Figure #1 The US Market monthly (1900-present)

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1 March 8, 2016 The Big Picture New-Wave Elliott Where we are, and where we re going Magnitude Transcends in two semi-log steps Why this Market Must Crash In figure #1 you see the US Market s price history since 1900, forming channels at three degrees of trend, to represent their relative magnitudes. The larger, green Supercycle Channel fills approximately 4x the area of the aqua Cycle Channel, which in turn fills approximately twice Primary Channel s width & duration. (locate the three channels above to see their relative magnitudes) Figure #1 The US Market monthly (1900-present) Page 1 of 11

2 The Diag II (Diagonal 2) heralds a long duration move Next focus your attention on the massive, bearish Diag II outlined in red beginning in (find the Diag II before you read any further.) With the exception of the bullish Diag II, which initiated the 1987 crash, the Supercycle Bull Market from 1982 to 2000 was virtually void of corrections. Regardless of Bullish or Bearish, this is a function of the magnitude disparity between impulse and corrective waves at Supercycle Degree and higher. Impulse waves transcend magnitude 400%, while their corrections remain stunted at 100%. Rather than two bear markets and two bull markets, the Diag II is a single entity - the prelude to the Crash, where the highest magnitude reached in Wave D Bear Market Rally is now being swiftly recalled for the plunge. Diag II begins a long trajectory In either direction, the Diag II relates the beginning of a long, trajectory. Just as the Supercycle Bull Market was virtually free of corrections, so will the free-fall ahead pause, rather than correct. (take-in the 1929 to 1932 free-fall to verify the absence of upside corrections, post the Diag II) The leap in bearish magnitude, compounded by stunted corrections, explains why Supercycle Bear Markets must Crash. Bear Markets are large scale Corrections Next focus your attention on Supercycle Wave (II), the (A)-(B)-(C) Bear Market, spanning 1906 and Bear Markets are nothing more than higher magnitude corrections. Like hurricanes and earthquakes, they augment in semi-log increments via Zipf s Power Laws. Bull & Bear statistics, like oil & water, don t mix Obviously Bear Market statistics compiled without regard for magnitude, are as flawed as the average height between a giant and a dwarf. Even worse, are statistics derived by averaging data from Bull & Bear Markets, since the former is an expansion and the latter a contraction, their conclusions are highly deceptive and totally useless. Only Russel Napier s Anatomy of the Bear makes sense of pertinent Bear Markets characteristics, by excluding those below a 50% price drop. Just as on the Richter scale, a category 9 earthquake is a log step, (10x) as destructive as a category 8. The market augments in semi-log steps to double magnitude. Above Cycle degree, two sequential a-b-(a); a-b-(b) Transitions increment 2 x 2 = 4x magnitude. The Diag^ is a subset of the a-b transition. The past 100 years have witnessed only two price runs that rolled-out at Supercycle Degree, in practice: one Bearish: the (C) wave within Supercycle (II) from 1929 to 1932, and one Bullish, Supercycle (III) from 1982 to Page 2 of 11

3 Figure #2 Supercycle (III) Bull Market ( ) Waves 2 & 4 alternate between simple & complex corrections To process the significance of transcending magnitude, view the monthly S&P 500 in figure #2. Beginning in 1997, as the Supercycle (III) Bull Market approached a top in 2000, two Diag^s geared bullish magnitude back down to baseline, before reversing to bearish. The next two Diag^s found in the B-wave geared magnitude back up to Supercycle degree in bearish mode for the C-wave plunge. According to RN Elliott, wave C should have completed the final leg of a simple, A-B-C Supercycle (IV), so as to alternate with the complex Supercycle (II). However, when the Fed artificially forced the market back up in 2009, it also augmented its magnitude 400%. As you see in wave D, there are four Diag^s, the aggregate of the first two transcended to Supercycle, the second two morphed to Grand Supercycle or 4x Supercycle magnitude. Grand Supercycle magnitude = 4x Supercycle degree (400%) At Grand Supercycle magnitude, the Diag II reverts back to a simple, A-B-C structure as labeled in figure #1. Just as we down-shift a manual transmission in a car before coming to a complete stop, so does the market gear-down before a major reversal. Immediately after reversal, via the Diag II, it swiftly recalls the highest magnitude reached in the previous Bear Market Rally. In 1929, this echoing Diag II collapsed in its first wave, making the crash relatively mild in comparison to Page 3 of 11

