Planet Yelnick

Traders View - Turn Window Upon Us

Amidst these longer term views is a turn window this week.  McHugh first spotted the May31 time frame as a likely top, and now has pinpointed Jun4 as a very likely top in the Nasdaq. The STU sees turn window on Jun1 +/- 2 days for a top this week as well in the S&P, at SP1201.  They are less sure about the Dow, but a surge to Dow10609 would hit the 61.8% retracement level and satisfy normal relationships; the 78% level is a bit over Dow10700. 

While Zoran agrees that a major Bifurcation Point is near, he is unsure if it reflects the same 'end of wave 2' analysis of Prechter and McHugh.  Zoran's count is different - he has us still in a wave 5 from 1994, a wave 5 he expects to truncate, ie. end lower than its own prior top in 2000 - but he too has been looking for a major change of trend to the downside.  Now he is less sure that this break is imminent.  A bifurcation could occur over the next week, but THE bifurcation may be weeks ahead.  The drop from Mar7 highs and reversal in May have now broken above the Bear Control Line, meaning this down move is unfolding slower than the prior up move.  The whole pattern could suggest a multiweek corrective period is still ahead, leading to a third top before the change of trend back down.  Zoran does not give timing, but here is an estimate:  the first top since Jan04 was in Dec04; the second top was in Mar05; and thus a third top of similar time would be late June or early July.

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.

Last Chance To Get Out?

The pattern we have watched unfold is a wave 1 of 2000W3 down, which will be followed by a wave 2 reversal and then a strong downdraft in wave 3 of 3. The general Elliott view was that wave 1 would break below Dow10K, and that wave 2 would meander into the summer.  Also, since most wave 2's since 2000 have gone back 78%, this one was thought to do so as well. 

Instead, it now appears that wave 1 ended right at Dow10K, and we have been in wave 2 for the past three weeks.  In the Dow, this wave 2 has gone 38%, and seems ripe for turning down.  The pattern is still a bit cloudy, since to count five waves down in this wave 1 would mean a fairly short and fast little wave 5, and the reversal has not yet violated rules against this being still a minor wave 4; yet it is beginning to go too long to be such a wave. 

BrainFood gave a market alert today, and sees this as rolling over either tonight or tomorrow after a little more upwards movement.  The STU has a similar count, seeing this as having ended or about to end. 

We are in a Fibonacci turn window, and tomorrow May10 is the most likely date for a turn. 

Whether this is the end of little wave 4 or the beginning of the nasty wave 3 down we shall see in a few days.  The difference is whether now is the last chance to get out, or will there be one more chance later this summer.

China Syndrome

The China Syndrome was a movie of the late '70s premised on the silly notion that in a nuclear reactor meltdown, the core could break containment and sink well into the Earth, on the way to China.  Around the same time, the Three Mile Island nuclear facility had a partial meltdown.  The containment vessel held, no one was radiated, no one was injured - except the nuclear industry, as no nukes have been built in the US since then.  Art trumps reality, and fear has no bounds. 

Fear of a new China Syndrome may be moving the markets.  The US government has been pressuring China to float the Yuan, and they briefly did so on May2, perhaps testing the waters.  Markets dropped when the news broke. China then said 'oops' and claimed it was a glitch.  Then we had the Fed glitch last week.  The Fed left out a statement in their first announcement, to the effect that inflation was well-contained.  Markets began sinking. They then reissued their announcement with the statement back in - an unprecedented move. 

Mitch at Brian Food sees the two glitches as connected.  A floating Yuan may do little to lower our trade deficit but it will make imports more expensive - importing inflation.  In our overall deflationary environment, this might not mean much of an overall price increase, more a product margin squeeze; but the fear of it may spook financial markets.  Hence the Fed may too have been testing the waters, and found that fears of inflation are still present in this market.  Next week Bush meets with the Chinese.  This may have been intended as the setup for a floating Yuan: Mitch also reports a rumor that on May18 the float is supposed to be announced, after the meeting next week. Now they may back off. 

As the Chinese curse goes, be careful what you wish for.  The Chinese do not want this, as it will expose their banks to the massive amount of bad debt they are holding; and we may not want this, due to the fear of importing inflation.  Perhaps these little tests will inform both sides to avoid a meltdown of financial markets by containing the float.

Australia Votes on Greenspan!

Zoran reports in from Australia on the US market opening tomorrow:

• If it goes up through the trend line there will without doubt be a short squeeze. 
• If it fails, it will dump.  At open, it will go into the third high and if (a big if) it reverses and breaks it will go!   

Zoran encourages his global readers that it would be worthwhile to stay up and watch the action. Opening after the Fed made its surprise amendment, the  Australian Index (SPI) has given a resounding thumbs down to Greenspan's last minute manipulation of the U.S. market.

Market Alert! Alternative View for Tomorrow

Here is a different view than Prechter's STU, which expects a drop tomorrow or at best a brief spike at the open as the buying wave crests.  Mitch, the author of Brain Food, thinks we have bottomed and will now have a robust wave 2 rally.  Tomorrow thus provides an excellent test of the Trader View, well expressed by Mitch below, which looks at many indicators, some of them Elliott; and the Wave Count, which sees today as a small blip in an otherwise ending wave 4 correction.  The STU summary today read:

The blue-chip stock indexes reversed lower today after testing our cited resistance areas. The Dow's impulsive decline suggests that a high is likely in place. If so, the late day bounce should lead to more selling pressure tomorrow. The key level for this view is today's high [which matches Fibonacci retracement levels].

Now for the Brain Food alert.  He thinks the wave 2 has now started:

Corrective Pause Ended

The STU moved closer to the Yelnick view today: that we have ended this little wave 4 and will begin wave 5 down tomorrow, not at the end of the week.  The markets went sideways today until the Fed Open Market Committee (FOMC) announced a rate hike,  The markets first went up on the news, but then dropped after digesting the pronouncements that went with the rate hike, due to fears of inflation.  The Fed then amended their pronouncement to allay those fears, calling inflation "contained," and the market shot up in the last five minutes as this was interpreted to mean no more rate hikes!   

Has the Fed done this before?  Long-time Fed watchers think not.  The Fed is creating a problem by ponderous and ambiguous pronouncements that analysts read like tea leaves. The Fed is behaving this way because it is in a trap: if it stops raising short term rates, inflation looms; if it continues, recession looms.  The Fed hopes to thread the needle by manipulating public opinion.   It had to amend its statement after the market reacted to it in the opposite way the Fed intended. 

Will this needle-threading work? The Wave Principle says no: the Fed's manipulations will be overwhelmed by events.   At some point their pumping massive liquidity into the economic swamp to prevent it freezing during the Kondratieff Winter will come back like crocodiles in the mud to bite us in our assets.

Corrective Pause Ending

We have been meandering in a corrective pattern for two weeks. Currently we are in one possible turn window, but McHugh, who has been quite focused on timing the turns, projects it for next  week (see chart). He thinks this is likely the end of wave 1 down and the start of a strong rally into the next turn window, around May 31. The STU in contrast sees the correction as continuing until the end of the week, then dropping, also supporting this turn window, but marking an interim top not a bottom. 

Most likely we are in a little wave 4, and it has a final turn down in wave 5 before a major bounce. Note that the markets often rise into a Fed announcement, which is coming tomorrow, and then drop after the news, hence we might end wave 4 and begin wave 5 tomorrow. Little wave 5 may be fairly quick, a poke below Dow10K, followed by the multi-week wave (2) rally.