Predicting Primary wave [3], part 1

We know that Primary wave [3] of Cycle wave c is coming. We know this because Supercycle wave (a) is taking the form of an expanded flat. Cycle wave a and Cycle wave b have been completed, and Cycle wave c is in progress. Within Cycle wave c, Primary wave [1] is completed and Primary wave [2] is very close to completion. Because wave c of an expanded flat subdivides into five waves, then it follows that Primary wave [3] is coming since it is the next part of the larger downtrend.

Primary wave [2] has been in progress for 2 years. Hopefully, people have used this time to get their financial house in order and get properly positioned for what is coming next. When Primary wave [3] starts, deflation will unfold in full force, unemployment will skyrocket, and social mood will rapidly go south. The socionomic events of Primary wave [1] was just a teaser-trailer preview of the hard times that will start to unfold when Primary wave [3] starts.

There is a model that we can use to predict how Primary wave [3] will unfold. We'll go all the way back to the 1929 - 1932 period of the stock market. We can show that Cycle wave c of Supercycle wave (a) has been making the same price moves as Supercycle wave (IV). Further, it is also interesting that the DJIA made the same price moves from 1974 - 2000 as it did from 1921 - 1929. The major depression really has been decades in the making.

Here's the charts showing the initial declines from the top.

DJIA, 1929

 

 DJIA, 2007 - 2009

First of all, notice that the patterns of the initial declines are almost identical. Let's illustrate how the declines are identical:

1 -- The first wave was a moderate strength downward impulse. The stock market declined slowly.
2 -- The second wave retraced 50% of the first wave.
3 -- In the third wave, the stock market declined with increasing momentum, culminating in a full-scale crash.
4 -- The fourth wave was a dead cat bounce, forming the first part of an inverted head and shoulders with the neckline at the 23.6% fibonacci retrace.
5 -- The fifth wave resulted in additional declines in the stock market. The fifth wave has a relationship of equality with the first wave, but unfolded much faster than the first wave did.

The sentiment of both declines are identical as well. A waves are seen as a pullback pursuant to the next leg of the advance. It is quite reasonable that a first wave in a bear market will be seen by people in the same way -- just a pullback within a larger advance.

In both cases, the initial decline was followed by a substantial bear market rally. Here's the charts showing the bear market rally that followed the bottoms of the initial declines.

DJIA, 1929 - 1930

DJIA, 2009 - 2011

The bear market rallies do have some differences between them, notably the location of the A wave top and B wave bottom. However, there are characteristics that are identical.

1 -- Following the bottoms of the initial declines, the markets put in an aborted H & S with the neckline at the 23.6% fibonacci retrace.
2 -- Both bear market rallies occur in three waves.
3 -- Both bear market rallies put in a head and shoulders top.
4 -- Both bear market rallies have the left shoulder halfway between the aborted H&S and the head.
5 -- Both bear market rallies exhibit decreasing volatility and volume as they approach their peak.

Again, the sentiment is identical in both cases. Both B waves and second waves are seen as a continuation of the previous trend. In both cases, optimism returned by the end of the bear market rally, with the consensus that the worst is over.

Now we are in position to start predicting how Primary wave [3] will unfold. The bear market rally in 1930 was followed by another leg down, taking the market to greater depths. The current bear market rally will be followed by another leg down as well.  In part 2, we'll look at how the next leg down will unfold.

The Bear Market So Far

In the last post, we have established that we are in a Grand Supercycle bear market. The goal is now to explore how the bear market has unfolded so far and what the expectations are in the years and decades ahead. We know that we ended a Grand Supercycle degree advance in 2000.

