DJIA update: tomorrow confirms breakdown or whether DJIA has one wave higher.

I know the endless stream of "tomorrow will tell us more" gets old.  But this is how they wear you down at the turns.  This is how most people do not have the stamina to stay in the game in order to receive max profits.  This is how most people, right near the end, give up and say "Things will never change.  Trees will in fact grow to reach the sky".  Market timing is all about knowing these things and doing what it takes not to get complacent or tired in the end game.  Just like golf, drive for show, putt for dough.  Same in timing the turns.

The wave count is seemingly vague right now to everyone trying to keep up with it.  But in my experience, it rarely is vague once the chart is in the books and can be reviewed in the rear view mirror. It is the real time aspect of the data analysis and the what-ifs that people seem ill suited to take on.  However, as a software debug expert, this is what I do for a living. I match the data to known causes and then set up experiments to confirm or deny the hypothesis (which are in fact just models).  In any case, if you are feeling fatigued by all this, hang in there because the rewards are coming and soon.

Having said that, based on the wave action today the chart can go either the red or blue route as shown below. The blue route is the current model.  Today's swoon was completely expected per yesterday's post.  And now in looking at the DJIA chart, it is perfectly reasonable that we got the big vee type recovery off of that low. So, if the current model (that is, the model whereby July 3rd was the peak) is to remain intact then we need to have a big sell off begin tomorrow per the blue line.

If this does not happen then don't freak.  All it would mean is that we have to suffer the C of 5th wave of an expanding triangle which is the red path.  That would actually put a nice little bow on the entire set of waves since mid April.  We should not just expect this huge bull to roll over and play dead for us. 

 

If the current model (blue model above) is going to happen, the reversal downward should begin from the open tomorrow and should only get worse to the downside from there.  Why?  Because this will be a 3rd wave and they are never the weakest.  So if we do not see this then we should begin to suspect a model change will be needed to the red model.

Another hint that we need to switch to the red model is that we see a higher high in the DJIA than the high of the recovery bounce.  So, something like 16960 or higher will be the trigger.  But even before that we will likely see the red squiggles as shown as the chart will likely want to put in a "b" wave with a triangular flavor in order to let us know it is the penultimate wave.

Whipsaw is how the market throws off anyone who is not worthy near the major turns.  Whipsaw is one way in which markets make sure that not everyone collects the full 20x that those who catch the bottom will receive.
 

By the way, near the turns is where we also often see divergence.   Look how TVIX did today.  Despite the fact that the DJIA was down only 70 points, TVIX is now up nearly 8% on the day.  70 Dow points is nothing.  When the DJIA has been going up 70 points TVIX is not taking an 8% hit.  So you can see that the wind has clearly shifted from being a TVIX head wind to now being a TVIX tail wind.  The VIX is a coiled spring and TVIX is its leveraged brother.

When this thing breaks loose it is going to astound most people.  The consensus is that the markets are due for a correction ranging from 10-30%.  All I can say is "yeah right".  I believe that 75%+ is more like it.  Reversion to the mean does not imply that bubbled just correct back to the average slope.  They undershoot as well.  We are in an historic overshoot right now and the most likely result is a massive over-correction to the down side over the next 24 months.  Here is a good read from like minded individuals.  Mish's bottom line was (yellow highlighting mine):


What's the Downside?

The mean-reversionists like Steen, John Hussman,  myself, and a shrinking handful of others have been ridiculed to death recently.
   
Nonetheless, I stay convinced, and in general agreement with Steen on the major points above except the potential downside. Whatever upside is left, mean reversion says the downside will grow with it.

History suggests bear markets will destroy many bears, some by turning bullish at the top, others by turning bullish way too soon after a correction.

And given the oft-stated downside has been something like 30% for at least two years, I suggest the downside may be a lot deeper or last a lot longer than most bears think.