4 the free-fall that followed into However, since speculators were 90% margined, a 10% drop was all it took to wipe them out. Imagine a Crash of 4x the magnitude of that is what we are facing! Each Diag^ visibly gears a semi-log step in magnitude Supercycle magnitude is two degrees of trend higher than baseline. So two Diag^s are required to gear up and down. As you see above in figure #2, Wave B ended 2007 contained only two Diag^s, likewise the Supercycle Bull Market ended 2000, required only two Diag^s to wind up and down, however wave D shows four Diag^s, to indicate the next dive will take on Grand Supercycle magnitude, 4x the severity of the 2008 free-fall. Humans project linearly to effect Boom/Bust Cycles Boom/Bust Cycles are the result of collective linear projection during the boom, to result in malinvestment and overcapacity at the top of the cycle. Such excess is expressed in all areas of human endeavor, from Government to the individual. This identical tendency lures investors in at the top of the Stock Market to insure catastrophic losses. Once expansion ceases, redundancy and excess surface to overburden the economy. In order to redeploy the assets, they must be liquidated in a contraction of the money supply, via the inverse multiplier effect. Likewise, politicians typically promise generous social services to grease the wheels of their political careers, projecting GDP and tax receipts to the moon. Just like free bread in Roman Circuses, were promised when cheap wheat from Egypt was plentiful and perpetual, once the supply of grain stopped, the cost of bread soared. The modern equivalent of free bread in Circuses In modern times, free bread in circuses, is analogous to the generous social services & cushy retirements promised during the boom times, that cannot be delivered upon once the economy contracts. When these services were granted in perpetuity, economists and politicians alike projected a perpetual boom. Anytime expenses exceed income, bankruptcy eventually imposes belt-tightening discipline. Meanwhile, politicians kick the can down the road for as long as they can, by going into debt. However, once debt service exceeds income, the only viable solution is default, to enforce severe cutbacks in corporate and government expenditures. Citizens who came to regard such government largesse as their birthright invariably riot, just the Greeks did in recent times. Shifting demographics further compound the squeeze on government coffers. As baby boomers retire en mass, there are far fewer individuals paying into the system, than withdrawing from it. Unlike the Egyptians we never made provisions for the lean year during years of great bounty, Page 4 of 11

5 when we should have been paying down the national debt. For a while, deficit spending delays confronting reality, in hopes that the Fed can artificially perpetuate the boom artificial. Such smoke and mirrors extension of the boom, is like a highly treacherous drug, the more it s abused, the less of a high that s conveyed to the economy. As I explained above, the QE drug eventually results in a far swifter and severe downward economic spiral, Nature can only be fooled for so long. Likewise, corporate pensions, previously over-weighted in Government Bonds, were forced to reallocate assets away from fixed-income, by the Fed s artificially-low interest rates. In attempts to catch-up with their unfunded liabilities, Pensions had no choice but to diversify into stocks, real estate, hedge funds and private equity. In the short-term, such myopic choices appeared to have been wise, and like QE, became universally embraced. However, when the Market crashes this time, at four times the severity of 1929, Trillions upon trillions of dollars will evaporate in the blink of an eye, to wipe-out most pensions, along with the US dollar. Once again, it is the Crash s magnitude that will force massive downsizing, along with drastic cutbacks in all spending, to result in unemployment levels not seen since the first Great Depression. Inevitably a rapid downward spiral in virtually all economic activity will appear bottomless & never-ending. Repercussions will felt around the globe, to rattle every economy, far more than in the first Great Depression. There are no longer any economies existing in isolation, as Thomas Friedman of the NY Times surmised The World is Flat. Just as the night & day, or the seasons cannot be artificially altered, neither can Fed interventions avert the Bear Market s logical conclusion postponements are like putting-off repaying a loan shark they merely serve to magnify the backlash, by augmenting magnitude and extending the duration of the inevitable Depression to follow. Had we allowed the plunge to play itself out naturally, this Bear Market would have likely completed in 2010 at Supercycle magnitude, 25% of its current severity. All Bear Markets subdivide into A-B-C Wave B is a Bear Market Rally Like all corrections, Bear Markets subdivide into 3 waves, (A)-(B)-(C), with one exception. At Cycle degree and higher, wave A often takes on a complex Diag II, to forecast the long duration. Wave (B) is always a Bear Market Rally, sandwiched between two bear plunges in waves (A) & (C). Similar to the eye of the hurricane, Wave (B) is a hiatus, to give the false impression that danger has passed, only to return with a vengeance in wave (C). Otherwise, Bear Markets have the identical patterns as intra-day corrections lasting a day on a 10-minute chart. This is the meaning Mandelbrot s proclamation the Market is a fractal. Other examples of enduring depressions preceded by a Diag II were Cycle IV s ( ) and Supercycle (II) ( ). Locate Page 5 of 11