From the start of the bear market, there was a decline that took place from Jan 2000 to Oct 2002, for a total of 34 months. This part of the decline would likely be Cycle wave a. Here's the chart of the DJIA during that period:

Notice that Primary wave [A] of Cycle wave a took the form of an expanding leading diagonal with a strong under-throw in Intermediate wave (5). In the S&P 500 and the Wilshire 5000 Primary wave [A] of Cycle wave a took the form of a five wave impulse. In the Nasdaq, Cycle wave a took the form of a five wave impulse. After the low on Sept 2001, a bear market rally, Primary wave [B] of Cycle wave a, unfolded in three waves. After the bear market rally ended, a five wave downward impulse followed, completing Primary wave [C] and therefore Cycle wave a.

After the initial leg down, markets rallied strongly from Oct 2002 to Oct 2007, for a total of 5 years. Here's the charts of the DJIA and the Nasdaq:

Nasdaq,  2000 - 2011

DJIA,  2000 - 2011

The difference between the two charts is that the DJIA reached new highs in 2007, but the Nasdaq didn't. This type of non-confirmation between the indexes means that the rally from 2002 - 2007 in the DJIA (and the S&P 500 and Wilshire 5000 as well) is Cycle wave b. Additional confirmation is the DJIA/gold ratio, which didn't hit a new high in 2007. Bull markets go up in real terms as well as nominal terms.

The implication here is that Supercycle wave (a) is taking the form of an expanded flat in the DJIA, S&P 500, and the Wilshire 5000, but taking the form of a zigzag in the Nasdaq. An expanded flat has a 3-3-5 wave pattern. We don't yet have a satisfactory 5 wave structure in Cycle wave c.

Within Cycle wave c of Supercycle wave (a), Primary wave [1] has been completed, and we are very close to completing Primary wave [2]. Next up will be Primary wave [3].

Here's what has unfolded so far since the bear market started:

Supercycle wave (a)   Jan 2000 - ???,   "The Great Deflation"

Cycle wave a             Jan 2000 - Oct 2002,   Dot-com bubble bursts

Cycle wave b             Oct 2002 - Oct 2007,   Stock market and housing bubbles 

                                                               (Housing bubble bursts in 2005)

Cycle wave c             Oct 2007 - ???,     Credit, commodity, student loan, 

                                                            and stock market bubbles burst.

Primary wave [1]        Oct 2007 - Mar 2009,  Stock market and oil bubbles burst

Primary wave [2]        Mar 2009 - ???,          Early Obama Administration Period

Primary wave [3]        ??? - ???,                   Late Obama Administration Period

Primary wave [4]        ??? - ???

Primary wave [5]        ??? - ???

It is clear that the so-called "Great Recession" is actually Primary wave [1] of Cycle wave c of Supercycle wave (a). In other words, the events of Primary wave [1] is just a teaser-trailer preview of the hard times that are yet to come, which will start when Primary wave [3] begins to unfold. When Primary wave [3] starts, deflation will unfold in full force, hence the name "The Great Deflation" for the period associated with Supercycle wave (a).

In the next post, we'll explore a model that will give a hint on how Primary wave [3] of Cycle wave c will unfold.

The Big Picture, part 5

In the last post, we established that the Renaissance period was a Grand Supercycle degree bull market advance. The next task is to look at the Late Middle Ages period to see where it fits within the larger picture.

Many historians see the Late Middle Ages as a period of advancement in human civilization, and most have the period dated at 1000 - 1350. Again, the key here is that the economy follows the stock market. There are also a number of socionomic indicators that provide clues to characterizing the period.

Upon examination of the period, there are already a number of issues with trying to characterize the Late Middle Ages as a bull market advance:

1 -- The Crusades took place from 1088 - 1254. Religious persecution is associated with big bear markets, not bull markets.
2 --  The Hundred Years War started in 1337 and ended in 1453. Wars are associated with bear markets of at least primary degree, and a war lasting 100+ years is too big to be associated with a Grand Supercycle bear market. A war of that magnitude only results from bear markets of Super Millennium degree or larger.
3 -- There is no blow-off top at the end of the period. Grand Supercycle bull markets always end in a blow-off top with a bubble lasting 20 - 30 years.
4 -- The size of the gap between the rich and the working class during the period is not consistent with a bull market advance. The gap between the rich and the working class widened throughout the period, whereas in a true bull market, the gap between the rich and the working class narrows during the first wave, remains narrow with a strengthening working and middle class during the third wave, and then the gap between the rich and the working class widens during the fifth wave.
5 -- Banks started collapsing in 1294. Bank failures occur in bear markets of Cycle degree or larger, never during bull markets.
6 -- When the economies of European nations peaked, there was no blow-off or bubble. Instead, there was a resumption of decline to greater depths than before.

