Getting your bearings with the big picture

It always helps to see the big picture and charts nowadays don't go back far enough to see it.  In addition, without some larger Elliott wave context it is easy to remain confused about what it all means.  I hope to provide some insight about that as simply as I can in this post.

Back in 2002, Robert Prechter wrote a book called Conquer the Crash.  It discussed how the money supply works and thus why deflation happens to the credit portion of the money supply at some point eventually no matter what the federal reserve wants or does.  His book made it clear that human herding behavior controlled the credit cycles and thus the timing of them.

His book also introduced (to me at least) the concept of Elliott waves (which Prechter had written several books about over the past prior decades, essentially picking up the work of the original discoverer of the wave principle, Ralph Nelson Elliott.  Elliott waves are a form of herd tracking, a set of rules and guidelines for market timing.

Prechter chose to release Conquer the Crash in 2002 because his wave count back then showed that we were likely at the peak of a Grand Super Cycle 3rd wave.  Remember what was going on back then, dot bomb insanity, etc.  Below is his wave count at the time.  As you can see, he was expecting an eminent crash and he had every right to do so based on the data available at the time.

Of course, waves are about odds and not certainties as Prechter would have to endure.  I say "endure" as opposed to "learn" because he already knew that fact.  But he had to make a choice: say nothing and wait for the crash to unfold and then explain why it happens (booooorrrrrring) or make an advance prediction based on the data he had in hand (riiiiisssskkkky).   He chose the courageous but risky way and the market simply was not ready to stop partying yet.  As a result, he earned the jeers and derision of thousands of short sighted people who overlooked all of his other teachings because they did not get instant gratification in the predicted result.  They did not want to understand this basic fact:  EW is about odds and not certainties.

However, I assert that Prechter was not wrong but rather simply too early.  This is a very easy situation to fall into if you are trying to call the wave count in real time (which is the only time that calling it has any value at all!).  Who gives a crap about how the count followed all of the rules if none of it was actionable in the pursuit of screwing the other gamblers at the table out of their hard earned cash?  Yes, that is what the stock market is all about, and no, not everyone understands this truth. Mark and Patsy have their retirements tied up in it and I am attempting to relieve them of their cash.  I don't feel badly about it because Mark and Patsy are ruining America by voting for liberal politicians while laughing at Ron Paul and Ross Perot for not being good-looking, charismatic Hollywood actors.  I hope their laughter lasts well into their retirements and is a source never ending warmth and comfort to make up for the fact that they voted themselves into poverty and assisted greatly in the decline of the once great nation which was America.

Below is an updated version of a chart that I found on the web which was created about the same time as Prechter's book came out.  I updated it with the chart data that has become available since then in order to show the full picture which has now (apparently/likely) revealed itself.  Prechter wasn't witnessing the peak of the 5th wave back in 2002, it was actually only 1 of 5 where the 5th wave would eventually turn out to be an expanding wedge as shown below.   From this picture you should be able to understand why I sometimes appear so excited in these pages about the coming prospects for profiting on the short side.  We are finishing up a massive 5th of 3rd wave where the 5th part of it started back in the 1930s!   Keep in mind that the guideline for a pullback here is to the level of the prior 4th wave.  The chart below is log scale so read those numbers on the right hand side carefully.  The target for the DJIA is Five hundred (500).  Will it get down that low?  Nobody knows.  But it will certainly break well below blue 4 of the expanding wedge which made up wave 5.

I don't know how fast this retracement will occur, but we do know that deflation is caused by lots of defaults and they tend to play out quickly.  If you look at the last real crash of 1929-32 in the lower left of the above chart you can see that in just 3 years the DJIA lost 89% of its value.  So anything is possible.  I do know that lots of boomers are now discontinuing 401k contributions to their retirements after having spent the past 5 years doubling down on their contributions to make up for lost time.  They are going to be very, very sorry they did this.  They trusted in corruption and corruption will teach them the hard lesson that it always does for Mark and Patsy. 

As they stop contributing and begin withdrawing, people will find that even good corporate profits do not buoy the markets.  P/E and P/B compression will be rampant.  People will be all confused because they don't understand that corporate earnings do not directly drive stock market prices!!  It is the buying and selling of the shares which control the prices.  If boomers are selling the shares in their retirements in order to eat, travel, and live out their golden years, and if kids don't have the demographic numbers, jobs or salaries that enable them to buy the shares up at higher prices then we will certainly have lots of supply of shares on the market with greatly reduced demand.  Economics 101 says that will result in lower share prices and there really is nothing anyone can do about it.

Corporate equities are not money.  They have no intrinsic value and they cannot be used to pay the rent, etc.  They still have to be traded back into dollars to do that.  So Wall St. fanboys can (and will) go on and on about the "great value" of stocks and how they are being maliciously manipulated downward by "the evil shorts" in the coming years.  They will ask the con men running the show to "do something" to save the retirements of Mark and Patsy, including punishing the evil shorts.  But short sellers are no more evil than loggers who recycle the remains of the freshly fallen trees.  The trees were born, grew up tall (but not so tall that they reached the sky) and then finally died and fell over of their own weight.  The tree is going to fall over and someone might as well profit from its collapse.  The wave count is yelling "tiiiiimmmmmbeeerrrrr" right now.

Below is the zoom in on what I model as being the end days of the expanding wedge which marks the end of supercycle wave 5 of grand supercycle wave 3.  The five rail bounce now appear to be complete as we see that the 5th wave broke out, peaked, then broke back down below the top rail into wave 1of the new bear market.  However, wave 1 was never going to be powerful enough to hold the line so to speak and so the wave 2 bounce re-took the line.  My current model says that over the next 2 weeks we should see a very small 3rd wave re-break-down that top line, likely with some level of authority in order to send the signal to the herd that the break down is real.  Once this top rail breaks down with gusto, it is like pricking a fully inflated balloon.  Not necessarily in the speed of collapse but simply in the inevitability of it.  Once people become concerned that the party is over, nobody is going to try to ride the crash out this time.  Everyone still remembers far too clearly the crash of 2007-2009 where no less than 50% of the value of the major indices simply evaporated into thin air from whence they came. 

If we do not see a growing sell off with clear signs of market panic very quickly then I will not hesitate to revisit this view.  It is always possible that there is one more wave up left, say, to DJIA 17500, before the real crash begins in the historically dangerous months of Q4.  This would be the scenario where TVIX falls all the way to the $2-$2.20 range in a 5th wave down.  We have to respect the potential for this so that we have plenty of cash to short this thing down once the real crash does begin.  In other words, set trigger points and use stops!

But for now, I betting that the crash starts to become visible early next week.