patrick.net

In a previous thread, CDon questioned me:

First, [...] you said you have been an EW trader for a dozen or so years - was there ever a time during that 12 year span where you were bullish for more than a few days or weeks? I ask because of approximately the 30 or so EW traders I have met in the last 15 years, not one of them was long term bullish (I mention this because there is an obvious implication of a "selection bias" issue which may be at work here - you would think that on the balance of probabilities, half of them would have been bearish, half bullish - yet it has been 100% - 0% ).

Second, when you see that Prechter has been (long term), resoundingly, pound-the-table bearish for approximately 25 years now, doesn't that bother you? If he cannot seem to anticipate the beginning of the downward c / apocalypse wave for +or- 25 years, do you personally believe that you can call it any better?

As for the first question, I am not as surprised as he is. I will explain, shortly, why the numbers stack so positively in the bearish direction. I personally, as CDon suspects, trade in days and weeks. At this Elliot Wave juncture (Grand Supercycle wave FOUR) I feel there is no other option. I will explain what GSC FOUR is in a minute, as well.

Just a comment regarding "selection bias" though. Without knowledge of Elliott Wave theory, and all things being equal, I would have guessed the ratio would have been a Fibonacci 62/38. Many studies have been done on subjects where the statistical odds were 50/50 but the human bias came closer to the "golden mean". A simple coin flip is a good example. The odds are obviously 50/50 but the human response will be 62% heads. The power of the Fibonacci sequence continues to amaze me everyday. Still, it does not surprise me that true Elliotticians (yes, that's how we refer to ourselves), would almost to a man be negatively biased right now.

So why is that? Let's start with a little Elliott Wave history. Ralph Nelson Elliot traced the history of the stock market back as far as he could, i.e., as far back as the Dow Jones Industrials were averaged, and then he speculated on the previous advance based on the English commodities markets (the primary markets of the world at the time). Robert Prechter later fine tuned the data with additional research by Professor E.H. Phelps Brown, Shiela V. Hopkins and further data by David Warsh. Warsh's data, in particular, created a "market basket of human needs" which traced relative prices of a basket of goods from 950AD to 1954. Prechter compiled and combined their data into a chart of Grand Supercycle data of wave THREE degree starting in 1789 and topping in January of 2000.

Using this data, we can set the beginning of Grand Supercycle wave THREE to 1789. Grand Supercycle wave THREE progressed in five waves of Super Cycle degree. Thus, the beginning of wave (I) of Supercycle degree also begins in 1789, the birth of United States and coincidently, the Industrial Revolution. Wave (I) peaked in 1835 as the Panic of 1835 set in, and the wave (II) correction bottomed at the end of the Civil War in late 1859. Wave (III) rose mightily during the height of the Industrial Revolution until 1929 when the stock market crashed bottoming into a corrective wave (IV) in 1932. Supercycle degree wave (V) carried the markets up to the year 2000 where Grand Supercyle wave THREE peaked in what Elliott describes as an "orthodox" top.

Since 2000 the markets have been in wave FOUR of Grand Supercycle degree. Fourth waves are the most erratic, volatile and unpredictable of the Elliott waves. They can be as simple as an A-B-C zig zag, or they can morph into a double or even a triple zig-zag. They can form triangles. The A-B-C can take the shape of a 3-3-3 or a 5-3-5 pattern or a 3-3-5 pattern. A 'B' wave can overthrow the orthodox top which is the condition the market is experiencing today. A 'B' wave can also form a triangle although that is not likely now that wave B has overthrown the orthodox top. Fourth waves are notorously difficult to track in real time. One of my rules for determining fourth waves is "if you can't figure out what the heck you're looking at it's probably a fourth wave". Not very scientific, I admit. Market behavior since 2000 seems to fit that bill though, adding a level of confirmation to the fourth wave assumption.

Supercycle wave 'A' bottomed in 2009. Wave 'B' is playing out now. So, if wave B of Supercycle degree is topping now, wave C will carry markets back down to unprecedented levels, levels well below the bottoms of 2008. Wave A and B have both occurred as three's which means the probability is that wave C will play out as five waves of Primary degree, rendering a 3-3-5 for the pattern of the A-B-C correction. Time wise, wave C should occur over the next 3-5 years. Mid-year 2016 is the area of the bottom most likely indicated by overlapping various business cycles.

