TIME CYCLES
This week the DOW broke out to all time new highs in a perfect wave location: Int. iii of Major 3 of Primary III, or 3 of 3 of 3. For comparison purposes we took a look at the last ‘breakout to all time highs’ in 2006. We then adjusted the wave count of that bull market as if it too were a Cycle wave. Under that wave count the previous ‘breakout’ was also at Int. iii of Major 3 of Primary III. A perfect fit, but there is more.
During the 2002-2007 bull market it took exactly 48 months of bull market activity before the breakout occurred. Then the market topped exactly 12 months later. That bull market began in Oct02, broke out in Oct06, and topped in Oct07. This 2009-2013 bull market has also taken exactly 48 months before the ‘breakout’. The bull began in Mar09, broke out Mar13, which now suggests a bull market top in Mar14.
Following this theme: breakout to new highs – then top within twelve months. We checked further back into market history and noticed the following. After the 1998 crisis the DOW made new all time highs in Jan99, then topped in Jan00. After the 1987 crash the DOW made new all time highs in Aug89, then topped in July90. There is definitely a time/price pattern at work here.
Adding to this probability is the potential for an upcoming recession, using the irregular presidental recession cycle. Since 1949 there have been eleven recessions. Three occurred in an election year, at the end of a president’s term. But eight occurred within 18 months after a new/second term president was sworn in. President Obama was sworn in January 2013.
If we now make the assumption that the bull market high will occur in Feb/Mar14 to complete Cycle [1]. This five year bull market will have matched, in time, the five year bull of the previous Cycle wave [1]: 1932-1937. It will have also matched, in time, the previous bull market: 2002-2007. Then, however, the market enters a new treacherous bear market period: Cycle wave [2].
After the last Cycle [1] 1932-1937, Cycle [2] dropped 49% in 12 months into 1938. Cycle [2] should have ended there with that percentage of decline. Cycle waves generate about a 50% market correction. After a big bullish looking rally into 1939, Germany invaded Poland and the market eventually went back to the 1938 lows by 1942. Cycle [2] should have lasted 1 year (12 months). This would have been similar to Cycle [4] which also lasted 1 year, 1973-1974 (21 months). The percentage of decline is important, not the time, as we recently observed in the 2 year, Oct07-Mar09, (17 month), 54% decline.
The next thing of interest is the presidential 4 year cycle, which typically bottoms in the months Mar/Jly/Oct. It has a pretty good record: 1982, 86, 90, 94, 98 and 2002. But occassionally it gets out of sync. In example: 2006, 2010, and soon 2014. When this occurs it eventually realigns, sometimes rather quickly. For example: 1946 made a high then a mini crash followed into the 4-year low, 1962 made a high and a mini crash followed, and 1990 made a high then a mini crash followed.
Finally, with about a 50% market loss expected for Cycle [2], the 4 year low potentially bottoming in 2014, and possibly a Secular cycle low as well. We looked back in market history for huge declines during a short period of time. We found two historical periods of huge declines, bonafide crashes, in just two months: 1929 -48%, and 1987 -35%. The 1929 crash, was a straight down one downtrend event. The 1987 crash was an unusual five wave/trend elongated flat event. Primary wave II, during this bull market, duplicated that pattern during its 19% decline. An omen of things to come?
With high frequency trading, long term rates heading higher, and the USD in a bull market. There is now the potential for a bull market high in Feb/Mar14, then a bonafide market crash during 2014. This is just another example of investor mass psychology patterns in action: past, present and future.
