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NEWS ALERT! - 'SHOCK' - 'POP' - 'DROP'By Peter Goodburn – Elliott Wave Analyst – WaveTrack International - copyright 2012 © This article examines and identifies the long term bear market unfolding in global stock indices – the S&P 500 is used as our international proxy. It is shown developing from its ‘orthodox’ high of year 2000 into a multi-decennial, three main price-swing or ‘wave’ event, labelled in super-cycle degree, A-B-C, identified as an expanding-flat pattern. Wave A is the initial declining ‘shock’ phase, wave B as the upward inflation ‘pop’ that follows and finally wave C as the ‘drop’, a collapse of historical proportions. Announcement – see Peter’s interview of the ‘Shock’-‘Pop’-‘Drop’ scenario on CNBC TV with Louisa Bojesen – click here
It’s not surprising that the bear market for stock indices is still fooling most since it began its decline from the ‘orthodox’ high in year 2000. It seems reluctant to reveal its true intent without some hard work being put in, and it has taken several years to fully understand and appreciate its inherent symmetrical beauty. It began with an initial collapse into the 2002-’03 lows (U.S./Europe) whilst unfolding into a perfectly proportional single zig zag pattern (Nasdaq the only exception) that prompted us to publish a very bullish outlook in April 2003 entitled ‘Do You Know’ [click to view/download]. At that time, mainstream Elliott Wave analysis was describing the same decline as a five wave impulse pattern that translated into expectations of only modest counter-trend gains prior to an additional collapse. But having ‘proofed’ this was a zig zag through fib-price-ratio analysis, our forecasts projected prices to new record highs, for the S&P, Dow and various others in the years that follow. At that time, the advance was labelled as a 5th wave within the long-term uptrend and although many indices including the S&P did later trade into new record highs some five year later, they did so again as three wave zig zag patterns. It was not long after when a subsequent decline accelerated in mid-2008 did wave counts depict a five wave impulse pattern in progress with downside targets to 651.09+/- into the next 78 week cycle low due in March ’09 - see fig #1 below. This combined with the preceding two zig zag sequences, the first in the 2000-02 decline and the advance of 2002-2007 revealed a developing expanding-flat pattern, A-B-C, 3-3-5. When the S&P finally unfolded as a five wave impulse into the March ’09 low at 666.79, then the expanding-flat was complete. At that time, it was given the same 4th wave labelling that was first assigned into the low of 2002, but as the global recovery began to lift prices sharply higher, something interesting happened.
The advance from 666.79 began to take the form of a five wave impulse pattern. Had it been just another zig zag, the 2007-09 impulse decline could have been labelled as completing the first wave of an ‘extended’ five for wave C of the expanding flat, but a five wave impulse advance makes that highly improbable. Furthermore, Fibonacci Ratio Guidelines tend to eliminate counting this same advance as a zig zag (to current levels of 1370.00) because it would necessitate wave ‘C’ of such a pattern measuring far to small compared to the ‘A’ wave, a ‘tenet’ that we have stringently adhered to over the last twenty or more years that has held in good stead throughout some amazingly volatile times. If the advance from 666.79 is taking the form of a five wave impulse, then this can only result in two ongoing possibilities – first, an expanding flat pattern that began from the 1552.87 high of 2000 completed into the March ’09 low at 666.79 as a 4th wave retracement and the 5th wave has since begun with ultimate upside targets far beyond anything currently imagined. Or second, the expanding flat to 666.79 completed wave ‘A’ of an even larger expanding flat that is unfolding as the long-term bear correction with wave ‘B’ now in progress with upside targets into modest record highs prior to a collapse in asset values for wave ‘C’ much later. How can these two be scenarios be distinguished between? The fact that these are two very different outcomes does help in this process of evaluation. There are two cycles that govern the long-term price trends for stock indices, the 42-44 year and 36 year periodicities. These point to a major peak into the year 2000 period and point downwards into the next major low in 2016-18. A couple of specific Asian stock indices are currently unfolding into ending-diagonal patterns that began in August 1998 that are approaching completion but remain incomplete. These two factors combined suggest the most probable scenario of the two is the latter – the long-term high in year 2000 ended a sixty-eight year uptrend and the balancing counter-trend decline that follows is taking the form of a multi-decennial expanding flat pattern that remains in progress and not scheduled for completion until 2016-18. It is not unique to find wave ‘A’ of an expanding flat also subdividing into a smaller degree expanding flat pattern – we have documented and saved many examples into our pattern archive. The only difference with this one is its amplitude/size, by far, the largest on record. The three phases of this expanding flat are labelled A-B-C in super-cycle degree, where wave A unfolds into a smaller expanding flat, wave B (currently in progress) as a single zig zag destined for a brief appearance into new record highs, and finally wave C declines unfolding into a five wave impulse sequence. Because of the magnitude of these price-swings, we have assigned each with a description of its effect – wave A as the ‘shock’ phase because for most, the depth of the initial decline into the March ’09 low coincided with disbelief that such a financial free-fall could occur in such a short space of time. Wave B as the inflation ‘pop’ phase, the result of a multi-year asset buying frenzy that is still underway, caused by the dual mix of governments and central banks lowering interest rates to levels just above zero combined with flooding the financial system with paper, through quantitative easing and increasing the money supply. Wave C as the collapsing ‘drop’ phase, the point from which an historical decline in asset values occurs, emulating that of the early 1930’s when indices fell by as much as -85% per cent – see fig #2.