With all of those issues in mind, the Late Middle Ages would actually be considered a bear market rally within the Dark Ages. The bear market rally would have begun in 1254 and ended in 1294, taking on an expanded flat pattern.

The Dark Ages preceded the Renaissance. In terms of wave counts, the Dark Ages, which lasted over 1000 years, is clearly too big to be a Grand Supercycle bear market. Given its immense duration, the Dark Ages is best labeled as Ultra Millennium wave ((II)), that is, an Ultra Millennium bear market.

Here's our updated picture:

Ultra Millennium wave ((I))      c10000 BC - 337,    Neolithic Revolution to Roman 

                                                                        Period

Ultra Millennium wave ((II))      337 - 1400,            The Dark Ages

Ultra Millennium wave ((III))     1400 - 11000+,       Modern and Future Civilization

Super Millennium wave ([1])     1400 - 4400+,         Modern and Future Civilization

Millennium wave ((1))               1400 - ???,              Modern Civilization

The Modern Civilization period subdivides into Grand Supercycle waves as follows:

Grand Supercycle wave [I]       1400 - 1720,     Renaissance

Grand Supercycle wave [II]      1720 - 1784,     Major Depression

Grand Supercycle wave [III]     1784 - 2000,     Industrial and Technological 

                                                                    Revolutions

Grand Supercycle wave [IV]     2000 - ???,       Major Depression

Grand Supercycle wave [V]      ???  -  ???,       Biotech and Nanotech Revolutions

The good news is that we are not in a dark age.

We now know our current position: Grand Supercycle wave [IV] of Millennium wave ((1)) of Super Millennium wave ([1]) of Ultra Millennium wave ((III)). We are in a Grand Supercycle bear market. This means that we are in for a pretty lengthy corrective period, and that a major depression is in progress.

Some hard times are going to be coming our way as the bear market progresses. The number one message of the Elliott Wave Principle is that while we do indeed go through hard times, there is also reason for hope and perseverance in the face of hard times, knowing that in due time, the correction will be completed and a new bull market, Grand Supercycle wave [V], will start.

Knowing that we are in a Grand Supercycle bear market, the next post will involve taking a closer look at the period to assess how the bear market has unfolded so far and what the ultimate expectations are.

The Big Picture, part 4

In the last post, we have established that we are in either a major depression or a dark age. Either scenario has very serious implications. In this post, we attempt to determine our position within the larger Millennium degree advance. We know that we ended a Grand Supercycle degree advance in 2000, and a bear market of at least Grand Supercycle degree is in progress.

So far, we have established the periods of two Grand Supercycle degree periods.

1720 - 1784       Major Depression

1784 - 2000       Industrial and Technological Revolutions

We also know that that the bear market that started in 1720 was initiated by the bursting of the South Sea bubble in England and the bursting of the Mississippi  bubble in France. We also know that the bursting of the bubbles marked the end of a long bull market period known as the Renaissance.

Now to take a look at the Renaissance period. The lack of stock market data prior to 1695 makes this endeavor more challenging. However, it turns out that people had kept records on economic activity as far back as 1150. This is important because the economy follows the stock market.

The book, The Great Wave, Price Revolutions and the Rhythm of History, by David Hackett Fischer, turns out to be an excellent source of information on economic data going as far back as 1150.

