Another way to test the wave count.

In order to make progress toward a goal, you formulate a theory and then you test it.  If you just test it with weak test cases and it passes then you basically did the useless "solvency tests" that central banks rant about as having passed.  But if you test it with the strongest test cases possible, it gives you the strongest conviction that you are right if the tests pass, and the earliest warning that the count is wrong if they fail.

Since the theory is that we are in a debt Ponzi which has peaked, the strongest test case is not going to be found in the obvious bubbles in NFLX, etc. but rather in the banks which everyone seems to think are safe and sound.  Better still, pick the banks that are reporting strong earnings and look at their charts.  These charts should have the same general shape as the broader markets.  Thus if the strongest of the banks show signs in the wave count that they are not forming impulse waves down, the whole view that a peak is in must be reviewed very, very carefully.  We have NOT confirmed 5 waves down in the broader markets yet and while I think the bull is dead I also know that an animal can appear dead only to gore those who try to carve steaks out of it before it is completely dead.

And so I present the chart of Morgan Stanley whose earnings just topped estimates.  I mean, if the market was really just in a correction where dip-buying is the right play then MS should be able to break the EW downtrend. IF it can do that, I will respect it.  My gut feelings about the state of the market will never overcome the hard data of a valid EW count.

The current wave count says that there were 5 waves down from the 19th into black 1 then an expanded flat (3-3-5) correction into wave 2 followed by a 5 wave move into wave 3 and then an a-b-c correction into wave 4.  If this is correct we should see something like the red or blue models play out.

There is one and only one thing you have to know about this chart: the current wave cannot go into the region of wave 1 and still have the current wave count be true.  Heading back up above $34.50 by even 1 penny destroys the current model for MS, and if destroyed for MS then how can it not reflect strongly for the broader markets?

These are the subtle but important correlations that I think separate the successful chartist from those who think they know something about it yet always fail. The message is clear for shorts: if MS goes above $34.50, cover your assets.  Go to the sidelines and watch for awhile.  Get nervous and paranoid in that case.  Until the broader markets confirm 5 waves down the bear market is not really confirmed.  That doesn't mean that the DJIA will recover and hit 25k or anything but it could have one more difficult to count impulse higher like it did just before the collapse that began in late 2007.  Such a move would bring TVIX down to $2.00 to $2.20 range and completely gut punch the market shorts.  I don't think it will happen but I will change my tune if market canary Morgan Stanley shares indicate that I should.