Los mercados en tus manos / Markets close enough to touch


Green, that I want you green

jueves, 14 de mayo de 2009 by Luis

Obviously the title is ironic because what we are going to tell you here have not just dressed in that color, but red. But I think it is appropriate not only for the irony, but also because it is very fashionable now with the "green shoots", in allusion to the nascent signs of recovery that, some says, the world economy show. They may have formulated this term to protect their reputation when the red arrives, but I fear that they will have to hide in the confines of Earth to save his own life when the wrath from the crowd unleashed.

I think it is appropriate to publish such content at the moment of bullish euphoria, when the bearish opinion is not marketable. We could sell later the bearish opinion, when it is easy, but also it is useless. Perhaps a few reports of doom will be seen from a different point of view a few months later and perhaps it will be useful to open the eyes of many who could be tempted when they hear the mercenary proclaiming the beginning of a new fever of gold from the rooftops. We have already posted on this blog an article titled "The biggest crash of all time", and at that time it cost me a little to accept that the scenario ahead was so catastrophic, but on the light of the evidence and dimensions of what was happening I had no choice but to accept it.

These days have fallen into my hands a report from a major North American analyst, specifically Robert Prechter. This gentleman stated at the end of 2006 that we were about to suffer a stock market crash of similar proportions to 1929 and after more than two years he maintained the forecast.


Prechter believes that the current upward movement or rebound in equity markets corresponds to the wave 2 of a series of 5 downward waves that the majority of the stock markets of the world will develop in order to complete a large correction of super-cycle proportions. He establishes a count in which it could be on the large wave of super-cycle C and states that the bear market has only just begun.

This document has no waste, and among the many statements that it made, what he states about this wave 2 in development called my attention. He thinks that if this rebound is sustained for a few months, many analysts will argue that the stock market is a safe investment again. And obviously, this will happen, we do not know exactly for how many months, but it would be normal if the wave 1 has a low rebound that lasted 17 months, for this wave 2 it could last at least 0.382 and normally the 0.618 of the wave 1, which leads us to believe that it will last at least until mid-October and most likely until mid-February 2010. But this issue should not be a worry for now, as time will clear up our doubts.

He also establishes an important difference between the American market and the European Market in their long-term counts, a difference that also maintains on shorter counts.


Then, while the American market would have completed a 5 waves super-cycle and therefore the current correction would affect the entire bull market that began in 1932, and developed in five waves of that degree, the European market remains currently developing the wave (IV), even though the development of (III) started approximately at the same time. But, we should not ignore this finding, because the consequences could have a direct effect on the depth of the correction. Then, if the count is right, the end of the bear market would be the crash of 1987 in Europe, and in the U.S. it should deepen up to 1973-1974 levels, i.e., to levels below 1,000 points in the Dow Jones Industrial Average. To give you an idea, depending on the level of the end of this wave 2 in the Dow, the next wave to lower levels should reach at least between the 3200 and 1700 points.


For the counts on shorter terms, he establishes differences between European and American market, but suggests some doubt. He maintains that Europe is developing a 4th wave instead of a wave 2. This difference in the counts for the short term raises the question about the end of that first wave down in the European market and shows the possibility that the next leg of this correction is a new minimum below the previous (in March) in these markets. This possibility seems quite consistent, in fact I was already planning for that possibility in the Ibex 35 (which has been going on lazy and has not fallen as other markets to the corresponding levels of the final wave A of the year 2002), influenced by the delicate technical situation that I appreciate in Telefónica, an idea that seems to fit well with the counts of Prechter.

This doubt is going to disappear soon, as the markets seem to have begun the correction of the previous rising leg and, if this assumption is met, it would result in the development of a more complex wave 2 in the American market rather than in Europe, perhaps one triangle in the first and a simple plane a, b, c in the second.

In the coming days I will add details regarding the conclusions drawn from this document. For now is enough with these charts that reflect the Elliot count and anticipate how this bear market will develop. To specify a little more, he states a market recovery during the current rebound to a rate of 0.5 or may be 0.618 of the whole stretch to the low. Obviously, that percentage in the European markets will have to be recalculated when it completed the wave 1 if these projections are met. Some remember that when this rebound begun, I was expecting that the market does not rebound so much and a new minimum before the big rebound.

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