With the economic data on hand, we can first attempt to identify both of the depressions that occurred during the Renaissance. The later of the two depressions is very easy to identify because an event known as Tulipmania occurred from 1634 and the bubble burst in 1637, resulting in a deflationary crash and depression. The earlier of the two depressions turned out to be more challenging to identify as no obvious blow-off top is discernable. However, Europe was engulfed in a series of wars from 1479 - 1495. (Later, I will discuss the correlation between wars and bear markets. Correlations between social trends and stock prices are part of a science known as socionomics). Looking at the economic data of that time period and utilizing the correlation between wars and bear markets, the earlier of the two depressions occurred from 1470 - 1484.

The Renaissance can easily be characterized as a Grand Supercycle degree bull market advance. Here's the picture so far:

1400 - 1720      Renaissance

1720 - 1784      Major Depression

1784 - 2000      Industrial and Technological Revolutions

The Grand Supercycle bull market associated with the Renaissance subdivides into Supercycle waves as follows:

Supercycle wave (I)    1400 - 1470    Commercial Revolution

Supercycle wave (II)   1470 - 1484    Depression

Supercycle wave (III)  1484 - 1637   Enlightenment Age

Supercycle wave (IV)  1637 - 1648   Depression

Supercycle wave (V)   1648 - 1720   Scientific Revolution

There is in fact enough economic records to identify the major recessions that took place during the later part of the Renaissance. Here's the Enlightenment Age in terms of its Cycle waves:

Cycle wave I            1484 - 1514    Early Enlightenment Age

Cycle wave II           1514 - 1520    Major Recession

Cycle wave III          1520 - 1587   Middle Enlightenment Age

Cycle wave IV          1587 - 1600   Major Recession

Cycle wave V           1600 - 1637   Late Enlightenment Age

Here's the Scientific Revolution period in terms of its Cycle waves:

Cycle wave I            1648 - 1660   Early Scientific Revolution

Cycle wave II           1660 - 1667   Major Recession

Cycle wave III         1667 - 1676    Middle Scientific Revolution

Cycle wave IV         1676 - 1695    Major Recession

Cycle wave V          1695 - 1720    Late Scientific Revolution

I think that the wave count works well here, as it identifies Supercycle wave (III) as an extended third wave, and the tendency of first and fifth waves having a relationship of equality when the third wave is extended is also fulfilled quite nicely. Additionally, Cycle wave III of Supercycle wave (III) is also an extended third wave, with Cycle wave I having a relationship of equality with Cycle wave V being fulfilled.

In part 5, we'll explore the Late Middle Ages period in detail, using the economic data and socionomics to see where it fits within the larger picture.

The Big Picture, part 3

At the end of the last post, I have shown that we ended a Supercycle degree advance, which means that we are facing at least a depression in the economy and the job market. Depending on our current position within the larger Grand Supercycle degree advance, it is possible that we also ended a Grand Supercycle degree advance as well, which has very serious implications.

Making that determination requires looking even farther back. The DJIA only goes as far back as 1896, which is far enough back to show a good chunk of a Supercycle degree advance that preceded the Great Depression. This indicates that the Supercycle degree advance that ended in 2000 is Supercycle wave (III) or Supercycle wave (V).

When Ralph Elliott originally pioneered the Wave Principle, he had data going from 1854 - 1941 to work with. Before the DJIA existed, the Axe-Houghton Composite Index existed, which was started in 1857. He labeled the period 1857 - 1929 was Supercycle wave (III), the Great Depression as Supercycle wave (IV), and the period after as the early stage of Supercycle wave (V). The labeling was based on the appearance of an apparent triangle pattern in the DJIA that spanned from 1929 - 1941 and the observation that triangles only appear in fourth waves, B waves, double-threes, or the final X wave in a combination.

In the late 1970s, the Foundation for the Study of Cycles released a chart of U.S. stock prices going back to 1789. The chart was created by splicing the DJIA from 1896 to the Cowles Commission Index from 1871 to the Cleveland Trust Company from 1831 to prices uncovered from their independent research from 1789 to 1830.

