Remember the difference between first and second order errors? Not sure I do but vaguely it was that in one case your hypothesis was wrong but the conclusion was nevertheless correct and in the other case the conclusion is wrong but you throw out the correct hypothesis. In the case of the TSE our hypothesis is that we are in a big flat A-B-C and have most of C ahead of us. Best guess we are in or at the beginning of wave 3 of 3 of C.  Of course nobody believes any of this, which is why we repeat it ad nauseam.

There are a few hurdles along the way. The first one, appropriately annotated with a 1, we have already passed. Right now we are on our way to 2. In the mean time we did manage to loose 2000 points or about 15%. For a US investor you can add another 25% for the currency for a total loss of about 40% and the party has not even started in earnest.

If our hypothesis that we are in the 3d of 3 is correct, the next 3000 points will evaporate faster than lighter fluid. That (point 2) will, by the way, set us back to where we were 16 years ago. This should continue at least to point 4 but, perhaps, much further. The reason is fairly simple. Janet Yellen, who is also the head of the Bank of Canada, was recently (Sept. 17) asked if it was possible that she would keep interest rates at zero forever. She responded by saying, quote “I can’t completely rule it out but really that’s an extreme downside risk that in no way is near the center of my outlook.”  With that all economic theory is thrown out of the window, in fact the very word economy loses its meaning. Simple concepts like savings, financial risks, investments, pensions etc. etc. are reduced to rouble and the always fragile TSX will follow.

I found this, semi-log, chart on Trading Economics. It is the longest I could find starting in 1950. I have changed or added a little bit to the count shown yesterday on an arithmetic chart. Both can work and it is more credible when they do.

In my comments yesterday, I omitted to mention that invariable there should be an extended wave somewhere in any 5 wave sequence. In this case the extended wave is wave 3, and more specifically wave 5 of 3. This is not unusual when you take into consideration that the TSX is dominated by gold, lumber, materials etc.etc. stocks.

The highly unlikely possibility of us being in a diagonal – for one thing it clashes with the periodicity that is clearly evident – is enlarged as there are actually two different diagonals possible. The one in blue as mentioned yesterday, but also the one in beige that starts years earlier and would allow for a deeper dip now and then still make a new high. Paradoxically the larger diagonal, because it is less steep, would not reach the highs of the smaller diagonal. We give both of these possibilities very little weight and even if one of them were to occur the new high would still be on the channel’s upper trend-line. Also it should stay shorter than wave 3, see the green line.

I entered the retail advisory business in the early ’90-ties. The time from 1988 to 1993 was, in my opinion, probably the most boring in the history of this , but others also, stock index. For the entire time the index rotated around the 3000 level. With the benefit of hindsight, I have accordingly labelled that period a wave 4 of 3 triangle and adjusted the rest.

EW is pretty well useless in terms of timing. But quite apart from that I show a certain periodicity that seems to occur repeatedly, which is the whole point. Roughly the pink arrows connect the highs in a cycle. They occur more or less every 8 years. Interestingly the “Benner” cycle operates on a frequency of the same length. If this rough pattern holds into the near future then stocks should start dropping seriously soon as otherwise there will be no time to return to a “high” before the 8 years are over.

Another point to consider is that this chart with it’s time period, probable best represents the “baby boom” demographic  phenomenon. Baby boomers were first born in 1946 and, assuming 65 is still THE age, retired in 2011. Instead of investing they are now divesting and quite a bit more than first anticipated given the terrible returns on bonds etc. The wealth transfer that is going to happen upon their demise will, for the most part, lead to more divestures as kids use the money to pay off mortgages etc.  Even if you are not in the demographics-explain-everything camp it is good to remember that there are many who are.

By the way, the low on this chart is 217.50, the high 15657.53 which clearly underscores the well known fact that being born rich is the best way to prepare for retirement. Choosing your parents is the single most important investment decision in your life. Making sure your siblings do not steal it all, the second. Efficient Market Theory, diversification and all the other stuff is mostly pure rubbish designed to solidify the advisor’s position.

There is an error in the last two blogs. Where we refer to the 4th wave of previous degree the level is not around 6000. That is the 4th wave of this wave up. This wave is supposed to be the 5th of the 3d. with 4 and 5 of a super cycle degree still to come. We do not have the means to properly verify that. However, if that is correct than the level of the 4th of previous degree is closer to the 217 level. Probable nobody would take that seriously, nevertheless it is what it is.

Here we have the usual then and now charts, then was exactly a year ago, Aug. 8, 2014.

As you can see very little has changed apart from a full year going by. Timing is important but more so for short-term traders or option traders. All others are best served by anticipating what might happen rather than the exact moment that it might happen.

What you need to take from these charts is that probably, starting a year ago, the TSX has entered into a bear market. Normally that means a retracement to a wave 4 of previous degree, that is the one on the way up, and or a retracement of a Fibo. 62%. Both point towards a level of about 6000 or lower. These, by the way, are normal minimums. There is nothing sinister about these levels, its simple the way markets work.

When you use EW the most important thing to remember is that you should not think. For most people that is not a problem except when it comes to the investment business. There are so many preconceived notions that we pick up from talking heads on BNN or wherever that we cannot accept that they are wrong well after it is too late. They nearly always are, so just stop thinking!

There is a whole list of reasons why the above charts conform to EW expectations. Trend lines or channels are well defined, proportions are near perfect, alternation between waves occurs, and there even appears to be a 7 to 8 year cycle.

Down legs are done in about two years, wave A is an irregular wave and also lasts about two years despite it’s looks. If this is a guide the TSX might be in one of these “right-hand-translation” phenomenon when nothing happens for most of the allocated time and then, all of a sudden all hell breaks lose. A bottom at the end of 2016 is entirely possible.

So what can go wrong? The count or the labelling could be off as there might be a viable, bullish, alternative. The one that presents itself is pictured in blue. This is a “diagonal” or wedge. It has to be as there already is overlap so if we are still in a 5th wave it must be such a wedge. We are now in wave 4 which may be complete or not at all complete if it is going to trace out a triangle. In that event more time will be consumed. Either way the top would probable be in at around 16000 a year or more from now. We would give this alternate possibility a very low weight. Furthermore for the next few years the downside is 5 to 6 times larger than the upside. Odds that only a non thinking person could ignore.

Inverse ETF’s are the thing to buy here. HXD is one but there are others.

We were always of the opinion that the steep drop late last year was a 5 wave structure indicating the start of a bear market, in this case wave C. There are always other possibilities, it could, for instance, be part of an a-b-c irregular correction so one has to be careful not to jump to conclusions. 7 1/2 months went by and the index came within 161 points of making a new high. All hell seems to have broken loose after that. We seem to be in what Don Cox of Basis Points fame used to refer to as a cascading waterfall. He is the only one I know that could effortlessly mix Greek mythology with economics. The problem with the waterfall pattern is that from an EW perspective it is hard to pin down exactly where you are. Having done about 1200 points, a little over the obligatory 1000 points, our best guess is that we are almost completing wave 1 of 3 of C. Next is wave 3 of C.

    Fundamentally this could work. Our economic backbone of commodities is pretty well in trouble throughout the spectrum, from oil to gold, lumber to potash with the only bright spot being hay in Sasketchewan going for $200 a bale (roll), this without the usual supply management system. Politically we are at a stalemate with unpleasant elections coming soon. Some of our top guys have trouble believing we might be in trouble and choosing denial as the best remedy. We will soon be going into the Sept. to Oct. season that is always good for some awkward outcomes. Time to unload some of the banks!