After a 767 point Dow decline yesterday, it looks like the futures are turning around and we may see a bounce today. But the truth is, we may not be out of the woods and I will show you one THEORY as to why.
Too early to trust happy-talk stories like Futures rebound after Wall Street’s worst day of 2019.
Let’s take a look at Ralph N. Elliott’s Wave ideas. There are several practitioners of Elliott who have expanded on this theory a good bit. Bob Prechter’s work at https://www.elliottwave.com/ is one.
But for simplicity in understanding the news and market gyrations, here’s a thumbnail sketch of how this all works.
Emotions Move Markets – in Cycles
When a major trend is in place and the market is moving in the direction of the trend, the market is said to be impulsive. If the market is running counter to the Big trend, then the move is corrective.
Three Waves or Five?
Markets can move either direction in steps of three or five waves. As a ballparking tool, three wave movements may be first thought of as potentially corrective. Five waves moves are usually in the direction of the larger trend.
- Wave 1 is often the smallest wave.
- Wave 5 cannot normally be smaller than wave 1
- Wave 3 is generally the largest wave.
- But wave 3 must be bigger than wave 1.
- In commodities, wave 5 may be larger than 3 and this has been happening more in stocks and ETF’s too.
- Magnitudes of wave movements tell us a great deal about future price expectations.
The Art of Wave Counting
Financial (and social as well as political) waves have definite structure. Here’s how a two and a half waves might look and I will explain as we go.
I colored the movements so you can follow easily. We begin with the black trace on the left:
One possibility is that we are in a Wave 1 down from the all-time-highs. As you can see, our expectation is that the waves are “nested.” We MAY have hit a bottom for a Wave 1 down.
Thus, with futures going positive (Dow futures +274 at writing time) there are two possibilities.
IF we are still in a Wave 1 down, then this may be a Wave 4. If that is the case, we can rally a bit, but will then decline to finish the first leg down as 5 down waves.
After this should come a three (or five) wave correction. Remember that in Elliott, the corrective move can be UP.
This is the purple line a, b, c move. As it completes, it would become the Wave II bounce after a Wave I decline.
Should this be the case, Wave I and two cannot be “orphans.” There must be a Wave III and since (see rules) the third wave is often the largest move, then we would expect that Wave 3 down will be at least as large as Wave 1 down.
More vexing, though, is that the III can complete over a wide range. Typically, Wave III is 1.5-times larger than Wave I but it can be as much as 2.5 to even 3.5 and 4.5 times the size of Wave 1 down.
At last, we will finish, but we cannot speak with certainty about where any of this will lead.
But We CAN Model
Which is why there is a spreadsheet tool in the Peoplenomics.com subscriber Master Index page that allows you to plug in the first move and estimate how far a three wave or a five wave decline would take us.
I’m going to share some numbers that you won’t find anywhere else. Because they constitute an Aggregate Index. This is something I developed in the wake of the 2000 Tech Wreck because brokerage firms were disingenuously telling people stocks were a good deal. They pointed at Dow and S&P indices and many just forgot to mention the $5-7-trillion of valuation lost in the Tech Collapse. The Aggregate, being a wider net, is more honest in its longer-term perspectives, at least so I believe. You’re welcome to drink whichever Kool-Aid you want, however.
Basis this way of tracking the totality of the market, 25,719.65 was the recent high for a possible fifth wave advance from the Christmas washout. That advance MAY have ended iots run on July 24. With the lows at the close yesterday – 24,092. 29 – one possibility is a Wave 1 down ids complete. Given the usual ranges and relationships between wave structures, then, we can model a POSSIBLE outcome. The green cells are some of the most common ranges to appear.
NO! This does not says we ARE going 11 percent lower. It’s just that it MIGHT happen.
When the market broke out of an expected trend channel last week, we did the only conservative thing possible: We went to a cash position.
How Bad Could 2020 Be?
When the hypothetical five waves end (down around 21,240) that’s when the question is becomes whether this first major five-wave sequence down will be “all there is to the circus?”
It might now be. However! If it is part of a larger wave structure, that larger wave count would call the whole decline to the end of Wave 5 down from the initial high only a larger Wave 1 Down.
That would mean a bounce and lower, lower still…
Which might be modeled as:
Again, not saying this WILL happen, only that a global war is in some of our timing models for five-years out and this kind of decline (America losing over half its savings – yee gads!) would certainly fill-in the term Second Depression. Beggaring American would be a real impetus for whatever government’s sitting to get a war rolling to keep people accepting the highwayman tax burden of government.
Just like the Cold War, we need an external energy to be great or to hornswoggle us into tax servitude. So sayeth history.
Three Positions, Not Two
A key thing to remember when markets are acting oddly? There are two “conventional” investment modes: “Long” – betting the market will go up. And “short” betting it will go down.
The third position doesn’t get enough creds: Being in cash – assuming the brokerage house doesn’t fail (like MF Global did and BTW why is Jon Corzine back in the business? No one has given us an acceptable answer to that one, yet. ) – cash is a position that removes some risk. Sure, you lose “opportunity” but you can avoid (or minimize) “calamity.”
All according to how you want to manage your money.
Our long-term advice to anyone who will listen simply goes like this:
“You can play Life for Maximum Gains, OR you can play for Minimum Losses/Downside Potential.”
We don’t know how this will all work out in the end, but in abnormal time there’s no point losing that which you can’t make back. A studious coward is better than a brave dead person in finance. Unless you have political connections, but that isd cheating. The Recession Watch Is Back On: CEO Daily.
We now return to what passes as Reality but are you sure? LOL.
Global Cooling Ahead?
Latest data on an emergent Solar Minimum is out from NOAA:
One possible reason for confusion? NASA and NOAA show different endings to this cycle. NASA has a happy-talk version showing a recovery sooner than NOAA. Who’s right?
Headlines Wandering By
“Trump administration freezes Venezuela government assets” Why did it take ’em so long?
Blockade Runners? “Defying U.S. Sanctions, China and
Others Take Oil From 12 Iranian Tankers” says the NY Times.
OK, off to work on Peoplenomics...write when you get rich,