Today I want to look ahead at the most likely, in my opinion, outcomes for this bear market and how 2010 fits into the picture. The passage above comes from pg 53 in the section on combination corrections in the book Elliot Wave Principle by Frost and Prechter. In the book there are two combination patterns shown that begin with a flat correction followed by a 3 wave upward correction and then finishing with either a zigzag or a triangle. At the bottom of the page I have added what I believe may be an as yet unrecognized elliot wave combination correction that I am calling the combination flat correction. I have only seen this pattern one time in one individual stock and that stock is no longer listed, but I believe it to be a valid possibility, as well as one that may dove tail with the consensus elliot wave opinion, but without as extreme a decline to complete wave Y.
These flat combinations only apply to the SP500 and the Dow and not the Nasdaq Composite or 100. The primary reason I believe the above flat combinations will be the likely path for the rest of this bear market is that 1) the SP500 and the Dow clearly completed flat and expanded flat corrections, respectively, at the March 2009 low, and 2) the proposition that the March 9 low was only primary wave 1 of c of a still ongoing flat, frankly, seems proposterous, and 3) if, and it does seem possible at this point even if not likely, the SP500 makes a new high this year, it will invalidate the ongoing flat with the impending primary wave 3 down case as put forth by Robert Prechter. It may ultimately prove to be correct, but a number of analysts have put forth fairly convincing models of the Dow that put the expected bear market low at somewhere between 2700 and 4000, not 400 to 1000 as proposed by Robert Prechter. I am not trying to beat up on Robert Prechter, but rather I am trying to put forth a hypothesis for the rest of the bear market that fits with my analysis of the cycles and that seems a little more sensible.
In my view, case I above is the most likely outcome. In case I, wave X does not have to approach the old high and is followed by a long drawn out zigzag for wave Y. We would expect wave X to top sometime this year. Wave a of Y would probably bottom in late 2012, which will be a confluence of the 4 year and 10 year cycle lows. Wave b of Y would probably last until 2017 and wave c of Y would probably bottom around 2019. Wave a of Y would most likely approach or test the March 9 low, and wave c of Y would most likely bottom between 2700 and 4000 for the Dow.
Case II above is the second most likely outcome. In this case wave X is followed by a triangle. This could be a problem for active traders as volatility might be so low as to make it difficult to be profitable. Even so, skilled intermediate term traders should be able to be profitable in this scenario. Wave a of the triangle would likely bottom in late 2012. Wave b would likely top around 2017, but wave e might not complete until well into the 2020s. Wave e of the triangle would most likely bottom at or above the March 09 low. Unfortunately, there will be no way to know whether Case I or II is in force unless and until the wave a of Y low is taken out, years from now.
Case III is the new pattern that I propose and the least likely outcome as I see it. If it occurs, perhaps some kind soul will give me credit, but since it is probably not going to happen, I won't worry about it too much. In this case, we would expect wave X to top out near or above the all time highs for the Dow and SP500. Afterward, a very sharp 5 wave decline that goes well below the March 09 low would follow and would likely bottom in late 2012. I say that this case dovetails with the consensus elliot wave view because it does end in a severe 5 wave decline, albeit from higher levels than the consensus expects. This case also presents another problem since it will be difficult to tell if the bottom in 2012 is the end wave Y or simply wave a of Y from case I. However, if it is deep enough we might reasonbly conclude that it is case III. Nevertheless, there will be no way to prove it until there is a higher low later in the decade.
These hypothetical corrective patterns show that 2010 is the year that wave X will complete and the next leg of the bear market will begin. They also show how it can be that we will approach the old highs while still remaining in the middle of a secular bear market, which will most certainly fool most traders and investors. X waves, like B waves, are fakes and the breadth and momentum of wave [C] of x will probably diverge from wave [A], and if so, it will help us conclude that the hypothetical combination corrections are the correct interpretation and prepare us for the coming decline.
It is not clear that after this correction is over that a typical new secular bull market will ensue as it may be that any of the above outcomes are simply wave a of very large triangle that lasts until the second half of the century in Supercycle wave IV. Even so, there should be several long periods of strongly advancing markets until the 2040s. If I'm fortunate enough to still be trading at that time, we can speculate about the next secular bear market then.
No comments:
Post a Comment