraced? For those of you who took advantage of EWI's intraday chart free week, it was clear during the day on Wednesday that wave 3 had continued. The short squeeze was retraced very quickly. Some of the ewavers put out Wed bulletins - Fibonacciman for example - saying watch out for vertigo ahead.

Yelnick comments on stock market issues, and tries to find the consensus view among the ewave punditry, rather than try to add yet another opinion to the mix. When the punditry is mixed, Yelnick will proffer an opinion. Yelnick noted the issue on Tues, noted the retrace on Wed, and put out a Dow Sell Signal report on Thurs. By the end of this week, even the shoeshine guy on Wall Street knew to bail out of equities. Wave 3's are when the herd recognizes the trend.

Was this week's drop predictable?

Turn Turn Turn

We noted in Divergences Abound that several Turn Dates were approaching.  We came through our first Turn Day of Feb 16 with a turn in all indices to the day.  Kudos to both Fibonacciman and Robert McHugh for their calls. What happens next is unsettled in the ewave community.  Most expect continued downside, at least in the near term; even the bullish The Elliotician sees a little more down before a continuation to much higher levels. 

These turn dates have not yet been systematically incorporated into Elliott Wave Theory and should be looked at as a promising experiment.  Yelnick has recommended to Prechter's organization that they put more focus on this topic; perhaps they will (at the next Free Week no doubt).  Currently they are several leading proponents of Turn Dates, including Prechter's Elliott Wave International itself. They use different methodologies, and sometimes come up with what we now have: turn dates at Feb 16, at Mar 4, and at Mar 16.  It is likely some sort of turn happens within a few days of those dates, and someone will be able to crow about it.  As they say, even a broken clock is right twice a day. In the meantime Yelnick will watch these for you and attempt to separate the wheat from the chance.

FIbonacciman has made some good calls, so we are watching his newsletter. Robert McHugh's method seems to be working the best: his posts are publicly available to check (although he is shortly to go to a paid newsletter service, sad for us who believe the proper model for the web is ad-supported and freely exchangeable).  He describes his method and success as follows:

Since this dramatic date [Jan 14, 2000], every single market top or bottom of measurable significance has occurred precisely in a Fibonacci .618 to .382 ratio of trading days from either that starting date 1/14/2000, or another top or bottom that has occurred since 1/14/2000, based upon closing balances. This is astonishing! A mathematical formula has been 100 percent correct in predicting market tops or bottoms in the Dow Industrials since the Bear began on January 14th, 2000, exactly five years ago today! Every top. Every bottom. Every turn. Each, an exact Fibonacci ratio number of trading days from the Bear's start and from another top or bottom during that Bear. And the trend continues.

The STU has a different next turn date of Mar 4.  They get there by noting the decaying technical indicators of this market and trying to predict the next turn based on a cyclical set of patterns since 2000.  Ironically for the leading proponent of Fibonacci ratios, these cyclical patterns are not Fibonacci based.  Doubly ironic for them as perma-bears, they think we have more upside to go, whereas as McHugh for example thinks the top is in and the big drop coming fairly quickly.  The STU sees both a 247 trading day cycle and a 360 calendar day cycle marking major turns in the S&P since the top in Mar00: 24Mar00 (top), 22Mar01 (bottom), 19Mar02 (top), 12Mar03 (bottom), 5Mar04 (top). They point to the next turn date in the period of 26Feb to 4Mar.  They expect yet another March to come in like a Bull and out like a Bear for the S&P.  Interesting is that the top/bottom pattern might instead suggest a drop from Feb16 to Mar1 or so, then a turn upwards.  Watch this space for the next few weeks.

Rethinking the Wave Count - the Dollar/Dow Ratio

Now that Prechter's Elliott Wave International is in Free Week, it is putting out some very interesting titles. Perhaps the web is learning from TV - the best shows are on during the ratings sweep periods.  This month in the Elliott Wave Theorist Prechter himself tries to explain why his calls seemed to misfire around Oct02 to Mar 03.  His answer: he likes to watch the Dow in nominal terms, but he is rethinking that, because when the Dow or S&P are adjusted against a stable basket of currencies, the wave count looks right.  Put differently, with the Dollar dropping 33% in the last three years, global flows of money can move to adjust, and so a relatively flat Dow in Dollar terms actually is a drop of 33% in stable currency terms.  And this is what happened: the Dow and S&P dropped farther against a stable currency than they appeared to against the Dollar. 

Yelnick has long taken the view that a constant-Dollar Dow is a better index to count than the nominal Dow.  Perhaps normally the nominal Dow is watched and influences market participants, but during periods of high deflation and inflation they adjust for the value of the Dollar. 

The Bullish Case 2005

This blog site evolved out of a private newsletter, which explored whether the drop off Jan00 is a wave 4 with a wave 5 to higher levels to follow, or a wave A as Prechter thinks, the beginning of a long and deep bear market. Yelnick has not laid this out for a while; you might take a look at an older post called The Big Picture, which was updated in a post called The Bullish Case and laid out this summary:

The question right now is whether the correction since the 2000 peak is 50W4, a major correction of the magnitude of 50W2, which lasted 16 years; or 82W4, a smaller correction in a continuing bull market. So far the broader market is down 50% from the 2000 peak as compared to the beginning of 82W3, a normal wave 4 correction that would fit the view that we are in 82W4. If so, 82W4 could have ended in Oct02 or Mar03, and we have begun 82W5; or 82W4 is still proceeding, and we have another wave down ahead of us. (It would count as an ABC, with the A wave down to Oct02 or Mar03, the B wave having possibly ended recently, and we would be in the beginnings of wave C down.)*

Some of the e-wavers have counted the move off the bottom in Oct02 as the start of 82W5. There are two quite different views of this wave 5, if it is a wave 5: The Elliottician believes we are in a new bull market that will go to new highs; whereas Zoran expects a truncated fifth wave, meaning one which does not go to new highs above the prior third wave. The Elliottician's view would expect us to make new highs soon, regardless of any January Effect or Presidential Cycle. Zoran's view is that the truncated fifth wave will presage a continuation of the bear market; indeed a major drop that would be 50W4, correcting the rise since the bottom in 1949, rather than 82W4, correcting the rise from Reagan's Morning in America.

