January 10, 2009

“In Nature’s Law, Elliott referred to a shape called a “A-B base” in which after a decline had ended on a satisfactory count, the market advanced in three waves and then declined in three waves prior to the commencement of the true five-wave bull market….The authors have never seen an “A-B base”, and have every reason to believe that it does not exist. Its invention by Elliott merely goes to show that for all his meticulous study and profound discovery, he displayed the typical investor’s weakness in allowing prior opinion to adversely affect his objectivity in analyzing the market”

-The Elliott Wave Principle by Frost & Prechter

A Revised Elliott Wave Count; Market trough in 2012

Contrary to the opinion expressed above I see these a-bs at every turn. They occur at both tops and bottoms, that’s why I prefer to call them a transition rather than a base. What’s more it is at times synonymous with a Diag II and what makes up an irregular top or bottom. By discarding this integral structure the wave count becomes hazy indeed. No wonder the wave counts derived without recognition of the a-b transitions are so far off the mark!

Below is the generally accepted Elliott Wave count. As you can see there are no A-B transitions, nor diagonal triangles of any kind.It appears to be a mystery count, conforming to the “channel”.Waves (II) and (IV)do not alternate, and wave(IV) appears to be a 5-wave structure. Obviously a wave count with an erroneous foundation can only perpetuate errors.

Anyone who knows just a little Elliott can see that it makes absolutely no sense. Now if you look at our interpretation, you see that everything has a logical explanation. From the far left we begin with a complex A-Btransition,the very structure we are currently seeing in most stocks and indices to a lower degree of trend. Next a Diag IIfollowed by aDiagin wave (I), the former indicates the beginning of a long move,the latter a dramatic reversal just ahead in wave(II).Note thathere wave II is a cleara-b-c. Next another a-b indication transition to the upside, followed by five waves completing in October 2007 for Supercycle wave (III), meaning we are currently in a Supercycle wave(IV) Bear market, which alternates with Supercycle wave(II), theGreat Depression, of the same degree.That is some relief! Although things are going to get much worse after we peak in three years, the severity is likely only about 25% of that projected by others.

Still we must drop back at leastthe first touch point of the lowest Diag II, which occurred between 1987 and 1990 in wave E,back to Dow 2750, and 1988 prices.

As you see 1982 to 2007 was all an extended wave V to complete Supercycle wave (III). What’s more the Diag II between 1987 and 1990 gives us the minimum downside, after we peak in 3 years at D. In the Dow, but not the S&P, we can expect a high of ~19,000, which makes wave D 61.8% longer from the orthodox bottom of 7500. As we learned last week, each successive upwave is decreasing in time by the Fibonacci sequence, while its trajectory extends by the Fibonacci multiple.

Wave A took two years, wave C took just one year to drop 61.8% more. Given the sequenceis 1, 1, 2, 3, 5, 8, we are tracing these out in reverse. From a high near 19,000, in wave D we must drop to at least ~2750 in one year, back to the level of 1988 or below. That is some Crash wouldn’t you say?

Once again we can expect a repeat of the chart below, only with a much higher slope to the top Diagonal line, while the S&P maintains a very similar structure of a flat top.

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What can we conclude? Deflation is merely being post-phoned, and aggravated by Fed interventions. What’s more all this Fiscal and Monetary stimuli will put us in hock, when the real need arises and misery is likely worse by a factor of 10. If instead of $300 billion tax cuts, the Government invested that same amount in the Market. Far more could be accomplished while generating a profit. If we were to buy the same percentage of all listed stocks over two years in equal allotments, and then sold in equal allotments for the duration of third year, it would mitigate the inevitable euphoria at the top, while replenishing the treasury and pay back much of the deficit. This time we are going backup like a rocket, no matter what. Since the end time and trajectory are likely fixed, then the effect of stimulation must be adjusted for in the b wave correction, so that we get back on track to that ~19,000 in October+ or – 1 month. The same goes for the preferred stock the government has taken in banks, unless there is an exit strategy those very banks will go down a second time, taking with them the support funds required for a subsequent bailout. Ironically, after such a Crash, there will likely be less than optimal funds to combat a far worse situation, and we will not bounce back like this time. Yet for the next three years make hay while the sun shines, it is going to be one hell of a ride.

Regards,

Eduardo Mirahyes

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