Planet Yelnick

Terminal Triangle Terminating

The leading ewavers are all seeing this final C wave as having ended or ending shortly. The intraday highs went above the Mar21 wave A highs, which is what one would expect on a C wave, but the markets failed to close at those levels, showing the dissipation of strength in this move up. Futures are slightly down at the moment, but as oft said, that can foreshadow little.

The STU turned bearish yesterday, although they allow for one final spike up. Ryan Henry sees a higher chance for one last spike up, to Dow8600+. Zoran believes the top is in, and we will now go through a terminal pattern, with a drop from the intraday high followed by a reversal that will only go back 38% - 62% of the drop - a pattern that the other ewavers will label the subwaves 1 and 2 of the wave down. So we have a good chance to compare their relative prognostication.

We will know that wave 3 has truly started when the drop becomes hard and fast.

Terminal Trangle

Prechter put out an interim bulletin today. He had previously called a top at Mar21, and since then the market indices have formed an ending triangle formation (higher lows, lower highs in a series of 3-waves) which have not exceeded that top. Triangles often end with a final thrust, a so-called terminal thrust, in the opposite direction of the trend. Hence we *might* see a strong up week this week and exceed that top. He warns, don't be misled. It will be followed by the wave 3 of 3 etc.

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.

Broken Clock Rule?

Sometimes ewaves behave as expected, with remarkable precision. As they say, even a broken clock is right twice a day. But the Yelnick view is more is happening than this. Yesterday we said watch a break of Dow8400 / SP900. The more precise number was Dow8395 - and the Dow went to that level intraday and bounced. Remarkable. Ryan Henry has a good analysis of today's action. The bounce began the final wave 5 of C. Made a nice 5 wave pattern up then corrected into the close down 61.8% of the final rise. If this is right, we should see little waves 3 - 4 - 5 tomorrow or into Monday to end wave C of 2.

Updated Count

Old Count: wave 2 had topped Apr7
New Count: wave 2 continues towards SP925

We had thought wave 3 had started, but when it really starts the downside pressure will be much more intense. Ewave sites upgraded to their alt counts today. Wave B of 2 subdivided into a triangle, and we are now in the final down-up action of wave C. Look for a down day tomorrow at least at the open, followed by a final leg up. If the down leg breaks Dow8400 /SP900 then likely wave 2 has ended. Otherwise expect market to climb again above Dow8500 / SP920. Also look for Nasdaq to head south first, leading the other indices as it has done since the MOAB markets began.

Scrambled Eggs-perts

The ewave community is in a flutter today as they expected a major wave 3 fall and got instead a wave C rise! So they are now assessing whether to make their alternative counts the prime count. This alt count was reported last week - that wave B of 2 may have been developing into a triangle, which would finish with a sharp move up in wave C. Tomorrow I will update the count after I see the consensus ewave opinion.

In the meantime, we can enjoy Ethan's Stock views. Finally, someone who makes me look succinct!

GroupBlog Self-Love Now that I

GroupBlog Self-Love

Now that I have access, I can plug myself, instead of asking Duncan to do it for me. No, I don't mean it like that.

GroupBlog Commences My humble prediction:

GroupBlog Commences

My humble prediction: Within days, Duncan will throw me off for being overly verbose and underly clever. Thus is the way of the world.

On baseball: The loyal reader's statements perfectly match what happened in Cleveland -- round about 1987, the stadium started to fill up; they built a new one, and sold it out from 1994 - 2001 continously. You can now get seats easily. As it happens, my friend Craig Calcaterra is not only a corporate lawyer, but also a really excellent (now retired) baseball columnist, who is well-connected to the statistical madmen over at Baseball Prospectus and Baseball Primer. Once he gets back from finding himself across the Great American West, I'll ask him to sic them onto this theory, and we'll get some hard data. Surely the people who invent new, arcane measures of baseball prowess -- not just for fun, but for profit -- will be intrigued enough to do some stock market/attendance correlations for us. After all, SABR and "SABRmetricians" are taking over baseball despite not yet being old enough to shave. Compared to that, forming a general theory of markets, sports, and the correlation of various aspects of crowd psychology should be, well, a walk in the park.

One more related thought: New sports stadiums are often a goverment/development boon, and form the centerpiece of, variously, suburbanization, downtown renewal, or whatever the current real estate trend might be. This could partially explain the correlation of attendance with bull markets -- certainly the building of Jacobs field in Cleveland was a major component of the team's success; and that wouldn't have happened if times weren't good. When was the *last* stadium in Cleveland built? Hmmm, 1932, at the depths of the Great Depression, in the faint hope of landing the Olympics for Cleveland. No, really, they actually thought that!

Baseball Been Very Very Good to Me

A loyal Yelnick reader sent in this indicator of the change in social mood. Headline:

MLB Teams Need More Than
New Ballpark to Attract Fans

Attendance has dropped since the peak in 2000. Parks are getting emptier. TV ratings are down. Owners find excuses.

