Thursday, April 2, 2015

The Equities Problem

The many arguments re equities overvalued state based on long term fundamental and technical metrics, the central banks capacity to continue support and at what eventual cost have been well recounted by now. As noted previously we are now officially in (or just completing) the greatest bull move in history, 1454 pt.s from the 666 low.
So how is this thrust up explained from an Elliott perspective and what is the count?

The great collapse into the 2009 low was clearly a five leg down, and so must be considered a C wave of IV, since it is not an A of an ABC. That seems kind of obvious to state now, but the move up from 2009 has never produced classic Elliott impulse waves that would be expected in a primary wave structure. Most technical analysts including myself viewed the move as corrective even as it exceeded the old highs. However, once the current move up exceeded 1.382 of the preceding move down, it could no longer qualify as an irregular B wave according to Elliott's principals. The result is a relabeling of the 2007 high at 1578 an irregular B wave and the 2009 low the termination of IV.

While it is possible that the move up from 1982 to 2000 was merely a 1st wave of the eventual V of greater degree, that would make this move up a 3, and imply much greater highs to come. The strength, breadth, percent increases, time of the move, macro economic increases in real economy, all support the preceding leg ending in 2000 being of a 3rd wave rather than the current leg up from 2009.



The most likely wave count then, is that the markets are now completing a 5th wave; a wave that began in 1974 rather than 1982 as is commonly held.  Alternatively, this wave could be of even greater degree than the 1982 to 2000 5th wave, and is related to some obscure 1 dating from the turn of the century. In either case, any fresh highs obviously beg to be sold, as the risk is becoming decidedly weighted to the downside.

 The leg ending in 2000 from 1982, was 1442 points. The current leg up from the 2009 low of 666 was 1454 points at the recent 2120 high; slightly exceeding but very near an equivalent leg. I will suggest that the current 5th leg up can fail at an point. The diagonal wedge forming at the end of an extended move up...along with repeated negative divergence of the RSI over the last 2 years, presents a set up for a violent thrust down into a vacuum with few shorts left to cover in.



Even if there is another medium term leg to go to the upside after a moderate retrace, a moderate retrace of the last leg up amounts to a great deal of medium term risk;



Of course once the 5th of a 5th is complete, whether 2120 or 2300 , the ensuing collapse will be dramatic and sustained. A retreat to the previous 2009 lows would represent a much more significant pull back than seen before both in terms of percent and real dollars, and pullbacks to the 4th wave of lesser degree are quite common.

Good luck and Happy Easter.





No comments:

Post a Comment