Decennial Pattern in Stocks

I am preparing my managed accounts for a market debacle in 2010.  Below is the Monthly S&P chart annotated with wave counts, false bar stochastic and fibonacci retracement levels which paints the big picture set-up for what should be a typical deceminal pattern year.

Here is a brief write-up by Robert Prechter on the Decennial Pattern, taken from the October, 2009 Elliott Wave Theorist:

"Back in the 1920's Edgar Lawrence Smith  found a reliable pattern to the decades that he called the Decennial Pattern.  One if it's prominent features is a price high in the "9" year.  We usually show the composite pattern, but it is instructive at times to isolate a feature of the pattern, as in [the chart below]. The arrows pointing downward show peak prices in the "9" year of each decade going back more then a century.  Observe that in ten our of the past eleven decades, the "9" year contained a high price.  In only one instance --1949--did the year contain in important bottom.  And no one could possibly mistake today's market conditions for those of 1949 given that year's record low P/E ratio, high dividend yield, bearish economists calling for a post-war depression and the public's general disinterest in stocks. We are clearly at the other end of the spectrum, i.e. the normal optimistic end for the "9" year.  And the year is nearly over.  If the Decennial Pattern holds true as it has done so often, then stock prices over the next three to five years will be down."

The above analysis is predictive in nature, not the the stuff that a profitable trend following strategy is built upon. What it does do is establish an effective, "what-if" scenario, i.e. what if the trend does turn down, what can be expected, how serious will the decline be, how heavily does one play the new down trend?

2010 should be a very negative year in stocks, probably much worse then the 2008-2009 decline of about 50%.  Fundamentals aside, EW and cyclital analysis is pointing toward a down move relatively more severe then any we have seen in decades.  When and if the trend models kick in, it is time to take advantage of a once-in-a-lifetime opportunity. 

I am willing to pay the price of a couple of mediocre years returns for that one stellar year where all of my big picture analysis comes together and is ignited by a turning of my trend following indicators.  Nonetheless, we have had some nice winners this past year or two, despite my skepticism about a sustainable rally.  So in the weeks and months ahead, I will continue to do what I do best, isolate special situation stocks that are worth a shot no matter what direction the market is going, but always keeping an eye on the big prize, the riding of a super-nova wave in stock prices, in a direction and in a manner and velocity that takes everyone by complete surprise.

(Well, almost everyone.)


My best holiday wishes for all who grace these pages with your time and support.  I am working on some new ideas for coming year that will be new for me as well as my readers. If you want a head start, simply read "Why are you here," on in the right again, placing proper emphasis on the number one reason for any of us to be on this site. 


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