"It's not a precipitous fall this season alone,'' said David M. Carter, who teaches sports business at the University of Southern California. "The bigger picture is what appears to be a steady errosion over a longer period of time. Baseball is good at dismissing problems. It's the weather. It's war fatigue. It's the economy. And to an extent, it is all of those things. But if your business is suffering a three to four percent drop every year, at some point it adds up to a real number.''

The ewave view is that baseball is a bull market sport. First became popular in the Roaring '20s. Was very prevalent in the '50s, another bull market decade. Faded in the late '60s and '70s, came back in the '80s and '90s. But now is destined to fade again. Look for bear market sports to increase in popularity - those with more violence, matching the underlying social mood. Football. Hockey. Racing. Maybe Gladiators make a comeback?

GS View - Impact of Iraq on Economy

Goldman Sachs had an exellent call this morning on the impact of Iraq on the world economy. Key points:

> the war planners have not prepared for the peace. The Mullahs seem the most organized, and Iraq may quickly become controlled by the same forces which seized control of Iran in 1979.

> the massive US aid to Iraq is unlikely to materialize. US voters will not want to support the Mullah government, if that is what occurs. Also, if our economy stays sluggish, political pressure will be to spend the budget deficit at home not abroad. Thus Bush has to let French etc. firms join the reconstruction in exchange for offloading the cost.

> Iraq can be very positive or very negative for Bush in 2004. He will be soundly criticized for winning the war but losing the peace.

> the next quarter may be slightly positive due to the war suppressing this quarter's activity, but this may not last:
- the economy has been sustained by consumer home refinancing, and this cannot last much longer
- businesses will continue to be conservative, and are reducing workforce to maintain productivity
- overcapacity has to be worked out, not maintained in ill-conceived attempts to prop up failed companies

> the Bush tax policy is not well thought through - in particular, the reduction in federal taxes is being offset by State tax increases - hence Administration needs to fix State budget problems

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.

Macho Time - Bifuration Point

Yesterday Yelnick sent out a bulletin to loyal readers that the little wave (ii) seems to be ending. It ended this morning at a 78.6% retracement level on the last day of the predicted fibonacci turn window, and then did a classic five-wave impulse down. Today was also an outside-down day, which means it went higher at open then closed below the prior day's low. Looking back over a series of waves 2 for this bear market, we see some striking similarities:

> most of these wave 2's retrace 78.6% rather than the *normal* 61.8%.
> most reversals happen in a predicted fibonacci turn window
> most end on an outside-down day or outside-down week
> most start with a fast-and-furious short squeeze in a long and strong wave A
> most end with a truncated wave C, as the bullish positions were largely placed during the A wave

This pattern - in particular the 78.6% retracement, a fibonacci ratio that represents the maximum a wave will retrace (if indeed it is corrective) - reflects the high level of wave 2 bullishness that still abounds. I guess in correcting the Mother of All Bull Markets we should expect this high level of wave 2 retro bullishness. Overall the market punditry is soundly bullish. And this when reported P/E is 24 and "core" P/E is 40, ratios well above the normal bull market peak of 22, the average level of 17, and the normal bear market bottom of 10. Remarkable.

The alt count discussed Monday is primarily based on triangles - is what we see as waves (i) and (ii) down actually waves D and E of a running triangle in the B wave of the continued wave 2 correction? Zoran has been following this closely and sent out a bulletin today that he believes we have hit the Bifurcation Point of market direction, and the next move is down.

After-market is up at the moment. The five-wave impulse down into the close today is little wave i of (iii), and will be followed by a little wave ii. So no surprise if tomorrow is up at the open. Always remember that the ewave pattern is a fractal, and has little five-wave impulses and three-wave reversals at all scales. But this little wave ii will end quickly, and be followed by wave iii of (iii) of [i] of 3 of (3) of [3]. Look for continued downward pressure through the end of May.

Menage a Trois

The end of this minor wave (ii) looks close, perhaps tomorrow, right in the middle of the predicted turn window. The prime count has us in minor waves (i) and (ii) of the long-awaited wave 3 of (3) of [3] that should drive the markets down below the October lows by early summer. Today thru Wed are the prime time for the current subwave (ii) to complete and subwave (iii) of 3 of (3) etc. to begin in earnest.

For being in the 3 of 3 etc. down, market has been more corrective than impulsive. As we wait for this to resolve, let's look at some alternative counts.

The prime count is Prechter's.

Glen Neely, who is in effect the Shi'ite wing of the Elliott religion (he broke with Prechter in the '80s), thinks we are in an uptrend towards SP960 over the next few months.

Zoran Gayer, who worships at both wings, believes we are in a small Gulf War II triangle of a much bigger triangle since last summer. He sees the July2002 low as much more important than the October low. The majority of ewavers originally agreed, and thought that July marked the end of (1) down, but later relabeled October as the end of wave (1). Not one to go with the herd, Zoran continues to believe that the whole action since July is best thought of as a triangle. Wave A went to Aug22, wave B to Oct10, wave C to Dec2, and wave D to the recent Mar13 low. We would now be in the final wave E of the triangle. Interesting is that this final wave may also be resolving itself as a triangle.