As you can see from the monthly chart, super-cycle wave A ended at 666.79, wave B is currently engaged in a larger zig zag destined for record highs towards the 1833.00+/- area, followed by a collapse in wave C to either of two downside targets, the higher at 482.77 the lower to 169.80 but both into the 2016-18 year period – see fig #3.
The two long-term cycle periodicities of 42-44 and 36 years can be seen providing the overall direction for price action during the next decade and beyond – see fig #4. Its track-record is impressive – a rising trend in the late 1800’s completed into 1920’s that engulfed the collapse in 1929-32 before gradually turning higher from the late 1930’s next peaking into the 1960’s. It perfectly forewarned of the prolonged downturn of eighteen years throughout the 1970’s until the next low in the early ‘80’s that finally peaked again in the late 1990’s. The next major low is in 2016-18.
The amplitude of the multi-decennial expanding flat pattern is most interesting because there are common fib-price-ratio measurements for its completion that recur frequently across all degrees of trend. The most documented recorded in our archives limit the break beyond the defined trading range of wave A by waves B & C as falling within a fib. 38.2% ratio, but can be 14.58% or 23.6% – see archetypal tutorial chart in fig #5.
A fib. 38.2% extension ratio below super-cycle wave A’s low of 666.79 projects wave C towards 482.77 – see fig #6. The only problem with this is that it falls short of another axiom that R.N.Elliott documented – that the ensuing correction should retrace back to the area of ‘fourth preceding degree’. As the 1552.87 high of 2000 is labelled grand super-cycle wave (III) three that began from the year 1842 low, that ordinarily would project downside levels back to the 1929-32 area of 31.83, something we would definitely not expect. But one degree minus would necessitate levels approaching the cycle degree high of wave four towards 121.74. The most bearish fib-price-ratio measurement that can be applied is derived by extending super-cycle wave A (1552.87-666.79) by a fib. 161.8% ratio to project a low to 169.80. This is considered possible because this same fib-price-ratio was applied very recently, last year (2011) during the expanding flat pattern that unfolded in the S&P between the February ’11 high of 1344.07 and the eventual low of 1074.77 in Oct.’11. Extending waves A-B by a fib. 161.8% ratio pinpointed the exact low.
Projection for 2012The inflation-pop recovery phase that began from the March ’09 low of 666.79 as super-cycle wave B must ultimately trade into record highs whilst unfolding into a single (or multiple, double/triple) zig zag labelled A-B-C, subdividing 5-3-5 in cycle degree. At this precise moment, count #1 depicts an initial five wave impulse pattern completing wave A to the April ’10 high at 1219.80, wave B ending in June ’10 at 1010.91 and a secondary five wave impulse advance now in progress as wave C. A more direct advance for wave C would concur with our proprietary composite cycle that depicts a major high (see red cycle line) into the late 2013 period – see fig #7.
But there is now good reason to consider promoting count #2 to a higher status that relocates cycle wave A ending later, at the Feb.’11 high of 1344.07 and wave B currently unfolding into another expanding flat pattern that remains incomplete. If correct, fib-price-ratios that extend the entirety of last years’ decline combined with a developing zig zag advance from the Oct.’11 low converge to highlight major resistance at 1450.00+/-. Price-rejection and a subsequent reversal signature would confirm a significant decline ahead for the remaining period of 2012 as the concluding sequence of this pattern. Downside targets measure towards 980.00+/- for ending cycle wave B. Should prices follow this path, it will effectively delay the next and final upswing as cycle wave C of the larger zig zag to record highs – see fig #8.
We have been incorporating the concepts of ‘Ratio & Proportion’ to the Elliott Wave Principle for over twenty years and can unequivocally state that its role in price-prediction if vital in diffusing the ambiguities and subjectivities found in the wave counting process. If you are responsible for managing the portfolio within an asset management business, a hedge fund, a sovereign wealth fund, a life insurance, pension fund or simply taking responsibility for your personal wealth creation and protection, get in touch with us now. We have outlined the entire price development of the major world indices and other asset classes for the next seven years and beyond with various check points along the way – this is invaluable in helping you maintain out-performance and for the protection of your wealth. With the security and reliability of this approach combining ratio & proportion guidelines to the Elliott Wave Principle, we have found this provides an unparalleled insight into future price trends. For more information on our Institutional EW-Forecast services, please click here for Private Individuals, click here END | FIN | ENDE |
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