This is the fundamental question right now: are we still in an up market, or about to continue with the bear?

Zoran Bifurcation Theory Explained

Zoran has kindly given permission to share his thinking with the Yelnick community. He has been working on advancing Elliott Wave theory based on more modern mathematics of living systems that come from the investigations at the Santa Fe Institute and elsewhere on Chaos Theory. It turns out that many seemingly random systems - such as the stock market, viz the famous book, A Random Walk Down Wall Street - are actually following an underlying order. The randomness or "chaos" patterns itself around a deeper pattern, and goes through times of unpredictability followed by times of order. Many systems run their most efficient right at the edge of chaos, at the border between predictable and chaotic. Living systems also show emergent order, where seemingly independent actions begin to organize themselves into a coherent system. Chaos Theory may soon postulate that there is an underlying Self-Organizing Principle to the Universe - systems tend toward order not chaos. If such a Principle were developed, it would rank with the Laws of Gravity, Conservation of Energy, and Entropy as one of the monumental achievements of science.

Elliott was one of the first to develop a theory of order from the seeming chaos of the market. His mathematics reflected the thinking of his time, a mathematics based on classical physics, linear thinking and statistics. Prechter has greatly expanded the thinking of Elliott in his search for the underlying causality of the Elliott Waves, with his new social science of Socioeconomics. Prechter incorporates quantum physics and other innovations into his new science, and was one of the first to recognize that the underlying nature of stock movements is fractal - meaning that the patterns repeat at small and large scale in the market (eg. minutes, days, weeks, decades). Fractal geometry is at the core of Chaos Theory; and yet Prechter has not taken the math of Chaos one step farther to actually modify the wave patterns charted by Elliott in the '30s.

Zoran has taken that bold step, and here is an exposition of some of his thinking. This is worth studying as it may give better guidance to the moment of market change - the Bifurcation Point at the edge of chaos - than classic Elliott Wave theory. Zoran refers to his approach as EWP:

The Bullish Case

The print edition of the WSJ on Friday had a number of articles which collectively built the bullish case, and represent the consensus view. The Ahead Of The Tape column calls this a Durable Recovery, and says: "The April Shower of powerful March data has turned around almost every last bear on the economy." The three most important indicators - employment, retail sales and CPI - scored a " 'triple double' " meaning all three were twice as high as expected. (Not sure why CPI increase is good news, but more on that below.) The front page ran an article called Companies Regain Pricing Power, suggesting that deflation is ending and predicting inflation ahead. The Money section had several articles on how to deal with the expected rate boost as the Fed heads off the now-anticipated inflation. The Heard On The Street column is entitled Bulls Argue Higher Rates Won't Hurt Techs and Financials. The bad news on inflation is said to be good news because it indicates that "the economy is heating up."

The key to the bullish case is business spending. The economy has stayed relatively bouyant due to increased government and consumer borrowing and spending. Government spending seems to have exceeded all bounds, and in a campaign year the pressure is on to constrain it. As the consumers' capacity to continue borrowing and spending abates, the economy needs business spending to pick up the slack. The key indicator to watch is durable goods orders. The consensus view was for a 1% rise in March - the reported number is 3.4%. Quite impressive. But not all bears went into hibernation. Bob Bronson reports in his private newsletter that the peak in these numbers actually occurred last December, indicating a slowing not accelerating economy. The reported number for March included revisions upwards for February; the impressive Mar numbers were actually lower than the revised Feb numbers, supporting Bronson's case.

The prudent bear would wait to see how these reports pan out over the next quarter. Even if we have begun a major drop, it will have its normal corrective reversal in late summer; and one can always get out (or short) then if need be. The imprudent bull should be buying on dips.

Constant-Dollar Dow

In a recent post, Yelnick described the strikingly different view of our current wave count one would see under a Constant-Dollar Dow rather than the Nominal-Dollar Dow we are so familiar with. The Constant-Dollar or inflation-adjusted Dow is discussed in Prechter's book At The Crest of The Tidal Wave (New Classics Library 1995). The Elliott Wave Theorist periodically uses the Constant-Dollar Dow to make a point. The Dec 15, 2003 issue updates the attached chart from that book to draw conclusions about the next major turning in point in the market.

We can also use the inflation-adjusted Dow to draw some conclusions about the current wave count.

Prechter Year in Review

2003 was good for stocks and bad for Prechter. In Sep02, he said he saw the market as clearly as he had in 1984, when he made the call that set his reputation. His expected meltdown ended well above the predicted levels, however, and his readers were caught on the wrong side of the market. He thought the bounce of the Oct02 low would reverse quickly, and he called the top prematurely a number of times before backing off to reconsider the count. He significantly changed the count he had been following since the peak in 2000. Recently, he has also changed the timelines for the Big One down. For many years he had expected a rapid drop off the peak, with a deep bottom in 2003 or 2004, similar to the fast drop from 1929 to 1932. Now, he sees the opposite: a slow decline that unfolds at 1/10th the speed of the second great crash during the Depression, in 1937-8, unwinding all the way into 2011.

