Saturday, August 21, 2010

Market Collapse of Epic Proportions

Let's make the case with our biggest picture time frame, the SPX_Monthly Trend Model. This trend model reversed SHORT with the April-June decline in the market.  Note also that these monthly signals measure in years, not days, not weeks.  The implications are for a heck of a ride down in the months and perhaps years ahead.

 SPX_Monthly Trend Model

There are two Elliott Wave counts embedded on this chart.  The first one (blue)  is automatically applied by my Advanced GET software.  I have been using this software since 1994.  It works more often then it doesn't, I give it a lot of weight.  It represents the most bullish of the two EW counts, yet still projects a move to below 600 on the SPX, as is suggested by the horizontal blue support line in the lower right corner of the chart.

The second wave count (black) is from Robert Prechter, the controversial EW analyst that EW wannabes love to disparage because of his missing calls in the past.  They ignore his body of work which is staggering in its prescient analysis and observations of not just the stock market, not just the economy, but in particular social mood as the driving engine of all things financial, in the evolution of society to some extent the rise and fall civilization itself.  

A little too sweeping?  Only if you believe the ignorant, snide snippets of opinion of him so rampant on the Internet.  Not if you read is seminal works,  Elliott Wave Principle: Key To Market Behavior and especially, the most important publication of last twenty years, Socionomics: The Science of History and Social Prediction.  There is no better Elliottician alive today.  We had better pay attention to his analysis, whether we agree with it or not.

All that said, I've placed  Prechter's Cycle degree wave count on the above monthly SPX chart, a completed Wave 1 (early 2009), a completed Wave 2 (April, 2010) and now the beginning of Wave 3 down.  From Prechter's  January, 2010, Elliott Wave Theorist:
The very center of the wave structure-the most volatile point in an impulse-should occur in 2010 when the market reaches wave iii of III of 3 of (3) of 3.  In a bull market, this point in the wave structure marks the time at which investors in the aggregate stop worrying about the downside risk and begin projecting ever-higher levels (for example, by writing books about stocks for the long run and Dow 100,000).  In a declining impulse wave, such as the market is in now, the same point marks the time at which investors in the aggregate stop focusing on the market's upside potential and start worrying about how far down it will go.  This is a very rare event at Cycle degree, and its upcoming occurrence will be stunning enough to set records for financial panic (Emphasis added).

Let's translate all of the above into some workable, tradable, ambitious strategies.  Below the Weekly and Daily SPX Trend Models:

SPX_Weekly Trend Model

 SPX_Daily Trend Model

The two most important characteristics of these trend models are first, the current dominant trends, which in these cases are both DOWN and second, each model includes a trend line that represents a reversal of the current trend.  In the case of a rally that extends, or in the event that these dominant trends are short-lived rather then the beginning of something massive, these trend lines will be broken to the upside and, "All bets (on the SHORT side) are off." 

I utilize these trend lines and trend models extensively in my subscription service, my private email list in which I give real time market observations and updated short-term trend model analysis.   On Thursday our SPX_60 and SPX_240 models reversed SHORT and captured most of Thursday's decline.  Our VXX_240 model has been LONG since August 11.  We use these short-term models for entries into the SHORT side in conjunction with the longer term Daily and Weekly SHORT trends in the SPX.  

There is no one strategy that fits all traders.  For some, simply buying an inverse ETF, such as the SDS, when the Weekly Trend Model went SHORT on May 3rd at SPX 1111 provides all the trading that is necessary to garner the most from an existing trend.  For others, the Daily Models provide more active entries and exits.  Finally, for the very short-term oriented traders, I update the 60 and 240 minute models in the SPX and QQQQ throughout the trading day.

I don't know what is going to happen next in the markets.  Monday, even next week, can go either way, as is always the case.  What these Trend Models of varying lengths do for me is assure me that the market isn't going to go too far in either direction without me.  That removes a lot of uncertainty from trading.  But even more significant, there is absolute assurance that if the above wave counts unfold as forecast that they will do so with me on board.   