With that out of the way, let's answer CDon's second question. I'll start by answering the question about Prechter's apocalyptic wave not occuring for 25 years. Again, a little history. In the late 1970s Prechter called for a giant bull market at a time when no one believed him, called him crazy. The Dow had just crashed from 1000 to 572 three years earlier and market sentiment was at a major low point. I think we all know what happened between 1978 and 2000, the greatest bull market in modern history.

But Prechter admits he failed to realize how powerful the market really was. Primary wave 5, from 1975 to 2000, extended beyond anything imaginable in 1978. Prechter began looking for the Grand Supercycle top in the late 1980s. The 1987 crash carved out an obvious Primary degree wave 4 so the wave 5 top and thus the top of GSC FOUR was near... just one more Primary degree move. But fifth waves often "extend", i.e., stretch themselves out as the larger degree attempts to fight reversal. Like a battleship or an aircraft carrier, large degree waves can't just turn on a dime, momentum must be reduced to the point where the physics works. In his 1978 book, "Elliott Wave Principle", Prechter had projected the top of the Dow would happen near 4000. But as 4000 came and went, Prechter wrote another warning called "Tidal Wave", in 1995 where he projected the Dow would top near 10000 around the year 2000. This projection turned out to be correct.

"But wait", I can hear you saying, "that wasn't the top of the market. The Dow rose to 14000 in 2007 before the big crash and now it's over 16000 and still going". That's true, and without an understanding of the Elliott Wave Principle it makes no sense to call 2000 the top of the market. To wrap your head around this concept you must first study data that reveals "real" asset values. Compare a chart of the S&P to retail money-market funds as a percentage of market caps. Go as far back as 1995 and compare a chart of the Dow prices to the Dow divided by the PCE, the Personal Consumption Expenditures Index. If you really want to know what the Dow is worth, compare it to the Dow divided by the PPI, the Producers Pricing Index or the Dow divided by the price of gold. In these cases and by many other comparisons, since the year 2000 the relative value of the Dow has continued to decline while the stock prices have continued to increase. Which do you think are "real"? The comparative values or the market values? Elliotticians will choose the comparative values every time.

But by the end of the rally in 2000, the unimaginable had evolved into typical or "normal" market behavior. The idea that markets can just keep on rocketing upward was and remains pervasive. A new version of Irving Fischer's infamous declaration of a "permanently high plateau" was born... the "new normal". This economic view will remain in place until it is proven to be false and eventually wiped away by the next deflationary collapse.

It is not lost on me that a number of people have lost a great deal of money trying to practice Elliott Wave theory. I would venture to guess that more have tried and failed than succeeded because that is also true of everyone of trading, in general. Prechter warned his readers in his 1978 'Elliott Wave Principle' that

"If you decide to do what only one person in a thousand can do -- trade or invest in markets successfully -- set aside a specific amount of money that is significantly less than your total net worth. That way, when you inevitably lose it all at the end of stage one, you will have funds to live on while you investigate the reasons for your failure."

Admonition of risk doesn't get any more clear than that. In none of Prechter's books or newsletters have I ever heard him say, sell your house and put the cash under your mattress or buy gold or short the market. However, he does stearnly warn his readership that the markets will collapse and their stocks, bonds, commodities, precious metals and houses will suffer catastrophic loss as a result. Further, he suggests cash as the first line of defense and short-term U.S. treasuries as a second line.

Admittedly, how to time the transition from portfolio to cash is a dilema of great magnitude. As CDon remarked in his comments:

"Even back as far as 1989, the deflationists were saying "BUCKLE YOUR SEATBELTS - IMMINENT FINANCIAL COLLAPSE!!!!!!" Yet, it is now 25 years later, and those who sidelined themselves @DJIA 3,000 - 25 years of renting with no end in sight - are pretty much destitute by now."

I can't and don't offer advice in that area. It is extremely difficult to know what to do in such a volatile economic environment as we have experienced in the last decade. Elliott Waves don't really help in this regard at this time because the time span of a top three hundred years in the making can be decades wide -- as is proving to be the case. Prechter missed calling the orthodox top of a three hundred year wave by seven years, that's a 2% margin of error. Is that good or bad? or even believable? It depends on your perspective, of course. As CDon points out, those that bought into the panic early, even if Prechter's admonitions eventually are proven out, will have suffered great, perhaps insurmountable losses. Those that never buy into the idea will suffer great and insurmoubtable losses.

Perhaps there is simply no hiding from a Grand Supercycle fourth wave.

You can learn more about Elliott Wave Theory here...

http://www.globaldeflationnews.com/introduction-to-the-elliott-wave-principle-the-key-to-understanding-market-behaviorpart-1-the-basic-8-wave-cycle/

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