It does not inspire confidence in Elliott Wave usefulness to miss the big calls this way and then change the timescale so radically. Prechter's strength has been the courage of his predictions. To his credit, he is still calling for deflation when the punditry is more worried of inflation, and making similar contrarian calls on the Dollar (bottoming), Gold (topping) and Oil (topping). His change also seems to have inspired major changes of direction from other Ellioticians. I wish I could include all of their private newsletters for you to review, but here are some examples:
* Prechter: slow slide into 2006, triangle correction into 2008, deeper drop into 2011
* Neely: an ABC flat, have ended A and are in B, and B will exceed the 2000 peaks
* Zoran: Dow still in the Bull but will end soon in a truncated 5th wave, below the peaks (Zoran sees the broader market, the S&P, as in a bear market, with a count similar to Yelnick's)

So, what gives?

New Year's Predictions 2003 Revisited: The Case for the Bull

Last year in his private newsletter Yelnick outlined three options for the new year.  How did they turn out?

1) Prechter's meltdown.  Didn't happen.  Yelnick thought it least likely: "The STU crew was soooo convinced of Big Debacle last October, which ended short, that they have been overly anxious to see the drop recommence ever since." 

2) Cycles rule.  Did happen.  Yelnick thought this most likely: "Historical analysis would predict the next up cycle as 9 months and the down as one year to 15 months, meaning generally up or flat through the first half of 2003, with a drop in the 2d half that extends into the last half of 2004 to end this cycle down."

3) The Bull is Back.  Could happen.  Yelnick still thinks unlikely: "Current worries are over the uncertainties of war, but a war in Iraq would be much less costly to us than real dip in the economy or another 9/11 event.  These uncertainties should be behind us by 2Q03, as a war in Iraq if it occurs seems timed to commence in Feb/Mar.  The market tends to anticipate the end of a recession by 6 months - which means the Oct bottom predicts we begin to grow again in 2Q03."

So, not bad in predictions.  The cycle prediction expected a downturn in late 2003 which has not yet happened; mid-year Yelnick modified that prediction to target Mar/Apr 2004 as the turning point.  This is still the preferred view.  If we pass by that turn period, however, the third prediction becomes interesting.  What about the return of the Bull? 

Fibonacci Ratios and Market Makers

Yelnick has been contemplating how fib ratos might develop in market indexes. Quick remarkable how often market movements shift at fibonacci ratios of each other. Prechter attibutes it to the fear & greed action of the limbic system in investors - since natural systems tend to show fib ratios in physical elements, he postulates it is also wired into behavior from the baser brain functions. It then gets realized in herd behavior. Zoran challenges this in the prior post, since small events or groups seem able to move markets ahead of the herd, and sometimes the herd is not able to turn the market.

Prechter attempts to answer this by suggesting that the herding instinct may cause a few to react before the herd, but react to the same underlying forces which later sway the rest, or fail to sway the rest. Could this explain the fib ratios?

Fib ratios occur not just in the classic fibonacci sequence (1 1 2 3 5 8 13 21 etc.) but in any summation series. Start with any two numbers and add them successively - the ratio between successive numbers trends to fib ratios (phi) very fast. This should also work with a sequence of mixed positive and negative numbers, although I have not seen anyone do this, since it is not intuitive. But it may reflect how markets move in fib ratios.

View the market as made up of groups of investors, all with different views at different times, some ahead and some behind. The behavior of these groups can be modeled as a sequence that sums or subtracts as time moves forward. A small group says X, and moves the market its way. A next group begins to agree with X, and piles on. Another group disagrees, and moves it the other way. These groups can be considered fib series whether they shift from positive to negative as long as they always 'sum' (make investment decisions in response to) the previous views. In this way the fib ratios emerge, whether there are positive or negative views. (I played a bit with a spreadsheet and it appears one can build a series of plus/minus fib series and sum them, and the result has fib ratios).

Possibly elliott behavior could be modeled using such mechanisms to attempt to derive the group opinions underlying the market. An advantage of this approach is not to see one 'market' or herd but to begin to understand the multiple market opinion groups or forces.

One could then see how a small group could create a wave 1, while the wave 2 swamps it as the groups which see the market the other way pile on to 'buy on dips' or 'sell on pops.' In the background yet other groups flip over to X's view and wave 3 emerges. All this needs is the time delay of opinion based on the actions of the other groups to result in fib ratios.

Zoran Teaches

Zoran Gayer is developing a modern version of Elliott wave theory, blending the orthodox Prechter view with the rival Neely view, and adding a better understand of chaos theory. He is attempting to solve the most bedeviling problem with ewaves, how to determine when a correction is ending. We have seen over the past year how Prechter's STU continually calls a premature end to this wave 2. For traders this is paramount, as placing positions at the end of a 2 to catch the 3 is where the money is made, at any fractal level of wave action. Here is part of Zoran's developing point of view:

EWP on the S&P 500 index 21
September 2003
(Excerpts)

I have read comments that this market is " climbing a wall of worry ". This is taken as indicative that this up move is a new BULL move. However, this statement is a contradiction the fact. How can you have a market "climbing a wall of worry" with optimism at the highest level since 1987 peak? This is not a "wall of worry" but more in line with exuberance of major tops and bubble mania.

The market comments are full of cliches that often are used out of context or times do not make any sense. Part of that is because our knowledge base has grown and that our view of the world has changed. Many of the market cliches we have inherited from the past and have been repeated so many times that they take form of market truths. Elliott formulated his concept over 50 years. Some things of Elliott's conceptualization may need revision. This not to detract from the man for his observational acumen was rare amongst men.

Let us consider three of his basic structural tenets.