6 these two Bear Markets on the long chart in figure #1. Before me, the foundational Diag II was not considered a possible corrective structure. The Elliott Wave Principle, by Frost & Prechter labels the Diag II beginning 1966 a running correction, an imagined structure that simply does not exist. A deep level assimilation of Mandelbrot s fractal insights, allowed me to see the larger trend s fractal inverted in its correction, one degree of trend lower. To learn why the Wave Principle has taken such a bad rap over the years, and what other perpetuated blunders persist in the establishment s Elliott Wave Principle, study New-Wave Elliott part 2. Part 1 is being re-edited and will soon be available again. In Bear Markets, Next, view the S&P 500 in Daily intervals below, it shows the Diag II pattern as an echoing fractal with just a few months left to complete a zigzag rally to wave 4. The zig-zag is an a-b-c, where c appears linear and transcends to higher magnitude, to simulate a new Bull Market. When the larger trend turns bearish, to imply a Bear Market, waves 2 & 4 correct to the upside. Meanwhile, waves 1 & 3 become 5-wave bearish impulses, just like an inverted Bull run. Figure #3 The S&P 500 in Daily candlesticks (July 2016 to present) Page 6 of 11

7 Like all corrections wave 4, takes on the same a-b-c pattern as the larger (A)-(B)-(C), only inverted, why? Because it is a correction of a correction, just as in algebra the product of two negative numbers is positive. (-2 x -3 = +6). Corrections of corrections are inverted, so that waves a & c ascend, while waves b drops back, often to a new low. Wave (b), shown in purple, is similar to b only, but also serves to transcend magnitude, to gear-up for the final rally. The result is a highly-convincing semblance of a new Bull Market. (get a clear picture of this foundational concept now, it is required for even a cursory understanding, and is radically unique in my work, as Robert Prechter discarded Elliott s A-B pattern long ago, calling it the delusion of an old man.) Observe this a-b-c upside correction in wave 2, found between August and November in figure #3, without augmenting magnitude. In the absence of Fed manipulation, magnitude augments in the final Bear Market Rally prior to the Crash, and can often be identified visually as an irregular top, which substantially exceeds the orthodox ending of the previous Bull Market. Thus, when a substantial new high occurs in a Supercycle Bear Market, a Crash follows in sequence. In figure #3, note that Wave D measured on the perpendicular, extends to twice the price territory as Wave B, to correspond with twice the magnitude. Bear Markets often feign & fake The red arrow pointing down to wave (b) in figure #3, indicates a feigned breakdown. Similar to a basketball player s head-fake, only to pivot and reverse abruptly. So too, the market continually makes fools of investors linear-projections. Every reversal is preceded by an a-b reversal. Whose wave (b) is a feigned continuation of the previous trend. This is the essence of the a-b-(a); a-b- (b) pattern. From the wave (b), trough, wave 4 augments magnitude to twice that of wave 2 in figure #3. Resembling a tightly stretched bow, it sends the market arrow flying when released, in a sucker s rally. What s more, the final stretch is indistinguishable from a Bull Market. Like the Sirens in the Odyssey ensnared sailors to crash on jagged rocks, the final stretch s bullish appearance and higher magnitude serve to lure-in the last of the sidelined investors, for the Crash. What s more, a critical flaw in Dow Theory indicates that a new all-time high, such as this, is sequenced by higher highs still ahead. You too, likely project the current trend to the moon Four clients have asked me the same question pertaining to different ETFs in the last two weeks. If gold is in a Bull run, why are we holding inverse gold? and if the S&P is going into the final rally, how come we are holding inverse positions. Bearish does not mean foolish! Early Bears, despite Page 7 of 11

