Thursday, July 31, 2014

Mathematical Relationship Observation and Other Technicals

In Elliott Wave Analysis, analysts look for what are called 'clusters'. These are price levels where one or more mathematical relationships exist, and add credence to a particular target for a move. Earlier in 2014, I noticed a price cluster that may have significance.

My thesis is that the stock market has been in a bear market since 2000. There have been two substantial bear market rallies in stocks and subsequent reflations in the system. The first was from October 2002- October 2007, and the second has been March 2009 to the present. I maintain that both of these rallies have been bear market rallies within an ongoing secular bear market. The fact that both rallies have taken nominal prices to a new all-time high does NOT negate the secular bear market thesis. Both, however, have indeed gone to new highs in nominal terms.

Now to my discovery. Using intraday prices the 2007 high at 14,198.10 moved 20.83% above the 2000 high of 11,750.28.  Often times, the market will exhibit symmetry, especially between waves A and C of a correction. In this case, however, the market has achieved symmetry between two B waves of differing degree: primary wave B, and cycle wave b, respectively. An addition of 20.83% to the 2007 high yields 17,155.85. This in and of itself makes for a very interesting juncture at the moment, given that the market recently registered an intraday high of 17,151.56 on July 17, 2014. But, this becomes even more interesting when considering the 138.2% retracement level (a common stopping point for b wave rallies) of the 2007-2009 decline comes in at 17,150.25. Concatenating these two price relationships yields a price cluster of between 17,150.25 and 17,155.85. The current top is within within 0.08% of the lower target, and within 0.03% of the upper target. Also of note, the day of the intraday high, July 17, was also the particular day the market topped in July of 2007, before downtrending into an August low and staging one more rally before the final top in October of 2007. Very interesting to say the least.

Now some other technicals that are worth noting

Monthly Shooting Star Candle (Bearish Reversal Pattern):

A shooting star pattern occurs in uptrends when price closes at the low of the particular time frame (i.e. day, week, month, quarter, year). This is a bearish reversal pattern and alerts the analyst to a potential trend change from up to down. 

5-period RSI negative divergence similar to 2007:

The relative strength index (RSI) simply measures price movement relative to itself (prior moves). A lagging RSI indicator is a cautionary sign of a trend reversal. Notice the similarity between 2007 and 2014. In both cases, there were three points of negative divergence.

Monthly Broadening Top Pattern:

Throw-Over complete:

This long-term broadening top pattern is one I have been showing for quite some time and one that I still think is valid. Although there have been minor spikes above the upper trendline in 2014, none have been more pronounced than the one which has just been confirmed complete with a move back below the trend line.

There are no guarantees in the market, but this combination of evidence warrants extreme caution, to say the least.

While pinpointing can be difficult, there is one thing I can say with near certainty. This rally from March 2009, when complete, will yield the largest stock price collapse in at least 80 years, and probably the largest since the founding of the republic. This market is a house of cards, and when the ultimate top is confirmed, whenever that is, we should witness a very swift collapse back to the 2009 lows, at a minimum.


  1. Hi:

    Price collapse largest since the founding of the republic?--interesting comment. If one were to assume that the 17,152 was the highest the DOW does get (not a prediction, just for argument's sake), we are talking about a collapse below 1,854 to be the biggest in history (Dow closed 89.19% below its '29 top on July 8, 1932). For reference purposes, on Oct. 19, 1987 the Dow closed at 1739 on the day of the big crash. So you gotta an awful big megaphone there, partner!!

    In reflecting on the constant tampering of the components of the average, substituting the good for the bad, I wonder if this would be possible?

  2. John,

    That assertion is based on the fact that this bear market is of the highest degree since the founding of the republic: Grand Supercycle. The degree of the bear market is evidenced by the size of the mania and subsequent credit bubble that preceded it. That mania ended in 2000. Amazingly, the topping process has taken 14 years.

    Regarding tampering of the components of the DJIA, it does not matter what it is in. The Industrials serve as a psychological barometer for the stock market. No matter what they replace, it will always be known as "The" Stock Market average by the public and society. This is what is important. When social mood trends downward in a bear market, stock averages come with it. They are not perfect barometers, but seem to be the best measure we have.

  3. Well Chris, that certainly would be a life altering event for all of us if the Dow exceed the losses of the Great Depression. It would mean the complete repudiation of Keynesian economics, the possible demise of the Fed (as we know it) and would prove that Andrew Mellon was indeed correct during the depression when he urged liquidation. Poor Andrew hounded by FDR, in a kangaroo tax evasion case, while he was giving away his art collection to same :).

    I hear you on the averages--only mentioned it because I had read recently that some of the changes in the averages around the time of the '29 crash that actually exacerbated the subsequent decline. I believe the S&P index was the one mentioned. Thanks for the response.

  4. I see the SPYs were trading at 200 this morning--roughly equivalent to 2000 on the S&P 500--looks like we have to broaden the broadening top? :)

    Its like that Forex commercial on Clown Financial TV where all fiat is being belched out by the Central Bank of your choice--juicing not only the "stawk" exchanges but also the sovereign debt markets that may be just a bit more dangerous than stawks. The 30 year note seems like a rather endless bear flag--the frogs in the boiling water will never know when it gets to a boil.