Hamilton’s E-Wave Analysis

The DOW has clearly exceeded its May 2 high of 12876 by about 50+ points. This would normally negate the count, that is the one where this was wave 1 down followed by an a-b-c correction/rebound. I simple do not know what to do with this! The structure is just fine, only it should not have gone this high. EW is supposed to work when markets work, that is when there are a multitude of participants who freely make up their minds to buy or sell. Perhaps this precondition is no longer met now that CB’s have thrown in 15 trillion into the punch-bowl (1/3 of the value of world equities!), never mind all the other “stimulating” factors. I just do not understand but at the same time will not get religious or dogmatic about it. Other than the Nasdaq, which is in a completely different phase, just about every other major index has NOT negated this count, so for the time being we will stick with it. Below are some examples;

You can click on them to enlarge. Un till such time that a few more of these “negate” the count I will take the catholic approach and simple nullify this one  single incident.

DAX, DOW, NYA, SPX, STOX600, TSX

This is the world’s second largest chemical company after Germany’s BASF, here are the charts;

You can click on the charts to enlarge. The large B-wave on the left is particularly clear; it calls for new lows sometime in the future, that is below the roughly $7 back in March 2009. There are alternatives but none that are very plausible at this point.

On the short-term chart on the right, the 5 wave initial drop is equally clear on this stock. The drop is from roughly $44 to $20, almost cut in half. As always, a 50% or even larger rebound is normal. That could take this stock to $32, where, by coincidence , we would have a completed a-b-c wave 2 with c=a. It does not have to go that far and it can go a little further, but the structure is perfectly clear. Wave 3 etc will start at some point in the very near future and it will be fast and furious compared to what we have so far.

DOW

Clearly the Dow did not stay in the triangle, it is now more likely an a-b-c, more or less the original thought. We will see. In any case 4 days in a row, up and down more than 400 points has never happened before.

Concerning the TSX, I am wondering if another original idea might not apply, given the violent move. Do not think so but one cannot help but wonder.

On the left is the original idea . It was discarded because it took to long. On the right is the latest up-leg. Just like the Dow , 900 points up in 3 days is insane. It looks like a wedge but  short-term I am not going to guess.

DOW, TSX

Should the Dow go decisively through the 11120 level, today’s high, the triangle becomes uncertain and a simple a-b-c might fit the picture better. Then we could go another 400 points higher. For the moment I prefer the triangle.

DOW

MSN has a cleaner chart that is almost a tick chart. On that info the 600 point surge we had after the Fed rate-freeze announcement could be interpreted as a 3-leg affaire, rather than 5. If it was 3-legs the triangle is still a possibility and , in fact, more fitting. Today we would be in c which should be about 60% of the 500 plus drop yesterday so 300 to 350, then down again and up again. In the end e would end at about 11000, putting the target at 10400. If it happens it could start late Friday or the next Monday. Do not trade on this, it is just an educated guess to give a roadmap.

PS, The flat is not out of the running!

DOW

The B wave is somewhat larger than expected. Perhaps a little lower and then up in C after which the crash is expected to continue.

DOW

It is near impossible to get a tick chart, even on the internet, so I will use this one from Stockcharts. I suspect that we are in some sort of 4th wave of 3 of 3, this may be a wrong assumption but at least it give a road map.

Yesterday’s low was at about 10600.The rise thereafter was was good for 600+ points to about 11200. It is , I think, a 5-wave move, which immediately excludes the possibility of a triangle! This morning’s dive down was for about 400 points (very close to a normal Fibo 62%) to 10800. This corrects the euphoria created by the Fed acknowledging that we are indeed in BIG trouble. Next move should be another rise of about 600 points to 11400. Then down it goes again as we are nowhere near a bottom. We shall see.