Markets follow order

This is a basic tenet of Elliott Wave Theory as expressed by Elliott himself. Quoting from the introduction in Nature's Law Elliott says, "No truth meets more general acceptance and that the universe is rule by law. Without law it is self-evident there would be chaos, and where chaos is nothing is" and "But the market has its law, just as it is true of other things throughout the universe. Where there is no law, there would be no centre about which prices could be the resolve and, therefore, no market."

The statement is partly true and partly not. There is no question as Elliott puts it that there is law (or order). That there is law does not mean that the market always obeys the laws. Conceptually according to Elliott, the market is completely ordered and thus predictable. IT OBVIOUSLY IS NOT. It is much more correct to say,

"Markets are self ordering mechanism that constantly adjusts to an uncertain world".

The second statement in fact states markets are unpredictable. Thus, the concept markets are never the same, but they do rhyme is true. Modern research into the way natural systems behave is that small changes can produce vastly different results. In fact, though the rules are the same the outcomes can be vastly different. Substantially all natural systems move from chaos to order and back to chaos. The financial markets follow more the CHAOS THEORY than that they follow ELLIOTT'S COMPLETE ORDER CONCEPT. (There is a form of order in CHAOS/ FRACTUAL concepts, which seems contrarian to its name).

Crowd behavior moves markets

The crowds may move the markets but they are not the instigators of the trend they merely reactors to what has happened. The twelve men in the monthly meeting of the central bankers (FOMC) have more effect than rest of the crowd combined. History shows that individual men not crowds made the greatest changes. Most trends of human behavior grow from small beginnings. Crowds do very little than follow established trends.

In fact, a common indicator is that the crowd gets it wrong thus giving rise contrarian indicators. At market tops, the crowd is BULLISH and at market bottoms, they are BEARISH. Those that sell the tops and buy the bottoms are the market movers. The crowd does not create the mood its mood is a reaction to the market conditions. Greenspan and the central bankers have created the BUBBLE TOP not the crowd; they simply reacted to the created circumstances. Government policy, destruction law, actions from a small group politicians that started the IRAQI war affected the market to a far greater extend than any crowd ever could. How Elliotticians can conclude that the crowd moves markets is rather perplexing for it is so obviously wrong. Short- term crowds obviously do not move markets as it was amply demonstrated on the 6 June reversal. I suspect something like Peretos law applies to the markets where 20% of the participants have 80% of the effect.

Simplest market move

According to Elliott, the simplest market movement is five moves up and three moves up repeating in perpetuity. The direction is in the 5-wave thrust. It is a result from a LONG TERM to SHORT TERM approach. Ilya Prigogine suggested that all natural systems would move from one plateau to the next. The moves between the plateaus is fast and is directional - the order component. The plateau component is non-directional, thus CHAOTIC. To Ilya Prigogine natural systems rotate between order and chaos.

Each PLATAEU or NON- DIRECTIONAL movement resolves itself in a point, which Prigogine called a BIFURCATION . Thus, the simplest move in a natural system is from one BIFURCATION to the next making up the FRACTAL of chaos. Small changes at the BIFURCATION can cause an explosive move upwards or downwards and often this point is a fine balance. Because each bifurcation is a balance, the outcomes are unpredictable, for it can tip easily either way.

This is the very reason why Elliott is obvious after the event and nearly all Elliotticians get it wrong before the event .

One has only to read the newsletters of some Elliotticians to see that they have difficulties in accessing outcomes but then so has everyone else. Thus, long-term moves are made of many small term moves. This is opposite to Elliott and rather obvious. It also states that predicting the markets is a much more complex affair for at each bifurcation the market can head either of two ways. That does not mean that Elliott analysis is pointless. Since we know markets are SELF ORDER SEEKING mechanisms, it just means that we have to be flexible in our approach in reacting correctly to each BIFURCATIONS OUTCOMES. We also know from study of chaos that the same patterns appear in multiple timer frames. Thus by combining a multiple time frames in the analysis often, we can see the likely outcomes of BIFURCATIONS of a lesser degree. Each BIFURCATION will supply a possible trade in that fast move of order seeking attributes. THIS ALSO SUGGESTS THAT ELLIOTT ANALYSIS CANNOT BE DONE EFFECTIVELY WITHOUT USING MULTIPLE TIME FRAMES.

K-Wave V: The Rise of Machines

Thinking about the K Wave question: will the coming always-on world being brought to us by widespread broadband and wireless connectivity be the new factor of production that takes us out of the K-Wave Winter and starts the cycle anew? 

A broader new factor is digitization, of which the always-on world is a subset.  It may finally take us out of the 'paperless' office into a new paradigm where documents are not created with the intention to print but created for a pure digital existence.  More generally it will spawn a vast collection of web services, which are machine to machine communications.   

We have only so much attention time to give to always on communication, but our machines can talk to each other orders of magnitude more.   They will allow the scaling of an information economy beyond the bounds of the prior analog world.

Kondretioff Rules

Yelnick has received some questions regarding whether the Kondretioff Wave conditions have been satisfied, which would be another supporting condition for a new bull market, or whether a major deflationary debacle awaits.  Like all cycles,  the K Wave is more descriptive than prescriptive (Elliott Waves are more prescriptive than cycles), but provides enormous insight into our current  economic condition.

The K wave was identified in the '20s by Kondretioff,  a Russian economist who studied capitalist systems.  When asked by Stalin in the '30s if the Great Depression was the collapse of capitalism predicted by Marx, he said no; based on his work, the West would rise again.   For his insight, he was sent to the Gulag.  Unfortunately for him, he never returned.  Fortunately for us, his work filtered  out.

