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Thursday, October 13, 2011

Revisiting the Large Count

Okay, it's time for Crazy Uncle binve's Unpopular Opinion and EW Count Time!

Last week (during another episode of Crazy Uncle binve's Unpopular Opinion and EW Count Time) I was showing this count. So far things are going pretty close to script. Move up the the top of the range. Pullback/pause. Then after that we will see how the next act moves.

But I have been thinking .....

Here are a few consensus views that seem to be going around in the EW and macro spheres:

1) The vast majority of EW blogs seem to be counting this as a Minor 1 down that ended on Oct 4 and we are in a Minor 2 up (with the dreaded Minor 3 down to come). There seems to be a sense of inevitability / preemptive vindication about this stance.

2) The macro commentators are just flabbergasted that the Eurozone is not immediately imploding. "Dexia getting bailed out and nationalized", "Slovakia not agreeing to debt terms", "Italy is teetering on the brink of default", etc. etc. So there seems to be a widespread belief that this is just a relief rally because things moved down too far too fast in August. And we will be seeing these economic problems manifest in the stock markets (Eurozone and then a contagion to the US) in the next couple of weeks/months.

3) Recession warnings are popping up all over the place. ECRI (who has never flubbed a recession call, granted in only a 15 year time span) is saying that a new recession is inevitable. It seems like the majority of economists are either outright pessimistic or have curtailed optimism greatly.

Hell, even my recent counts are showing us that we completed a W down, we are in an X up, and so we will be making a lower low in a Y wave early next year.

The view seems overwhelmingly biased that we will be making a lower low across the analyst spectrum. In preparation for this 'inevitable crash' short selling reached a significant peak recently.

Of course there are contrary bullish voices out there, but from my (hopefully objective) assessment, they seem to be in the minority.

I have made the case many times that this cyclical bull market is likely not over:

-- Yet another reason why I don't think we saw 'the' top
-- Yet another reason why I don't think this cyclical bull is over
-- Update on Long Term Projection

However my original thought was that this mid-bull interlude would last longer. But with all the bearishness out there, now I am not so sure.

So I am revisiting an idea that ZimZeb and I were hashing out at the end of August. It has to do with some time relationships, and it comes from this comment thread. Here is the relevant excerpt that I will be discussing:

I also was doing some (likely erroneous) time analysis and comparisons, it goes something like this:

Call March 2009-May 2011 Primary W. = 2.15 years

Primary W is made up of Int W, X, and Y. The time ratio of Int X (0.22 years) to Int W (1.12 years) is 0.196.

Apply to Primary W => 0.196*2.15 years = 0.42 years (~5 months)

If Primary W started in May 2011, then if it obeys a similar time ratio, then it would end in Oct 2011.

This is what I wrote in August, and didn't think too seriously about it.... But now I am. Because in that same comment thread, you can see that one of the criteria that I was looking for (and didn't happen in August) was PPO divergence at the bottom. But with the October low (which could arguably be a capitulation bottom) we do have one.

So that means I am starting to think more seriously about this count:

The bottom of the Jul 2010 wave and the Oct 2011 wave display PPO divergence (blue indicator at top) [for an explanation of the PPO vs. MACD, see here]. I don't use the standard 12,26,9 settings (because it is too fast to be useful) and I like to slow it down to 14,30,10 which responds a little more slowly and less erratically.

This is certainly far from 'proof' of a bottom (which I guess the 'proof' would be a higher high above 1370, which is not particularly useful from a trading perspective) but says at the very least:

1) A tradeable bottom is in and any pullback should be bought for a couple more weeks of upside
2) The *potential* of a more significant bottom ('the' pullback low before continuation of the cyclical bull) is in.

Like I have said before, I don't let my expectations get in the way of my trading: Regarding Trading Positions and Long Term / Macro Outlook. But the point of this post is to illustrate why I think for the intermediate term (weeks/months) and potentially for the longer term (several months/couple of years) the risk is to the upside, not the downside.

Of course, like I said here and here, if the US significantly embraces austerity, then all bets are off and look out below.

So *IF* my theory about a significant bottom is an accurate prediction, then the longer term landscape could look something like this:

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