DOW

   EW is about mass psychology , something that works almost subconsciously when large numbers of people interact. Consequently it could be rendered inoperative in the event a single party or small group takes over – as perhaps in the case of a over active Fed or the proverbial “plunge protection team”.  Not a frequent occurrence and otherwise entirely pragmatic, that is derived from the real world and totally devoid of assumptions, hypothesis and other such fancy academic stuff. Let’s assume it applies, still.

According to EW you go up 5 and down 3 and then simple repeat the sequence on a larger scale. The above chart shows a fairly clear 5 up from the depths of the great depression to 2000, 2007 and now 2011. Typically this entire sequence unfolds within a channel with well define boundaries (see green par. lines). A “throw-over” at the peak is normal and first happened during the tech-bubble. Normally there is alteration between waves 2 and 4; here wave 2 is a zig-zag (straight down, more or less) and 4 an expanding triangle (sideways). Alternation occurs often and everywhere, take for instance Volcker/Greenspan or Prohibition/smoking.  It happens often that wave 5 in the sequence travels the same distance as waves 1, 2 and 3 combined. On this semi-log scale chart not only is that precisely the case , but the time spent is also precisely equal , making wave 5 vector equal to 1.2 and 3.(see purple lines).

Geopolitically this 2 generation period from 1930 to now covers a unique period. We went from WW2 to the fall of the Russian Empire, from no cars to 2 cars in every driveway,from a TV in every room to home computers that have more power than the old IBM mainframes, live expectancy has increased by roughly 20-years, we walked on the moon etc.etc. This kind of progress will not stop but it is hard to imagine another 70 year period with so much change. Typically ages of enlightenment are followed by darker days. In short it seems at least plausible that progress will be a little less robust as we try to solve, energy and earth related problems.

So, after the 5 wave sequence up is complete the whole thing typically drops to either the trend-line or the 4th wave bottom on the preceding way up, more often the latter, here 5000 (green) , 2000 (red) and roughly 700. We have not come even close to these levels and consequently it makes a lot more sense to expect a  (large) drop than to assume that the 70/80 % retracement from the March 2009 lows will continue.

In this blog I have presented at least 20 different stocks over the past few months that have very clear , three wave retracement patterns. The German DAX index (like the DOW also 30 stocks), has a similar pattern even if it is not entirely clear which one should prevail.

The A-B-C pattern  (on the left) is pretty obvious, defining the rise from the March 2009 lows as corrective, implying that the drop from the 2007 highs is not complete, nor has it reached the par. trend-line or the level of the 4th wave on the way up. By the way, should this interpretation be wrong, there still is not much upside (to 8500 perhaps) from the 7600 highs left . Certainly the risk/reward analysis would , without much hesitation , favour the downside.

Here in Toronto the picture is very similar;

Compared to the DOW there may be a slight difference in which top is THE top, but compared to the DAX the chart is pretty well identical in every aspect. The TSE did have a slight “throw-over” whereas the DA did not; also the TSE managed to climb right to the trend-line, the DAX did not. It is actually quite amazing that the stock indices of two countries that are so completely different in terms of their economies should look alike so much( click on the charts and you can move them side by side), which itself lends some credibility to the EW approach.

In short, from an EW perspective, the markets should be ready to go down, now or very soon and by a good amount and it would be silly to bet on the opposite.

Fundamentally there are also a lot of reasons to take a reserved approach. What got us here is an idiot that left interest rates substantially below “market” levels, this despite adhering ostensible to the market- finds-its-own-equilibrium concept. This Ayn Rand self correcting, free market concept was applied where it suited and ignored elsewhere. In the mean time all the rules were relaxed, Glass-Stegall, reg Q, accounting rules etc. etc. many of which are now gradually reversed but so far nothing really has. Ergo, it is quite difficult to understand why we are once again at these levels. Greece now has a CCC rating, the US is fighting 3 wars without knowing who the enemy is and the budget deficit has ballooned to unbelievable proportions. As the saying goes, if something cannot go on forever, it wont.

DOW