The Prechter and Zoran views will both resolve in the next few days. Stay tuned.

Trendline Breached

Market broke below a trendline drawn from the Mar12 wave 1 bottom and the recent Mar31 B wave bottom. This confirms the change of trend. We are in subwave [i] of 3 down. Look for it to complete either tomorrow or Friday, and be followed by subwave [ii] into our fib turn wndow of April 14 +/- 2 days.

Financial Pundit Follies

If this trend change occurs as predicted, the *fun* part of this (if you enjoy this sort of macabre fun) will be how wrong the popular financial press will seem. First, they will be besides themselves trying to find the Victory Rally, like the Coalition forces trying to find evidence of WMD. When the rally evaporates, they will be stumbling over themselves to find the cause - did we finally wake up to how weak the economy is? Or how large the deficits will be? Or how complex the post-war Iraq situation will be? The ewave view is they have causation backwards. The social mood has created a situation with a weak economy, large deficits and fraying world fabric, and the market is beginning to fully recognize it.

Trend Change: Victory Rally Over!?

Count: Wave 3 of (3)
Target: Below Dow6400
Time: May 21 (preliminary)

One of the amazing facets of Elliott Wave theory is it often can peg a trend reversal precisely when the mass of opinion is trumpeting the other way. Today may be one of those days. Some of the major sources yelnick uses for wave understanding - EWI's short term update, Ryan Henry's Wavespeak, Abdulhameed Almousawi of StockCharts - all agree on this trend change. I am waiting for Zoran Gayer to opine as well, as he has been very good at picking Bifurcation Points, the point at which the trend change becomes clear.

Wave C appears to have truncated, as we noted was an increasing probability. If so, wave 2 ended today at Dow8520 / SP905. Look for a down few days as subwave [i] of 3 heads towards Dow8000 again, followed by subwave [ii], which will look like another war rally but will set up a great shorting opportunity: Macho Time IV. Timing for this remains Apr 14 +/- 2 days. Then (if this count is correct) wave [iii] of 3 of (3) of [3] should hit with a vengeance.

Head Fake?

The warblog sites reported a week ago that the embeds had gone suspiciously silent for two days. They recalled that in GWI the military had pretended to focus on a direct assault on Kuwait and instead did a head-fake by end-running and flanking the Iraqi troops. Were they doing it again? Was there a hidden Northern or Western Front? A week later, none has emerged - and yet a different head-fake may have occured.

It might turn out that the 'pause' was the head-fake - a strategy to lure the Republican Guard out of hiding, sensing weakness of the US advance. And be pummeled in the open desert. Even if this strategy wasn't intended, it might be claimed after the fact.

The market too may pull a major head-fake on investors. We are well into wave C of 2, and should continue up next week, perhaps after a dip on the open Monday. Targets and timing remain on track. Yelnick has previously noted how wave C's in this Mother of All Bear Markets have tended to finish earlier and lower than normal ewave patterns (but still consistently with ewave theory) due to overly-enthusiastic fast-and-furious take-off's at the start of the rally. Thus, this wave 2 rally may complete early next week, then begin to drop in wave [i] of 3 down. This wave [i] will be followed by a wave [ii] back up, which would be the head-fake. Some market analysts are looking for a victory rally of 40% off the recent lows. Wave [ii] may look like another fast-and-furious take-off, this time of the expected vistory rally. Instead, it would merely presage a great shorting opportunity - the hard fall in the long-awaited wave [iii] of 3 of (3).

Schwarzkopf's Law

Commentator on MSNBC explaining that it used to take 9000 bombs to assure target destruction, now it takes 1. Sounds like the military has found its version of Moore's Law!

Trend Change: Wave C Underway

Count: Wave C of 2
Target: Dow8630 / SP910
Time: Apr 15 +/- 1

Wave C has begun on schedule. Since wave 2 has already passed the "normal" 61.8% retracement of the drop from Dec2, its next most likely stopping points are where wave A = 61.8% of wave A, or ~Dow8630; or the next fib level of 78.6% of the drop from Dec2, or ~Dow8700. Equivalent levels in S&P are in the range 910-920. Interesting is that if wave C = Wave A, another common relationship, the Dow would stop just under the Dec2 high, or Dow9042. More likely, as discussed previously, Wave C will be truncated. Timing looks to be into the end of next week or early the week after.

From CNBC on down, the punditry will attribute this rally to war news, although this rally was predictable in timing and eventual scope, and there is no significant change in the war. Similarly, when this turns down decisively in Wave 3 mid-April, with an expected plummet to below the October lows by late May, the punditry will attribute it to the war bogging down in Baghdad (or whatever).

More significant today is the Bonds Away prediction is also being realized. Long term rates may have bottomed. Bonds are falling as rates are rising. Get in fast!