The chart of U.S. stock prices from 1789 is already suggesting that we also ended a Grand Supercycle degree advance in 2000. This has very serious implications -- namely, we are facing at least a major depression in the economy and job market. The correction will dwarf the Great Depression in terms of severity and duration.

Here's a chart of the DJIA equivalent from 1695 - 2011, showing that the Grand Supercycle degree advance started in 1784 and ended in 2000. The period from 1720 - 1784 gives a hint that major depressions are massive in duration and severity and is clearly identified as a Grand Supercycle bear market.

In terms of wave counts discerned so far, here's what's known so far:

Grand Supercycle wave [II] or [IV]    1720 - 1784,  Major Depression

Grand Supercycle wave [III] or [V]    1784 - 2000,  Industrial and Technological 

                                                                        Revolutions

The Grand Supercycle degree advance that ended in 2000 subdivides into Supercycle waves as follows:

Supercycle wave (I)     1784 - 1835,  Early Industrial Revolution

Supercycle wave (II)    1835 - 1859,  The Long Depression

Supercycle wave (III)   1859 - 1929,  Late Industrial Revolution

Supercycle wave (IV)   1929 - 1932,  The Great Depression

Supercycle wave (V)    1932 - 2000,  Technological Revolution

What is clearly evident is that we didn't have a "Great Recession" that ended. We are in either a major depression or a dark age. To find out which one it is, we must determine our current position within the larger Millennium degree advance. That will be in the next post.      

The Big Picture, part 2

Since the "Great Recession" would be considered a major recession if it was the entire correction, then it follows that we ended a Cycle degree advance under that scenario. However, the goal is to look at the big picture to determine out current position within the Elliott Wave sequence, and thus be able to determine whether the worst is over or still yet to come.

The starting point, therefore, is to determine our position within the larger Supercycle degree advance.

Here's the chart of the recent Cycle degree advance that ended before the so-called "Great Recession" started.

The chart is the DJIA, which shows the entire Cycle degree advance from 1974 - 2000.

The Cycle degree advance subdivides into Primary waves as follows:

Primary wave [1]               1974 - 1977,  Early Computer Age

Primary wave [2]               1977 - 1982,  Recession

Primary wave [3]               1982 - 1986,  Late Computer Age

Primary wave [4]               1986 - 1987,  Panic of 1987  (Recession in 1990 - 1991)

Primary wave [5]               1987 - 2000,  Internet Age

The next task is to determine if the Cycle degree advance is wave I, wave III, or wave V within the larger Supercycle degree advance. If the Cycle degree advance is wave I or wave III, then the correction is completed and the worst is over. If, however, the advance is wave V, then the correction is not completed and we are facing at least a depression in the economy and job market.

The next chart goes farther back, from the end of the Great Depression in 1932 and continuing through 2011. The chart shows the larger Supercycle degree advance.

Doing a wave count of the advance since 1932, it is evident that we didn't just end a Cycle degree advance in 2000, we also ended the larger Supercycle degree advance as well. The Supercycle degree advance started in 1932 and ended in 2000.

The Supercycle degree advance subdivides into Cycle waves as follows:

Cycle wave I                1932 - 1937,   The New Deal

Cycle wave II               1937 - 1941,   Major Recession

Cycle wave III             1941 - 1966,   Atomic Age

Cycle wave IV             1966 - 1974,   Major Recession

Cycle wave V              1974 - 2000,   Computer and Information Age

Preceding the Supercycle degree advance is the Great Depression, which was a Supercycle degree correction that took place from 1929 - 1932. With that in mind, the Great Depression would be labeled either Supercycle wave (II) or Supercycle wave (IV), and the advance that took place afterward from 1932 - 2000 would be either Supercycle wave (III) or Supercycle wave (V).

Part 3 will continue the determination process, looking at our current position within the even larger Grand Supercycle degree advance.

