A Moment of Great Significance

They came to The Netherlands in the fifteenth century. They were Sephardic Jews fleeing the horrors of the Inquisition in Spain, their homeland. They were welcomed as undocumented immigrants. They were excellent traders and merchants and, by the early 1600s, had made Amsterdam the financial capital of the Western world. Having stupidly shot itself in the foot with its treatment of these folks, Spain’s economy and global eminence went to near zero.

The developing financial market in Amsterdam, on the other hand, emerged as a method for capital allocation that is still in use today, and the birthplace of market analysis in the Western world.

Three hundred years later, empiricist Ralph Nelson Elliott observed a regularity in the seeming chaos in the price movements of stock market averages. Tracking prices across the continuum of Amsterdam, London, and New York, Elliott identified a regular growth pattern in the markets, consisting of five waves–one, three and five up as impulse waves, interspersed with waves two and four down as corrections from periods when markets get overextended.

This pattern, Elliott observed, occurs at multiple degrees of trend, from trends covering centuries, down to those completing in as little as a few minutes. He named the pattern with the greatest observable amplitude Grand Supercycle, and that is the one we need to be concerned with today.

Grand Supercycle Wave I began in about 1610, peaking in London in 1720 with the collapse of the South Sea Bubble and the demise of the Bank of England. Wave II of the pattern held the financial market and the Western commercial world in a depression for over fifty years. Grand Supercycle Wave III got underway in 1874. Within Wave III, a five wave Supercycle bull has been underway. Wave 1 of the smaller cycle topped in 1929. Wave 2 bottomed in 1932. Wave 3 climbed to a top in 1966. Wave 4 required eight years to take the market through several swings from a peak of Dow 1,000, down to the 1974 low of 574. Wave 5 of this Supercycle has been underway since ’74, and now, after five waves of cycle dimension, appears to be coming to a close.

Thursday afternoon, Bob Prechter, the most eminent Elliotteer extant, published a notice saying that he believed the Dow Jones Industrial Average was tracing out an ending diagonal triangle. this is what he saw:

diag-triangle

To the casual observer, there is nothing special about the pattern contained by the orange lines. To an Elliott Wave analyst the pattern is a potential Ending Diagonal Triangle. The analysis is supported by considerable data providing evidence of exhaustion of the move.His comment:

I think we need to consider the market to be at or very near the end of wave 5 of (5) of V of (V) from 1932–which will also cap the Grand Supercycle rise of Wave III from 1784.

The translation from Elliottspeak is, We’re gonna fuckin’ die!

What follows is Wave IV, which is expected to ultimately bottom in the vicinity of the 1929 peak of Dow 391. Fourth waves, typically swing back and forth a bit on the way to their correction low. I do not have a graph of a fourth wave of Grand Supercycle dimension, so I’ll use the 1966-74 Supercycle graph to give an idea of what we might expect:

gs-fourth-wave-example

First, for disclosure: None of this essay is a recommendation to any one to make any investment moves whatsoever. This is an exercise in probability. I approach every investment I make for myself in  terms of probability. I rate the probability of the course I’ve overlaid in the ’66-’74 chart as follows:

December 2016 as the top of Grand Supercycle III: Very high
An initial crash to around Dow 3400: Very high
An ultimate low of Dow 400: Extremely high

The probable dates for the first and final lows in Wave IV: no assigned probability.

The levels of decline are to be found in the ratio analysis that is part of the Elliott Wave Principle, which does not say anything about how much time will elapse from top to bottom. The expected levels, together with supporting momentum and sentiment data will come when they come.

Cindy and I will hold cash until at least the interim low. If things go well, we may be able to be in stocks through the second rally. I do not expect to be alive for the trip to the final low. If we can make that one trade, or even part of it, I think we will have done all we can do. For now, the main thing, the only thing, is capital. preservation.

If we do see the end of Grand Supercycle Wave III before 45’s inauguration, we can expect him to be dealing with the worst depression since the 1700s. That, along with the 75 lawsuits presently against him should keep him busy, even as he scrambles to ship all the brown people out of the country to open up plenty of jobs cleaning toilets in seedy motels for white guys.

Maybe he’ll speed things up with an executive order to start a new Inquisition. Send Muslims to the rack unless they recant and become Evangelical Christians.

America’s gonna be great again. Can’t wait.

Cheers,

Rod

 

 

 

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