The K wave is a 54 year cycle (+/- a year or so) with internal phases that are sometimes characterized as seasons: spring, summer, etc.  Spring   phase: a new factor of production, good economic times, rising inflation.  Summer: hubristic 'peak' war followed by societal doubts and double digit inflation.  Fall:  the financial fix of inflation leads to a credit boom which creates a false plateau of prosperity that ends in a speculative bubble.  Winter: excess capacity worked off by massive debt repudiation, commodity deflation & economic depression.  A 'trough' war breaks psychology of doom.  New factor of production emerges, happy days are here again, cycle begins  anew.

K-wave I: 1789 - 1842.  New   factor:  canals.  20 good years. 1812, peak war. US invades Canada, gets slapped back.  White House burns. 1815-1824, inflation, turmoil, weak Prez (John Quincy Adams), end of Federalist rule.  1828, Andy Jackson elected, false plateau of prosperity. 1837, Bank of US cancelled, severe depression, deflation.  Ends with trough war, Remember the Alamo! we win Texas from Mexico.

K-wave II: 1843-1896.  New factor: RRs.  1861, peak war. 1865-1873, reconstruction, inflation, Prez   impeached.  Turmoil. 1873, RR fiasco, financial panic.  First bought of deflation as Civil War inflation ended.  False plateau of growth.  1879, return to gold standard.  Second RR bubble bursts.  Deflation continues. Ends with trough war, Remember the  Maine! we conquer Spain's remaining colonies. 

K-wave III: 1897-1949.  New factor: oil/autos.  20 good years.  US becomes world economic leader.  1914, peak war to end all peak wars.  1919-1925, inflation, turmoil, scandal (teapot dome).  Coolidge becomes Prez.  False plateau. Roaring  20s.  1929, Crash.  Depression.  Severe deflation.  Ends with trough war, Remember Pearl Harbor!, Pax Americana.

K-wave IV: 1950 - 2004 (?).  New factor: aerospace.  20 great years.  American Century. 1966, peak war: Vietnam!  Rising inflation.  Wage and price controls.  Oil crisis.  Nixon resigns.  Vietnam war is lost, American innocence gone, stagflation, Prez Carter blaming malaise not on government but on the people. 1980, Reagan elected.  Morning in America.  Volcker kills inflation.  False plateau!  Greed is good.  1990s, deflation in Japan, dot-coms in US, Greatest Asset Mania of All Time, bubble bursts, now in longest bear market since 1930s.  On schedule, trough war, Remember 9/11! we go into nation building. 

Most of the primary K-Wave predictions have been satified.  We have had the K-Wave false plateau followed by a speculative bubble. We have had deflation in commodities for a while, and some currency deflation (eg. Japan).  We have had enormous rolling debt repudiations: Mexico, Asian Flu, Long Term Capital  Management, Telecom bubble companies. We have started our trough war (War on Terror). NYFD is heroic again!

Is the cycle turning? In timing the K-Wave would nominally end now, in the period of 2003-2005.  But two caveats. First, in previous cycles we had much more severe economic disruption - the downturns in 1840s, 1880s and of course 1930s were considered depressions.  Second, the new factor that leads us out of economic hardship should be emerging.  It might be broadband/wireless - the always-connected world - but that was the subject of much of the bubble!  So while the new factor is apparent, the K-Wave Spring recovery is not yet emergent.  Both caveats suggest more trouble ahead, and more likely bottoming in 2004 or later than now.

Brain experts now follow the money

From JP Morgan's daily newsletter, investigations which could substantiate the tie between emotional-driven financial decisions and stock movements, the foundation for Elliott Wave theory:

Neuroscience may soon shed light on all sorts of economic behavior,
The New York Times reported yesterday. Researchers are busy scanning
the brains of people as they make economic decisions, barter,
compete, cooperate, defect, punish, engage in auctions, gamble, and
calculate their next economic moves. They are finding that chemicals
in the brain drive behavior, and that these behaviors aren't always
rational.

Neuroscientists are also using economic games to explore brain
activity. It is possible to trace circuits in the brain that are
activated when people anticipate making or losing money, decide to
trust a stranger, or punish freeloaders in a game of sharing public
goods. It is also possible to calculate how much emotion goes into
evaluating the worth of economic activities and to study the neural
underpinnings of bargaining.

Editor's comment: Microeconomics has, at its core, the notion that
individuals can rationally calculate their own best interests when
making decisions. Now neuroscience is delving more deeply into the
chemical underpinnings of our decision-making. We may buy a stock,
not because of the company's business prospects, but.because it
generates dopamine flows in our brains, In the end, brain chemistry
may be one reason that tech stocks trade at higher multiples than
more staid industrial companies.

Most of us still cling to the notion that we are rational, and by
extension, that the markets that we trade in are rational. But what
if we aren't completely rational and our brains are wired to
interact to the emotions of others? Then the econometric model
builders will have to account for more than resource factor prices -
- they will have to add the chemistry of crowd psychology.

Elliott Wave Basics

The Yelnick thread has new members, so I thought it worthwhile to give a brief intro to ewaves. A better tutorial is available for free at Club EWI.

Ellliott developed his theory in the 30s. Prechter picked it up in the 70s and made a killing calling the 1982-87 period correctly. (Typical wave 1, many people were skeptical of the bull.) Then, Prechter called the top multiple times in the 90s and his cachet faded - until the real top in 2000. Now Prechter is back!

The Elliott religion has split into several sects, the most popular being Neely, whose work is being improved on by Zoran Gayer, often mentioned here. The Yelnick thread looks at multiple Elliott sites and derives a consensus opinion. The STU from the Prechter camp is usually the best source; also very good in the orthodox Elliott camp is Ryan Henry, whose work is available under the name Wavespeak online here. Some of the more active Yelnick readers share their views either with me or the group, and that is encouraged.