Elliott Wave Labeling Chart

Before I continue with the big picture analysis, it is necessary to introduce the wave labeling chart that will be used. Brackets are used in lieu of circles for the minute, primary, and grand supercycle degree wave labels. Waves smaller than subminuette degree are labelled with italic lower case roman numerals and letters. The standard wave labeling for all other wave degrees currently used by analysts are followed.  The Millennium wave is the largest wave recognized by people that utilize the Elliott Wave Principle, and the Grand Supercycle wave is the largest wave that has standardized wave labeling.


Ultra Millennium   -- Lavender -- ((I)) ((II)) ((III)) ((IV)) ((V)) ((A)) ((B)) ((C))
Super Millennium  -- Dark Red -- ([1]) ([2]) ([3]) ([4]) ([5]) ([a]) ([b]) ([c])
Millennium -- Purple -- ((1)) ((2)) ((3)) ((4)) ((5)) ((a)) ((b)) ((c)) 
Grand Supercycle  -- Blue-Green -- [I] [II] [III] [IV] [V] [a] [b] [c] 
Supercycle  -- Green -- (I) (II) (III) (IV) (V) (a) (b) (c)
Cycle  -- Pink--  I II III IV V a b c

Primary  -- Yellow -- [1] [2] [3] [4] [5] [A] [B] [C] 

Intermediate  -- Red --  (1) (2) (3) (4) (5) (A) (B) (C)
Minor  -- Blue --  1 2 3 4 5 A B C
Minute  -- Lime Green -- [i] [ii] [iii] [iv] [v] [a] [b] [c]
Minuette  -- Orange -- (i) (ii) (iii) (iv) (v) (a) (b) (c) 
Subminuette  -- Dark Yellow -- i ii iii iv v a b c 
Micro  -- Gray -- [i] [ii] [iii] [iv] [v] [a] [b] [c] 
Submicro  -- Gray -- (i) (ii) (iii) (iv) (v) (a) (b) (c)
Miniscule  -- Gray -- i ii iii iv v a b c


When the Elliott Wave Principle was originally pioneered in 1938, the subminuette wave was the smallest wave recognized, and the Grand Supercycle was the largest wave recognized. Since then, Robert Prechter introduced the Millennium wave in the title At the Crest of the Tidal Wave in 1995.


Although the Super Millennium wave and the Ultra Millennium wave are not officially recognized by people that utilize the Elliott Wave Principle, there is very strong evidence for their existence in human civilization. More on that later.

The Big Picture, part 1

When the period known to the public as the "Great Recession" hit in October 2007 and continued through August 2009, the question that naturally came to people's minds is this: Is it over? Or is the worst yet to come?

Knowing the answer to the question involves much research and looking at the big picture. It makes a great deal of difference if the so-called "Great Recession" is the entire correction, or just a part of a larger correction that is yet to fully play out before an economic recovery can start.

If it was just a major recession (which is what the "Great Recession" would be if it was the entire correction), then the worst is over. When it comes to depressions, major depressions, or even a dark age, it is critical to be able to see it coming before it hits, and to do so with enough time to get properly positioned to ride out the hard times and make it through the correction in one piece.

This is where the Elliott Wave Principle comes in. Pioneered in 1938 by Ralph Elliott, the stock market was discovered to be a fractal. Progress does not occur in a straight line, but is interrupted by corrections of various sizes along the way. The pattern is five waves up, three waves down (or a variation) at all degrees of trend. It is also well known that both the economy and the job market follow the stock market, and thus are fractals as well.

In general:

Primary degree bear markets result in recessions
Cycle degree bear markets result in major recessions
Supercycle degree bear markets result in depressions
Grand Supercycle degree bear markets result in major depressions
Millennium (and larger) degree bear markets result in a dark age.

Because the stock market (and thus the economy and job market) have a fractal pattern, it is a matter of looking at the big picture to determine our current position within the current Elliott Wave sequence.

Since the "Great Recession" would be considered a major recession if it was the entire correction, and major recessions result from Cycle degree bear markets, a good starting point is to determine our position within the larger Supercycle degree advance. In future posts, charts will be put up and the larger picture will be analyzed.