Page 1 of 11
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 2 of 11
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 2000. (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 1932. 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 sub-
set 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 2000.
Page 3 of 11
Figure #2 Supercycle (III) Bull Market (1982-2000)
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 4 of 11
the free-fall that followed into 1932. 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 1929 - 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 mal-
investment 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 5 of 11
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 2008-2009 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 (1966-1978) and Supercycle (II) (1906-1932). Locate
Page 6 of 11
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 7 of 11
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 8 of 11
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 & 1932. 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 1931. 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, (4850-
2859)/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 9 of 11
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) 1906-1932
Page 10 of 11
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 1942. 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 11 of 11