With the Monthly, Weekly and Daily Trend Models all pointing down coincident with a compelling EW case of an imminent market collapse of epic proportions, a persusive case can made for being SHORT the market, right here, right now.



Anonymous said...

Allan - Would you clarify what Prechter means by "wave iii of III of 3 of (3) of 3"?

Anonymous said...

I look forward to Allan's reply on that. but its something everyone ought to know by now already(if youre an investor or trader)

Basically,my own translation of it would suggest that wave 3 of 3 of 3 of 3 ,etc... at a time like now,could only mean World War 3 as a likely trigger.

What else could trigger such a massive historical development ?

I cant think of anything phenomenal enough.

and I hope pray and doubt that will happen.

I cant imagine global world governmental powers could be that insane,no matter what their agendas may be.

Yes,we must acknowledge Prechter's brilliant status and yes,his recent timing misfires.

Both things are important and deserve examination. My big question is "Why has he been wrong in the last year?"

What's Different now,if anything?

Is the stock market world the same as it was 50 years ago? 10 years ago? 10 months ago?

When Ralph Elliott established his vision 75 years ago, did he envision Supercomputer trading and a Plunge Protection Team?

Did he envision a Global economy,new economic powers,global governmental systems, etc?

I think the stock market world he understood changed about 20 years ago.

upon the advent of supercomputers

I think we are witnessing the demonstration of the power of these supercomputers and the power of global governments involvement in stock markets,for better or worse.

and we are right in the middle of the middle...of a complex global development.

and it could go either way.

But WHY must it be a catastrophic disaster?

Prechter has made up his mind towards the extreme down direction.

If this happens quickly like 2008, my guess is world war.
If it happens slowly then logic says his count of 3 of 3 of 3 of 3 etc, has to be wrong because such a wave 3 by definition has to be "something extraordinary to behold"

like september 2008 only much worse.

so a slow collapse is ... not the wave 3 monster.

Environmental disaster,like a giant asteroid or super volcanic eruption that circles the globe....yes,that sort of thing would be the idea.

but an antenna glitch in one of Apple's gadgets is not gonna do it.

For the sake of hope

an alternative vision might suggest that somehow,global markets will hold steady in some sort of Range ,between the july 2009 bottom/june2009 top (930 area)and the january 2010 top (1160 area)
we are in the middle zone 1050 area.

and maybe nothing catastrophic happens for the next 2 years.

Boring is good.

and in terms of wave counting and price points and targets
just because a wave turns down ,at 1200,or 1170,or 1130,or even 1100 (S+P)

still doesnt mean it cant hold support at 1070,or 1060,or 1040, or 1020,or 1000.

OR even hold at the July 2009 low of 900 area ,or june 2009 top of 950 area.

and this could be the bottom of the RANGE.
(IF there is a range)

and market could rally back to the top.

we shall see what we shall see.

Predicting is very tricky.

I would love to have known what Ralph Elliott would think now,about the governments super computers

and the global world order.

How would he factor in this concept?

This is where I think Prechter's 'brilliant' concepts fail to account for.

I love watching elliott waves and trading with these waves

but I also Have to respect whatever the agenda is of the invisible wizard who works magic at strange times....those are the times where Prechter has turned out wrong.

Lets hope he's wrong again.

If the global governmental powers choose to work together in cooperation for the common good

Prechter will be wrong.

....oh, and if the asteroid or volcano doesnt erupt too, I almost forgot.

Allan said...

Prechter is referring to degrees of waves i.e. cycle degree is one larger degree then primary, which is one larger then Intermediate, then minuette, etc. His count currently is that the market is at multiple degrees of 3rd waves, suggesting the most violent of declines.

Anonymous said...

Thanks, Allan. Let's see how violent it becomes, it at all.

pimaCanyon said...

I agree with the poster above who hopes and prays that Prechter is wrong in his analysis because if we do get that kind of financial panic in the markets it would likely be the result of a very dire event or series of events happening in the world such as the breakout of a global conflict. Moreover, if this kind of financial panic came to pass I suspect it might become very difficult to profit from it. Prechter himself has warned that the financial markets might have a complete meltdown and it might become difficult to collect on profitable trades that you make during this time.

