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Sunday, January 16, 2011

The Large Count with Historical Perspective (Part 2)

I wanted to look at the 1966-1975 Bear Market that I brought up in my last post (The Large Count with Historical Perspective) in a little more detail. In particular, I wanted to compare it to the current rally.

References for this post (please read these first - especially #2 and #5):

1) Not All Five-Wave Moves Are Impulses: A Short Treatise on Elliott Wave
2) Another Impulse Wave Study: A Look at the 1974-1975 Low and Rally
3) Historical Count: 2002-2007
4) Five-Wave Structures Revisited: The Identification of an Impulse Wave
5) The Large Count with Historical Perspective

There were 3 basic observations that I made in reference #5:

A) The NIKKEI from the last few decades. There are some precedents (especially in an index whose economy faces many similar macroeconomic headwinds we now face) for very complex and sideways X waves.
B) 1966-1975 Bear Market. X waves can sometimes be a simple bridge (like in the triple zigzag on the SPX from March 2009 - Apr 2010) where they are roughly the same same as the B waves in a 7 or 11 wave sequence. Other times X waves can be very complex and sideways and be on the same order of size and time as the W and Y waves.
C) A Study of Historical Bear Markets. The Pragmatic Capitalist put up a very interesting post looking at several bear markets to come up with an "average secular bear market"

The structure of the 1966-1975 bear market is what I am interested it. From the end of Cycle Degree 3 of the last bull market, this bear market begins with an expanded flat that runs from 1966-1970. The next X wave runs from 1970-1973. The last sharp leg down is very fast running from 1973 to the end of 1974.

This pattern looks like an expanding triangle (has a megaphone shape) and has 5-leg structure that a triangle exhibits. I however don't believe in 'expanding patterns' and think that 99.9% they are a red herring. But however we label it (either an expanding triangle or a flat-X-zigzag) the point is this bear market made both higher highs and higher lows several times before ending. This was a meat grinder.

What is very interesting is that in the current market, the SPX also makes an expanded flat from 2000-2009. And the current sharp wave up (the current V-shaped 'recovery') closely resembles the start of the large X wave in 1970.

With those observations, I wanted to put together a side-by-side comparison.

Now, there are some HUGE caveats that go into this comparison, and you must be mindful of them.

1) There is **NOT** time equality in this comparison. What this means is that I have adjusted the time scales of the two waves to match up peaks, rallies and declines. This is a wave pattern comparison. The wave from 1966-1975 was a Cycle Degree wave, and the current bear market is (my contention) at the SuperCycle degree. As such, if the pattern presented at Cycle 4 from 1966-1975 plays out in this bear market from 2000-20(18-20?) the peaks do not line up in time.

2) The are some major differences in macroeconmics between now and then. The 1970s were characterized by large inflation that was increasing and massive oil shocks. Largely since 2000 (and actually into the 1980s) the trend has been disinflation. Reporting of inflation via the CPI over the past 5 years or so has been suspect (rampant exploitation of hedonics and substitution - see: Regarding Economic Debates and Opinions: The Fallacy of "Purely Objective" Analysis) and I do think it is being underreported. And John Williams keeps alternate inflation statistics at ShadowStats (which I think are too high). Somewhere in the middle is what my opinion is. Also in 1971, Nixon closed the Gold window and we have been a completely fiat currency system since.

With that in mind, here is a look at the comparison chart that I put together:

Some observations:

-- Even scaled, the peaks do not exactly line up. Keep in mind, that is not the point of this comparison. But what is interesting is that the shape and relative severity of the waves are a pretty good match.

-- The shape of the rally since the low in 2009 is analogous to the shape of the rally in 1970. Not exactly (of course) but there is a good amount of correlation.

My main reason for showing this chart is to illustrate that the shape of the 1966-1975 market could be a precedent for the for the current secular bear market.

Even if this is a valid prototype for our market, there is very little chance it will play out exactly the same way (and I even show above, the previous peaks and rallies don't precisely line up on a scale comparison). If this is a valid prototype, I would think that it shows a loose representation as to what the overall wave structure might look like. This is NOT (nor am I suggesting it to be) a timing device of any sort

Since I have shown that the impulsive count off of the March 2009 low is NOT an impulse (see references #1 and #4) it is a corrective wave of some sort. That being the case, there is no reason to assume that this peak is market (Jan 2011) is 'the top' before the next big wave down (i.e. there are many precedents where X waves are large and complex and can test most if not even more of the range established by the preceding W wave).

I still think that the overall bear market could be something very ugly like this:

I will likely put some more macro thoughts together with this projection and how it could play out. And why I don't think we will have a major top (one that proceeds a >15% decline) until the summer. Look for that in an upcoming post.
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