The basic ewave is either a 5-wave impulse or a 3-wave correction. Impulses travel in the direction of the trend, corrections counter. The impulse is counted as waves 1 - 2 - 3 - 4 - 5, where the odd waves go in the direction of the trend and the even waves go opposite. The correction is counted as A - B - C, where A and C go in the corrective direction and B goes the other way. You can count the bull market this way:
> wave 1 from 82-87
> wave 2 correction from 87-91 (the Crash of 87 plus the Gulf War)
> wave 3 from 91-97 (includes the first Internet mania in 95-96)
> wave 4 correction from 97-98 (the Asian Flu)
> wave 5 to the manic peak in 2000 (dot-com fever!)

Impulses only have two basic forms: the standard five wave and an overly enthusiastic variant of 9 waves where one of the segments 'extends' or breaks into a mini-5 wave of its own. Corrections come in 11 variants, including:
> Flat, an ABC in a trading range, which subdivides as 3 - 3 - 5 waves
> ZigZag, an ABC which goes deeply down, which subdivides as 5 - 3 - 5 waves
> Extended flats and zigzags, where you get double or triple ABC moves
> Triangle, a very extended series of five ABCs that have lower highs and higher lows

The ewave is a fractal, meaning it has the same form at all degrees (minutes, days, decades, etc.). Within a impulse pattern, each wave itself breaks into subwaves. The odd waves in the direction of trend, waves 1 - 3 - 5, subdivide into impulse patterns. The even waves, 2 - 4, subdivide into corrective patterns. So after a 5-wave wave 1 up, we see an ABC wave down, then the wave 3 starts, etc.

The waves follow certain rules, the most important of which are:
> fives waves in the direction of trend, three waves counter
> wave 4 cannot go lower than the start of wave 2 (the top of wave 1)
> wave 2 cannot go below the start of wave 1 - if it did, the pattern would be counted as 3 and not 5 waves
> wave 3 is never the shortest wave - indeed, it usually is the most intense
> waves 2 and 4 alternate in form - so if 2 is a Flat, 4 is a ZigZag or Triangle

The rules as stated are for a bull trend; the rules reverse if the trend is down (eg. wave 4 cannot go above wave 2)

These rules are in play right now. At the top on Monday, we reversed and came down in a 5-wave pattern. This suggests the trend has changed. Today we corrected that 5 wave move in 3-wave pattern. The first 5 waves make a wave 1, the second 3 waves make a wave 2. Tomorrow will be very interesting. The wave 2 correction may not be over yet; futures are up overnight. If the market breaks its Monday highs, then the rule about wave 2's not breaching the start of wave 1 fails, and we know we have not yet changed trend. if the market turns down again, it would have entered wave 3, which is usually the most intense.

It is easy to get lost in numbers. Also, watching the ewave theory over the past two decades, it doesn't seem to work as well during corrections. This is where Zoran may be about to improve on the theory, since he has been developing a way of fixing the Bifurcation Point when the correction ends.

One way to understand the waves is that the market does not recognize a change in trend until wave 3. That is why wave 3 is the most intense. Everyone piles on! This lack of recognition of trend is what is happening right now. Everyone is eager to call a bottom and get back on the Bull. We have come down in a wave 1 to the low in October. Was that the end of the Bear? We have now come back in a wave 2. Bullishness is at levels not seen since 1987! This is extreme, but typical of wave 2s. When wave 2s fail to exceed the prior level, then the herd begins to recognize the trend and a wave 3 starts.

Another way to understand this is the difference between stock distribution and stock accumulation. After a peak, the waves A and B down (if corrective) or 1 and 2 down (if trend change) can look the same. Often they will mirror the waves 4 down and 5 up from the prior trend. This pattern forms a classic Head and Shoulders pattern. The traders who bought during the wave 5 up but didn't sell at the peak will try to get out during wave B or 2. If the stock is being distributed not accumulated, wave 2 will fail, and we turn down into wave C or 3. At some point wave 3 reverses in wave 4. If at that time stock is accumulated, wave 4 could exceed the start of wave 3. This changes the count from 1 - 2 - 3 - 4 down to A - B - C down followed by wave 1 up. If wave 4 fails to exceed wave 3, then the final wave 5 down will follow.

Final part of the basics is fibonacci numbers. Prechter believes what separates Elliott Wave Theory from Ptolemaic epicycles is that it reflects underlying social mood, which follows certain biological patterns based on mass psychology. Many aspects of biology show fibonacci relationships. The ratio of fib numbers is the very interesting number Phi, which is more irrational than Pi or e. Often Elliott Waves show numeric relationships based on Phi ratios. Phi is approxiamtely 1.618, and the inverse of Phi is 0.618. The square of 0.618 is 0.382. Often waves 2 reverse 61.8% of wave 1, often wave 3s are 1.618 the length of wave 1, and often waves 4 reverse 38.2% of wave 3, which happens to also be 61.8% of wave 1 if wave 3 goes 1.618 times wave 1.

This relationships can be used to predict both reversal levels and durations of waves. A full 5 wave pattern often runs 2.4x its first leg, for example, which can be calculated from those fib relationships. Usually wave 2s do not exceed 61.8% reversal of wave 1. And usually in ABC corrections wave C equals wave A. The current wave 2 is running into a number of these relationships. It topped on Monday at close to 61.8% of wave 1 and also where its A wave = its C wave.

Thus the next few days are extremely interesting. The wave pattern strongly suggests we have or are about to end wave 2 and start wave 3. Yet bullishness is rampant. One of these two perspectives will have to break, shortly.

