Predicting Primary wave [3], part 2

In the last post, we established that Cycle wave c of Supercycle wave (a) has been making the same type of price moves as Supercycle wave (IV). History does not repeat itself exactly, but history rhymes in many cases. We know that after the bear market rally in 1930 ended, another leg down followed, carrying the markets down to greater depths. There is every reason to believe that the bear market rally that is currently in progress will also be followed by another leg down that carries the market down to greater depths.

We know that Primary wave [3] is coming. When that time comes, deflation will unfold in full force, hence the name, "The Great Deflation" for the time period of Supercycle wave (a).

Now to utilize the 1929-1932 bear market as a model for predicting Primary wave [3]. The premise here is that Cycle wave c of Supercycle wave (a) will continue to follow the same price moves as Supercycle wave (IV). Here's the first chart of the DJIA, which shows the bear market rally and the first five waves down that followed the bear market rally peak.

DJIA, 1929 - 1931

The first thing we notice is that the bear market rally in 1930 lasted 5 months, and the first five waves down that followed lasted 13 months. This suggests that there will be a fibonacci relationship between Primary wave [2] and Primary wave [3] in terms of duration. The bear market rally that is in progress now has lasted 2 years. With the same type of fibonacci relationship playing out, Primary wave [3] will have a duration of 5 years.

The next task is to calculate a price target for Primary wave [3]. As indicated before, the difference between B waves and second waves must be taken into account. Supercycle wave (IV) is a zigzag, where Cycle wave c of Supercycle wave (a) is a five wave impulse. For this reason alone, it is not surprising that the bear market rally that is in progress retraced a larger portion of the previous decline than the 1930 bear market rally did. Primary wave [2] is approaching the 78.6% fibonacci retrace benchmark, which is Dow 12560.

Generally, second waves that are a deep retracement of the first wave are followed by third waves that are larger than normal. A 78.6% retracement definitely qualifies as a deep retracement, so we should expect Primary wave [3] to have 2.618 times the length of Primary wave [1] in terms of downward impulse strength.

In Primary wave [1], the DJIA fell from 14198 to 6469, falling by a factor of 2.194
For Primary wave [3], the DJIA will fall by a factor of (2.618 * 2.194) = 5.745

With a price target of 12560 for Primary wave [2], we calculate a price target of 2185 for Primary wave [3], and the target should be reached around Apr 2016. Applying the same technique, we calculate a price target of 218 for the S&P 500.

Primary wave [3] is going to be a very strong downward impulse.

The same model can be used to predict Intermediate wave (1) of Primary wave [3]. Here's another chart of the 1930 bear market rally and the first wave down that followed.

DJIA, 1929 - 1930

There are some interesting things about the chart.

1 -- In terms of time, there is a fibonacci relationship between the distance of the left shoulder to the head and the distance of the right shoulder to the head. The relationship is 5 time units for the left shoulder and 3 time units for the right shoulder, in other words, counting down the fibonacci sequence.

2 -- In terms of time, there is a fibonacci relationship between the distance of the left shoulder base to the head and the distance of the right shoulder base to the head. The bases are the two points where the neckline of the head and shoulders pattern is formed. The relationship is 3 time units for the left shoulder base and 1 time unit for the right shoulder base, counting down the fibonacci sequence.

3 -- The low point of the first wave down following the bear market rally peak is below the low point of the aborted H&S.

Applying the model for Intermediate wave (1) of Primary wave [3], here's what we come up with:

Minor wave 1 lasts 3 months, takes the form of a strong five wave impulse that takes the stock market back down to the neckline, around 9500 on the DJIA and 1025 on the S&P 500.
Minor wave 2 lasts 5 months, forms the right shoulder that peaks 8 months after the peak of Primary wave [2]. The right shoulder should trace out a zigzag. The target is 11400 on the DJIA and 1225 on the S&P 500.
Minor wave 3 lasts 3 months and takes the form of a strong five wave impulse, dropping the DJIA down to 8400 and the S&P 500 to 875.
Minor wave 4 lasts 1 month and forms a flat. The target is 9100 on the DJIA and 950 on the S&P 500.
Minor wave 5 lasts 1 month and drops the DJIA down to 8000 and the S&P 500 down to 775. Both the DJIA and the S&P 500 will take out the July 2009 low.

Optimism will remain throughout Intermediate wave (1) of Primary wave [3]. When the economy and job market follow the stock market down, it's very likely that economists and analysts will say that we are in a "double dip recession". This is part of the phenomenon known as the "Slope of Hope".

Here's a chart showing the predicted wave path for Intermediate wave (1) of Primary wave [3] in the DJIA:

DJIA, 2009 - 2012

In part 3, the rest of Primary wave [3] will be fleshed out.