No doubt Prechter is brilliant in his analysis of how social mood is reflected in financial markets. That is the basis of EW theory and his work has done much to make that concept mainstream.

But IMO where he falls short is in practical application of EW to trading the markets. Why do I say this? Because he has become so very sure that his big picture count is the only possible EW count that could be in play here that he comes to the market with a bias, a very bearish bias, and I believe that prevents him from looking at the markets objectively.

Note that there are other very good EW analysts out there, some of whom are quite bearish, and they do not see the kind of decline that Prechter has been forecasting. (Glen Neely is one.)

Because of the dire implications of Prechter's P3, let's all hope and pray that his big picture count is wrong.

Anonymous said...

EWT doesn't call for a catalyst. It says that human emotion operates in waves, and the WWIII, or some other scenario is conveniently called upon to explain what would otherwise have happened anyway. I can't say I disagree, but I feel in my gut it's a bit of both. The wave doesn't cause the event, but a given event such as WWIII won't happen without the wave. So the avalanche is ready, it doesn't matter what the event that touches it off will be.

As for the market changing. HFT's and the government can only delay the wave, not stop it. Prechter himself acknowledges that EWT is not a magical formula for predicting the future. It is a science, and although it is useful, it is a science in its infancy. In Prechter's Perspective, Prechter writes that EWT is especially good for analyzing the markets, BECAUSE the markets reflect the total sum of human emotion. I would say they USUALLY do. However, when the Fed, the Treasury, the Banks, and the HFT quants get into the game as they have recently, the markets don't reflect human emotion as clearly. This would seem to invalidate EWT, but if you examine history, it actually supports it.

We just underwent a ten year campaign to goose the economy and it has utterly failed. They have changed the accounting rules, done everything they could do to support the banks, and mounted the biggest snow job in history, to re-inflate the bubble. Despite the trillions spent to manipulate the markets, we are right back where we started with a looming collapse.

Prechter himself says that EWT analysis works because the markets are an especially good place to view human nature in action. That view can be obscured, it can be delayed, but it can't be erased. Maybe the TIMING can be thrown off for EWT analysis (Hey, a few trillion here and there creates a big ripple in the pond), but the end result always comes back with even more built up kinetic energy.

There's nothing wrong with Prechter's analysis. All of the errors have been made in Washington.


Anonymous said...

I also disagree that EWT is impractical for trading. It works great for long plays, but tends to get the timing wrong on the short side due to market manipulation intervening between human emotion and market prices.

As an aside: If this is true, one would expect to see a lot more extensions and subdivisions while prices go up than while they go down. We already know prices take the stairs in a bull market and the elevator down in a bear market, which is another way to say they drop quicker than they climb, but I would guess that if one were to conduct a study adjusting for the time factor, you would still find a lot more extensions and subdivisions on the long side due to market manipulation, either from the government or from the more traditional big money manipulation when they are distributing their line of stock.

If you don't trust EWT, use it to trade long. Prechter has made some absolutely wonderful long calls in the past. The best one that comes to mind was his calling the bottom in March, 2009. We have been in a range for some time now, and his team has made a number of long calls. They work great for swing trades. I just wouldn't take a long position trade right now. That would be a no, no. When this avalanche moves, it's going to move fast.


Anonymous said...

Didn't Prechter also call the top in 2007? First in July (close) then October when it actually was the top.

Anonymous said...

I prefer the "Allan Cycle", which means that the market will go up on any day he predicts anything like a "market collapse of epic proportions".

So far, so good...

Allan said...

Below a link to a video presentation from Tony Robbins making the case for economic collapse. Noteworthy because Robbins seldom ventures into economic forecasting and almost never sends out anything but upbeat messages. He does a nice job here of detailing the hows and whys of what is coming:

Anonymous said...

What exactly makes Tony Robbins an expert in any stock market matters?

His FTC violations?

Allan said...