Lunacy Eclipses Technicals

Tomorrow is a lunar eclipse. This sometimes brings out the worst in the ewave community. Even the Great One himself, Prechter, launched yet another interim bulletin this morning to encourage his faithful to stay the course. His charting was clear and concise - more on that below - but his long preamble was intended to show how the Carolan Spiral Calendar could be made to substantiate the market top in 2000 by matching it to major turn dates of the past - 1350, 1492, 1600. A decade ago he had done the same analysis but predicted the top in 1995, so some revision was in order! Good to know that astrological predictions are so, well, flexible. On top of this, a number of folks are touting the eclipse as presaging a change in mood and therefore an end to this extraordinary wave 2.

Back on Earth, this is an extraordinary wave 2. Zoran sent me an analysis that shows every major index - Dow, SP, Naz, Dollar, Bonds, etc - are on the 'wrong' side of their moving averages! Sounds like a planetary alignment. The bullishness is even more extreme, and as noted previously, is higher than at any time during the mania! This is likely to end badly, and soon.

Prechter's view is that we are in the final throwover of an ending diagonal triangle, which may have ended yesterday but likely has a bit more to go, maybe just a day or two. This might go up and touch Dow8770, then turn; it could even go higher, perhaps as high as the January high of 8869 or even SP954. Watch for these levels & see if they are eclipsed.

Cycles Trumping Waves

The ewavers are still scratching their collective heads (and running their fingernails down their whiteboards) about this persistent wave 2. Time for a broader perspective.

I have mentioned a UCLA physics prof who has tried to curve fit bear markets following manic peaks. His analysis is - as the bear lengthens, so do the length of the waves. Hence he predicts we will not see the 3 of the 3 until late in 2004. We could have a generally corrective or even up market for the balance of 2003 and into the first half of 2004.

Another perspective comes from the well-known four-year cycle, which is explained quite well here. Looking back, it has been surprising consistent. Consider the dates of the lows of the last 30 years: 1970 - 74 - 78 - 82 - 87 (slipped a year!) - 91 - 94 (back on schedule) - 98 - 2002. Driven by US election cycle? Perhaps.

On the way up, the cycle waves have right-hand translation, which means the peak happens late in the cycle - in effect, is stretched to the right; on the way down, left-hand translation, which means the peak happens early in the cycle. In this case, 2004 would be right in the middle, and 2006 the time for the next low. Might the 2004 peak come early? As early as June 2003? Perhaps.

The four-year cycle suggests this scenario: continued positive hump through the summer, beginning of the big wave down in Sep/Oct, typical seasonal rally from Nov03 - Apr04, but at lower highs than this summer, followed by a major downturn in late 2004. Some sort of bounce follows, but the ultimate low is 2006.

Battle of the Bulletins

Prechter, Wavespeak & Zoran all launched mid-day bulletins today.

You gotta love Prechter. On Friday he says no way will it poke above Dow8612. Today it did, and Prechter stuck to his guns. Ok, so what he read as a wave 5 on Friday was only a 3, and needed a final wave 5, so that is what happened. But this is it. He compares this to his most epic call, a call for the ages: in Sep 1985, in a downturn of a then weak market, he saw that a perfectly interlaced series of waves 1 - 2 had coiled up ready for a massive wave 3. He not only called it when other pundits were bearish, he bet heavily - and made a fortune. He sees this as almost the perfect inverted setup, where the massive wave 3 heads down and not up. As he says:

We think we may see a new extreme in bullish advisory service sentiment on the next report. New extremes in sentiment opposing an established trend are so rare that this is only the second one I have seen in the stock market in my career. ... Whether there is any further rally or not, in the long run, markets never look back from such junctures.

Ryan Henry of Wavespeak (which is about to graduate from StockCharts to Free Newsletter to Paid Service - good on him!) continues to do clear wave counts & predictions. He noted that the Nasdaq has broken the Dec high (1521), which changes the wave count. The old count had the Nasdaq ending its wave 2 off the Oct low in Dec; the new count has the whole action since Oct as an unfolding ABC wave 2. Only wave A ended in Dec, not wave 2; we are now in wave C.

He predicts an intense down move over the next few days, but staying above 1425, and then continuing back up towards 1600 in a fairly strong rally. In contrast, the Dow is a different story - although it went through Prechter's 8612 level, it has not broken 8664, where it would violate a fundamental Elliott rule, that wave 3 cannot be the shortest wave.

We have noted how the Nasdaq has presaged moves in the NYSE indices. The Nasdaq has now diverged from the Dow and S&P. Is it presaging that those indices will also break their Dec highs? Wavespeak thinks not.

For clarity on these conflicting bulletins, we turn to Zoran. His count has been the alt count all along - that we remain in a wave 2 correction from the July lows (Oct lows being merely the second leg of the five-leg Iraqi War Triangle). He notes that the S&P did go the wee bit higher he thought it might, but it rests right at the tipping point. If it drops, then the Prechter view is right. If it continues up, then the whole wave count needs to be rethought. We would be in a wave 3 up of wave C of 2, and should have a fairly broad-based rally!

For those of you who trade, a nerve-wracking time. For those who blog, a truly wonderful Elliott moment!

E-Waver Face Off!

Today dropped about where expected and then made a run up before fading at the close. We can look at how the prime ewavers see this:

The Orthodox view, from Prechter and Hochberg (who does the short term update or STU), is that we hit our high on Wed after trying to close above Dow8520 three times. They leave open the possibility of a final poke above this level, but believe it will happen in days.

The Reformed Orthodox view, from Ryan Henry of Wavespeak, who is a very 'clean' ewaver using the orthodox theory without hedging his predictions, is that we should have a final 'spike reversal' tomorrow or early next week to around 8609.

The Shi'ite wing of the Elliott religion, led by Glen Neely in a dramatic split a number of years ago, made a clear prediction when the S&P broke 909 today to go 100% short. He sees this wave [ii] as over and any further corrective activity as not challenging the recent highs.

