I analyze macroeconomic issues from a fundamental perspective, and I analyze market behavior from a technical perspective. Original macroeconomic analysis can be found here and both macro analysis and commentary can be found on my Caps blog. If you like or appreciate my analysis, please add yourself to my Following List

Sunday, March 28, 2010

Another Impulse Wave Study: A Look at the 1974-1975 Low and Rally

My last post (Not All Five-Wave Moves Are Impulses: A Short Treatise on Elliott Wave) was looking at the rally since March 2009 through the lens of "Is this an impulse wave?". Specifically, we are observing a five wave move, but per my argument, a five wave move is not sufficient to define an impulse. The key is acceleration of the third wave. It must display more strength and dynamics than the first wave.

My friend Anchak asked me to look at the 1974/1975 bottom. This is a very good idea. This was the most recent secular bull market to emerge from a several year bear market, which makes for a very relevant comparison point.

The theory is that 1969-1974 was a vicious up and down bear market with a *severe* drop from 1973-1974 (about 50%). So perhaps the wave forms get distorted in an impulse wave after a severe drop? Let's see if this idea is backed up by the historical record.

First, lets put the SuperCycle Count from 1929 to 2000 into perspective. Here is how I count that wave, from my post (The Long View)

Next let's make some observations about the wave behavior, starting large and then zooming into 1975 area.

The SuperCycle Wave

As we can see, the point that I was making in Not All Five-Wave Moves Are Impulses: A Short Treatise on Elliott Wave, ... And when the market direction is determined by the herd, it does so dramatically and impulsively to break out of the tug of war. We see third wave accelerations in impulses from a 1 minute chart to a 100 year chart. And it is obvious that it is more than simply a 5-wave sequence that defines an impulse. ... does hold up. We see third wave acceleration at the Cycle Degree all the way down to the Subminuette. It is the defining characteristic of an impulse. Not the only one, but a very important one. One that, if not present, should really make you question its identification as a 3rd wave

Cycle Degree 5

Again we see acceleration in the 3rd wave. It is absolutely unmistakeable. We see it not only in Primary 3 compared to Primary 1, but definitely within the Intermediate 3 of Primary 5 extension. This is a critical (and obvious) tell that a third wave is at play.

Primary 1 of Cycle Degree 5

Okay. This is the first Primary Degree Wave after the major bear market low. So those wanting to call the move from March 2009 to now an impulse wave should pay attention to this wave closely.

We see Intermediate Wave 1 bounce off the low in an impulse. The next move, Intermediate 2, is a *very deep retrace* of Int 1 (78.6%). Wave 2's can vary in their complexity, but more often than not they are deep retrace waves (50% - 78.6%). Intermediate 3 is a very nice, clearly impulsive waveform, with Minor 3 of Int 3 *showing very clear acceleration*.

So the theory that a wave forms get distorted in an impulse wave after a severe drop is *not* supported by the historical record. The 1975 wave form is a very clean impulse with unmistakable acceleration in the third wave.

Now let's again compare to the March 2009 rally.

If a "5-wave" structure
- Wave 2 retraced *significantly less that 38.2%*
- Wave 3 is *substantially decelerated in comparison to Wave 1*
- Wave 3 has a *very overlapping structure* that does *not* look like a third wave extension (most of the waves are sideways in overall progression, not vertically slicing through resistance)

(from my post: Examination of the Large Technical Landscape / Possible Paths)

The first wave of ANY impulse of ANY degree MUST ITSELF BE AN IMPULSE!!!. This is basic Elliott Wave 101.

Because this move is *not* an impulse, that rules out the possibility of a new secular bull market starting from March 2009. The fundamentals do not support that claim and the wave forms sure don't support that claim.

.... But then again, don't pay attention to me, no matter how relevant my observations are. I am just a permabear after all.
blog comments powered by Disqus