Yea right, we should be listening to Cramer, or Kramer, or Constanza.

Anonymous said...

i think there is a misunderstanding of what "degree's of 3" means here. it is not a "degree" interms of how bad is gets, but rather a period of wave action where the smaller waves within the small waves withing the medium waves within the larger waves all coincidentally are in their repective "3" wave down, thus multiplying the result exponentially. similar i guess to how a "Roque Wave" would form amidst a seemingly "normal" sea.
i don't think there is a required associated "world event" that accompanies this market move.

obviously, a WW3, nuclear event, terrorist strike, etc would cause an extreme market result regardless of what wave we happen to be in, but the market "crash" will be a slow, realizing result of 30 or more years of wayward economic and social policy, not just in this country, but worldwide. decades of political corruption, wasteful gov't spending, deficit programs, runaway printing of money, and huge accumulation of debt at every level, individual, local, state, national, worldwide.

just my meager attempt at separating economic disaster from Apocelyptic crisis. the world may stay pretty much the same, you just won't see as many 15 year olds with $600 cell phones and $200 blue jeans.

The Bear Inside said...

For how long have we been listening to the "imminent market collapse of epic proportions" story? Yes, there will be a big wave 3... a bull one.

Anonymous said...

Nice comments,and still its all very complex.
Many experts,not just Prechter saw and called the march 2009 bottom, but Prechter made the 'Wave 3 collapse' warning call on Aug 3 2009 (I was a subscriber so I remember the exact issue)

so....he's been 'right' and he's been 'wrong'

Maybe what should be watched closely is not the Calendar Date but the PRICE POINT. Where was S+P on august 3 2009 ?

food for thought

I guess for me, the question is trying to unravel the insight about what we can clearly see.

I can clearly see

1) the stock market IS rigged.its a rigged game.

2) Elliott wave analysis does work alot of the time,especially in shorter time frames.
3) BUT when you watch wave counting, you will also see many times the wave structure Does Not terminate and reverse after 5 waves....but completes 7 or 9 waves (smaller time frames) before it 'Reverses'
(Maybe on the 'right time frame' it appears as 5 waves.....but right time frame is up for debate, what I always see is 7 or 9 subwaves .....not 5.

and then.... in other time frames, yes, 5 waves.

4) The debate of whether Elliott wave expresses or demonstrates the "Social Psychology of the civilization" within the wave structure and its already built in to the wave like "which comes first, the chicken or the egg ?"

and this debate ,while fascinating, can spin round and demonstrated here in these comments.

What I do see ,that can be seen clearly is that "social psychology" is Constantly manipulated and engineered ..BY the government.The television is a brainwashing tool. mainstream media, same thing.
even flouride in our drinking water.
do the research .

so it forms the question, which comes first and which is it that represents the true reality....natural human social psychology,moving freely.....or government engineering and manipulation that shapes and moves it to its own agenda?

May be a combination of both.

and youre saying that whatever the combination of forces is still reflected perfectly through the wave structure of EWT.

and theres the circular debate.

my brain is now fried ,dinner is served.


Anonymous said...

The question here is "What's in everyone's Go Bag?"

Anonymous said...

So, how will NNVC fare if we have a Prechter sized collapse? In 2014 will it be at $100? $10? $1?

I'm still holding on to all my original shares (over 20,000) and I'm getting close to hitting my break even. What was once a 40k profit is all but gone.

The fact that everyone has turned so negative seems like a great buying opportunity is rapidly approaching. Especially if it's Prechter leading the charge. However, he'll probably be right this time because I'm "all in" across the board...

Anonymous said...

Market watching note
for thursday aug 26.

at the 3 o'clock witching hour,when panic sellers make their move, the market was dropping (as expected) steadily all day,and precisely at 3 pm when the price on S+P hit precisely the magic critical line in the sand at 1045....Blast off stick save back to key support at 1052.

If this isnt what a stick save by the stick savers looks like....I dont know what else.

Isnt this what they created a plunge protection team for?

it appears to be working ok at the present time.