The Modern view, an updating of Neely being developed by Zoran Gayer and Bob Bronson of Bronson Capital Markets, predicted the current action almost to the number - the drop today was as expected, and the reversal also only slightly higher than expected. Like Neely they do not see the recent highs as being challenged, and look for the 3 of the 3 to start. His analysis is precious :

The bottom was about right however, the recovery was a little too high. The short squeeze was a bit more successful then expected. It is the same again tomorrow, but this time it should NOT bounce. It will require speed for confidence that action has hit pay dirt. ...

The starts of most major trends are difficult until they are established. This is particularly so of BEAR trends because of a natural bullish bias. Life would be very difficult without our illusions. The BEARS suffer from spontaneous or deliberately caused short covering rallies. In addition, BEARS are taken to be disloyal to the country?s economic recovery.

Once the trend is in solid ground, it is less likely to trigger short covering. This is an ideal spot to start a rumor of Ben Laden?s capture if you like to break the action through the top.

Iraqi War Triangle

The leading ewavers other than STU are now calling the Wed high as the end of wave 2, rather than the Apr15 high. This will be confirmed if Monday heads down below certain levels, beginning with Dow8250, and will be disconfirmed if we break Dow8395 to the upside. We should then see one final leg up. Ryan Henry lays this out fairly well in his weekly newsletter, and charts it on his site, here. The view of the STU is that the preferred count calls for one more leg up before the end of wave 2.

Zoran has the best overall analysis of where we are - if he blogged I would refer you his site. Suffice to say that he sees the whole correction since last July as influenced by the Iraqi War. if you recall, back in September we were heading to war, then backed off to let the UN continue its inspections. We rallied off the October lows. As it became clearer that we would head to war regardless of what the inspectors found, we peaked in November. Recently we had the Victory Rally, which started before the war started as the market tried to anticipate events. During the war we were flung up and down on rumors of this or that, all in a triangle - lower highs and higher lows. The triangle either has ended or is coming to a near term resolution.

There is a lot of bullishness out there. Recent articles have suggested that the VC industry bottomed in Q3 and have begun picking up activity in Q4. Business Week picks up this theme and argues that Tech has bottomed as well. Some pundits suggest the recent activity is not waves 1 - 2 of the big 3 down, but the beginning of a new wave up! If so, we would now be in a wave 3 up, and should be seeing sharp and dramatic rises. Instead, the first wave up from the recent lows, which Yelnick reads as wave A (corrective), was fast and furious, whereas the recent wave up, which Yelnick reads as the final wave C, was much slower. Hence this is best read as corrective of a larger downtrend.

The Big Picture

The big picture scenario: markets dropping in 2004 to levels of below Dow4000 and SP400, and then continuing in a triangle formation (lower highers and higher lows) into 2011-2016. If so, the period from 2004 - 2008 should be a barn-burner bull market similar to 1933-37, where the Dow went up roughly 5x in 4 years.

Many technical indicators give the forecast of below Dow4000 / SP400:
> manias retrace all the way, and this one started in Nov94 (after the Republicans won control of Congress for the first time in 40 years) around Dow3600 / SP400
> in a head-and-shoulders pattern, the amount of the rise above the neckline is the amount of the drop below, and the 1998-2000-2002 H&S pattern in the S&P has a neckline of ~SP950 and a head at SP1550 - hence the drop should be 600 pts or ~SP350
> P/E ratios get down to ~10 at a bear market bottom, whereas currently the ratio is 24 based on reported earnings (and much higher based on more traditional earnings metrics), meaning the S&P would be 2.5x lower on current earnings at a typical bottom, or around SP350

A drop of this magnitude is nevertheless extraordinary and would reflect fundamental problems in the real economy. Currrently debt is at record levels and economic conditions are deteriorating. While unemployment has been flat for two years and consumer spending relatively bouyant, this may be due to the massive refinancing of homes with the drop in interest rates. If this market scenario plays out, we should see in parallel an accelerating deterioration of the real economy.

There is a divide in the Elliott Wave community on the magnitude of the current drop. The extreme view, trumpeted by Prechter, is that the Great Bull Market of the Industrial Revolution since 1789 has run its course. This is based on wave count, which has us just ending the fifth wave of the bull market that began in 1932, a bull market that reflects the fifth wave at a higher degree since 1789 (grandiosely numbered as V). The problem with this count, besides the obvious that industrialization does not seem to have run its course, is that on an inflation-adjusted basis it appears that the bear market that started in 1929 did not end so quickly, and indeed ran until 1949. This is also consistent with more general economic and political views on the Great Depression, that are that it did not end until after WWII.

The alternative view, supported by Zoran among others, is that we have completed wave 3 of V and are in wave 4 down, with a final wave 5 to go. Under this count, wave V began in 1949, and we have had only 3 waves so far - wave 1 from 49-66, wave 2 from 66 - 82, and wave 3 from 82-00. Prechter counters this by saying that the wave from 49-66 had better technicals than the recent wave from 82-00, and typically wave 3's have the strongest underlying characteristics. The relative weakness of the 82-00 bull market vs. the earlier one may be explained by the Kondretioff Wave, which began in 49 and is ending in 04; a bull market wave which runs through the end of a K-wave will show weaker characteristics. K-waves begin with a bang, peak with inflation, and end with deflation.

The implications of these differing views is profound. If we are correcting the 200 year run-up of the Industrial Revolution, the potential depth will be quite low, the duration quite long, and the fundamental economy quite weak. If we are in a wave 4 of V, the depth should be lower, the duration shorter, and a long bull market wave 5 will follow, carrying beyond our investment horizon.

Most likely we are in that wave 4, as key elements of the core economy look sound: Moore's Law is still working, oil is not running out, and globalization continues.