July 24, 2010
The long-term Elliott count is your most accurate compass
In a world where the vast majority, navigate the Market blindly, only the long-term Elliott count is an accurate compass. Going back to the late 1700s, when the SupercyclebeganSupercycle Degreecorrections, Waves (II) & (IV) denote Depressions, while Waves II & IV of cycle degree denote recessions, or what we might call “mild depressions”. As you see below the only Depressions occurred in Wave (B), the Supercycle degree transition, Wave (II) the Great Depression, which kicked off right after the wave (I) peak, and Wave(IV), the Second Great Depression, since March 2000. Therefore, the statistical comparisons continually being made between pseudo-recessions and those of cycle degreeor Supercycle Degree are akin to comparing mountains with mole hills, and any conclusions drawn from them are utterly useless.
Like a Pendulum the Market swings from Optimism to Pessimism and back again
What’s more, the Market, like all living things, has a Life Cycle, which reflects that of humans, composed of alternating waves of optimism and pessimism operating on all degrees of trend simultaneously. That is to say that within a mostly pessimistic Bear Market of Supercycle degree, there are bear market rallies of optimism lasting several years, months, weeks and even days, times when we temporarily deny the big picture, hoping and perhaps delude ourselves into thinking the Big Bear is behind us, only to be blind-sided when he ferociously returns. Let’s face it, ten years into this Great Bear Market and we are less than 1/3 of the way through. This single aspect will color our lives to the same degree as those who lived through the First Great Depression. (see chart below)
The market is a fractal
Since the Market is a fractal, meaning the whole is echoed in the parts, a 30-year wave (IV) Supercycle Bear Market looks just like a wave iv that may last only an hour on the 10-minute charts, or a day on the hourly chart. The only things that differentiate the two are severity and duration; otherwise the smaller can be viewed as a “scale model” of the larger.
The Market is Cyclical – like the seasons
As you see from the graph above, the Market is also cyclical, like the seasons. Stimulus attempts to create a perpetual summer, once the fall has already begun. Although stimulus may bring on something akin to “Indian Summer”, the Winter which follows will be all the more severe and long-lasting as a result. Depressions and Recessions must be simply be endured.The best we can do is plan for sufficient heat, adequate shelter and warm clothing. This is precisely our current predicament. We have squandered huge sums in futile attempts to create a perpetual summer, only to learn that we may not have the resources to clothe, house and feed our own citizens. Actually, we do of course, if we cut out the wars, eliminate foreign aid, and instead learn from the Chinese on how to expand high ticket exports.
Chinese Model for rapid growth
The Chinese are not waging wars; instead they are widening their sphere of influence, so they can develop markets for their exports. Instead of deficits they have surpluses. Rather than borrowing and spending, they save and invest. By providing credits to African nations, they’re able to sell huge infrastructure projects that will only increase their sphere of influence at near-zero cost, while we continue to give money away in the name of foreign AID, only to be held in contempt. Foreign AID, a vestige of American Imperialism, implies US superiority.That’s why the US is despised in many parts of the world.
A Paradigm shift
As the world’s largest debtor nation, a major paradigm shift is required, and fast. We simply cannot afford such extravagances any longer. If we are to ease the misery of our own citizens these grandiose ideas of yesteryear must come to an end. Its either guns or butter, as economists often point out.
Stimulus in a Bear Market is Keynesian stupidity
Last week we saw how Reagan’s stimulus in boom times actually worked to increase economic activity and tax receipts while lowering taxed. In a Bear Market, stimulus is benign stupidity. Hopefully you will see the reason stimulus has gotten us nowhere, is that we are in a huge pessimistic cycle. While in boom times stimulus is spent, in depressed times, stimulus windfalls are saved, or used to pay down debt, rather than invested or spent.No wonder the money supply continues to shrink. The Second Great Depression cannot be avoided, or side-stepped, no more than the tides or the seasons can be manipulated.Since Greenspan’s easy money in 2003, repeated by Bernanke in 2008-2010, all we’ve done is “kick the can down the road”.On the other hand, each time we put off reality, the eventual reconciliation becomes all the more catastrophic. Unless European style austerity is instituted, we will destroy the bond market and cause our national debt to skyrocket through the marvel of compound interest, at far higher rates.
Below is a stylized Elliott chart approximating the Dow’s trajectory, includes both Great Depressions.This Bear Market began in March 2000.The dashed lines are indicative of how much is left to go and the likely gyrations. The past 10 years have been the worst of any stock market on record. We are far below the March 2000 high and going much lower before we get even temporary relief. This Bear Market’s trough will likely come in the A wave, when Depression will be in full force, when the Dow plunges to the area of Dow 550, the extreme of the previous 4th wave of one lesser degree, Cycle wave IV, as shown.
While the low of Supercycle Wave (II) occurred at the end, in the C wave, this time inSupercycle Wave (IV)it will occur in the A wave, about half way through, as you see below. Unlike the first Great Depression, this one will contain the equivalent of two Great Depressions, with and intervening Bear Market Rally, Wave B.
The conclusions of these data are crucial for planning your life and your business.
Current trading positions
In the Daily S&P chart below we see the progress so far we have dropped in wave 1 and are now correcting in that drop inwave 2.Wave 2should take us back to at least S&P 1180 and likely a false breakout in the transitional “b“near the top. The peak of this chart at 1220 relates to wave b in the chart above.
The likely trajectory of Wave 2 is shown below, an a-b-c sharp correction, which sub-divides into 5-3-5. Wave b, also comprised of ana-b-c,echoes the entire wave 2 up-side-down. Next we drop into complete wave bshown in the dashed red lines, slightly below a. From the low of b begins a very long 5 waves up to complete wave 2. Wave b should not drop below the origin, in this case wave 1. The diagram below leaves out the a-b transitions which are the portions of the wave most susceptible to short-term sentiment and occurring at every turning point. They can be thought of as crown molding which transitions from the walls to the ceiling and proportional to the degree of the wave change. As in architecture, the higher the ceiling the larger the crown molding required to make a smooth transition.
Although the Dollar is dropping hard, a small bounce is required here to complete a Diag II, along with the much larger Diag II just to the left, confirm it will be a very long plunge.
Bonds, both levered and un-leverd, are on the way up to begin a long move. But first, a retracement to at least the red dashed line, where the Diag II began in wave ii, is required.
The VIX is on its way to at least 20, after 3 Diag > in sequence and as part of wave iv of a Diag II. Like the calm before the storm, an explosive Spike in volatility follows the drop to 20. Mot likely we have a Runaway Bear Market Rally.
Here is the SPXU and the beginning or our inverse funds, with a likely upside to at least the 50% retracement.
Gold is our only long and in a terminal rally, perhaps the last, as denoted by the Diag >s
DRV gives us a min upside between 50% and 61.8% as the min upside, since it must swiftly retrace to the beginning of the previous Diag >
EDZ should climb to at least the 50% and 61.8% Fibonacci retracements, like most the others below.
FXP is the other that provides a clear min upside to 39.21
SCO to at least the 50% and 61.8% Fibonacci retracement
TYP to at least the 50% and 61.8% Fibonacci retracement
TZA could go above the previous high in a, marked “failure”.
My apologies this week, I have an eye infection and the light irritates it.
Best regards,
Eduardo Mirahyes
Exceptional Bear