The Anatomy of this Bear Market
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A plunge below the March low next, since the first drop was slow and relentless, the one just ahead could be a CRASH bottoming in October. Free fall should be at least 45% and could stretch out to ~71%, before a reversal into the next Rally above Dow 14,000.
"Make no mistake, with a little market timing the next 3-6 months will be profitable beyond your wildest dreams so long as you are short or invested in inverse funds”
To see the big picture, we need to look at the monthly “forest chart”. Fundamentals can never provide such a clear picture. Fundamentally the closest we can come is to understand the Austrian Theory of the Trade Cycle, as explained by Ludwig von Mises or his disciple Woods in the NY Times Bestseller, Meltdown. Artificially low interest rates, while temporarily easing the pain, merely serve to postpone and aggravate the severity and duration of the subsequent Depression.
Below is a simplified 5-wave Supercycle progression to the present. Wave 2 was the Great Depression, while the Bear Market beginning in 2000 is the Second Great Depression, the corresponding wave 4 of the same Supercycle degree. Since the market is a fractal, meaning that the whole repeats in the parts, the structure below is the identical to one that might occur in a 5-wave progression lasting just a day, or an hour on the ten minute or 5 min charts. The same patterns repeat, becoming ever larger.
A Bear Market is just a huge correction lasting for many years, as seen on a monthly or yearly chart.
Notice that Supercycle Wave 4 is a complex A-B-C, containing a Diag II in the A wave, along with simple B and C waves. The trough occurs upon completion of the A wave, likely back to the extreme of the previous 4th wave of one lesser degree, at 572. That was the low of the previous Cycle (one degree of trend smaller) Bear Market from 1964 to 1977as you will see below.
Like the example above, our Supercycle Bear Market should be very similar. In a Diag II(read Diagonal 2)the subdivisions are 5-3-5-3-5, just like a bull move, regardless of direction, with the 5’s often containing smaller Diag IIs to echo the larger, while waves a & d overlap. Diag IIs indicate the beginning of a long move, relative to the area of their size, in this case a protracted Bear Market. Two or more Diag IIs pointed in the same direction compound the force of the subsequent move, as if their areas were multiplied. I like to draw the analogy of a spring being tightly wound, so when released, it jets out in the direction it’s pointed. The upper trend line of the larger Diag II above from 1965-1974 more closely resembles the current configuration in the S&P 500, with a flattened upper limit, while the Dow shows a sharp upwards bias. This indicates a much higher peak for the Dow in the Mother of all Rallies, while S&P merely matches its 2000 peak for a triple top. Click here to see full chart.
Once wave C completes, we can expect a swift retracement up to at least the area of 12,750in wave D before a meaningful correction, where the Diag II began.
There are several examples in these charts of a Diag II swiftly retracing to its origin. In the Supercycle wave 4 chart we see the identical pattern in the b wave, this time amplified by Greenspan’s easy money, darting right past the 9800 minimum, to area of 12,750 before the first pullback. Above in the 1964-1977 cycle bear market the b wave swiftly retraced to the Diag II’s beginning, marked by the broken green line.Given far more radical fiscal and monetary policies this time around to amplify the stimulus effect, the overshot in the Mother of all Rallies should be even greater.
Lastly we have just completed the identical Diag II complex A-B-C in wave 4 of C just ended on Friday. While Supercycle wave 3 was a high, wave 3 of C was a low, so the entire structure is inverted, but nevertheless identical. The final a-b transitions to the downside. The smaller Diag II, which occurred in b, effectively nailed the coffin shut on the green shoots rally.
Elliott Synopsis:the Market moves up in 5 waves, where corrects wave 2 corrects wave 1, and wave 4 corrects wave 3. Upside moves subdivide into fives and are denoted by numbers, while corrections consist of three waves or variations thereof, and are labeled with letters. Since the market is a fractal, the structure of the whole is contained in its parts, so that each of 1, 3, 5 sub-divides into another 5 waves from the multi-century to the 1-minute chart. Below is a simplified 5-wave Supercycle progression from 1789 to the present. Wave 2 was the Great Depression, while the Bear Market beginning in 2000 is Second Great Depression, the corresponding wave 4 of the same degree. The structure below is the identical to one that might occur in a 5-wave progression lasting just a day, or an hour on the ten minute charts. Since the patterns repeat becoming ever larger, a Bear Market is just a correction at a higher degree of trend such as a monthly or quarterly candlestick chart.
Here are Elliott's only three rules:
1) wave 3 is never the shortest, and is often the longest
2) wave 2 cannot exceed the origin of wave 1, and
3) wave 4 cannot overlap wave 1
Except in Diagonal Triangles and Diagonal II's
Guidelines include:
Alternation between waves 2 and 4 of the same degree. That is to say, if wave 2 was a simple, sharp structure as was the Great Depression, then the current wave 4 of the same degree should be sideways and complex.
The extent of a correction is usually the extreme of the previous 4th of one lesser degree.
A Diag II indicates the beginning of a long move relative to the size of the diagonal, and occurs at the beginning of waves a and wave 1, and rarely in wave i of a long wave 3. By definition, wave 4 overlaps wave 1 in a Diag, while wave 3 can be the shortest, and wave 2 often dips below the origin of wave 1. The Diag II sub-divides into 5-3-5-3-5, just like an impulse wave.
In contrast a Diag > read Diagonal triangle is a terminal configuration indicating dramtic reversal ahead. These sub-divide into 3-3-3-3-5 or 3.