8 being eventually proved right, will have lost most of their capital by them. As Elliott wisely stated it s not just what you buy, but when you buy it that optimally compounds wealth. In 2015, I was named Timer of the Year for navigating bear market turbulence better than anyone else, 34% better than #2, as verified by Timer Digest. Early Bears will eventually be proved right, after losing most of their capital If we were to go long Gold, or the S&P now, we would be early, contrary the mindless herd, which jumps on the bandwagon after the trend is played out. In a Bear Market, Bull Market, linear projections are highly treacherous, this market must be swing-traded. Last year, Buy & Hold would have resulted in losses, and serves a warning that the tide has turned. No longer will Bull Market strategies pay off. The Diag > at the tip of the Daily S&P chart in figure #3, confirms the reversal, while RSI in the lower chart serves as further affirmation that sentiment is approaching overbought. By the time you hear news that gold is a Bull Market, it s time scale-out for a correction. Except in a Crash, when pauses replace upside corrections, the market moves three steps forward, two steps back in the direction of the larger trend. In all long equities, that larger trend is now South. So, if the source of your investment ideas is the Nightly News, you are always going to be a day-late, loser. The highest probability trajectory is what you see in my charts; however just like a course set on nautical charts, it must be continually adjusted to compensate for the elements to avoid landing on a different continent in this case the elements are herding behavior and irrational sentiment. Swing-trade opportunity in the China Bear Market China, the World s second largest Market, displays an analogous, Bearish Diag II pattern, one degree of magnitude lower than the US, and likely 25% its magnitude. Note how closely the Shanghai index s B-C segment in process, resembles the (B)-(C) segment in Supercycle (II) in the US between 1929 & Shown in a magnified view below, wave 1 of that Diag II is analogous to the 1929 US Crash, while wave 4 replicates the bounce into Once this Shanghai Diag II completes Wave 4, the violence will become highly intensified. In the meantime, the long China swing trade has outstanding profit potential, to be precise 48% from here, ( )/2859 much of it this year. Less than a handful of US investment professionals will match that performance. Only yesterday, John Perez of Comstock confirmed the trend with a chart showing a Spike in the price of iron in China, characteristic of a Bear Market Rally. Take a moment to compare the Shanghai Diag II in the C-Wave, with the corresponding Diag II in US Market from 1929 to1931 in figure #5, the last chart below. Page 8 of 11

9 Figure #4 Shanghai Composite (1990 present) Below you can see Supercycle (II) (A)-(B)-(C) Bear Market magnified for detail. Supercycle (II) and the current Supercycle (IV) correspond with waves 2 & 4 of the larger, 5-wave Grand Supercycle progression. Figure #5 Supercycle Wave (II) Page 9 of 11

10 Now that you have scanned this piece mindlessly, go back and take in the chart each time it s referenced, so that you get it! It s not easy, but it is Simple! Don t feel slighted, Robert Prechter, the so-called Elliott Guru, doesn t get it either! History repeats itself most often in the Market Elliott, short for the Wave Principle, is a study of Market history, as reflected in a perpetual, pendulum swings of the collective unconsciousness from overvalued and overbought, to undervalued and oversold. History repeats itself most often in the market, to reenact the price patterns originally identified by RN Elliott. So where s the market going over the next 5-7 years? The answer is found on the far right in Figure #1. The red down-arrow ends in the dashed, horizontal red line at Dow 100, the price level last seen in History repeats itself, just as Consumer Price index reverted the to the level of the American Civil War, 70 years earlier in 1920 in Supercycle (II), so will this Supercycle (IV) reenactment. A reversion to 1942 prices would be 74 years, statistically in-line with the previous 70-year CPI regression. To learn more read my other posts on LinkedIn, or view the Exceptional Bear website. Eduardo Mirahyes Page 10 of 11

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