The Great Wave Debate

By: Eric Noel | Mon, May 30, 2005
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There is not much debate among technical analysts that the 2000-2015 time period has been and will continue to be a secular bear market in stocks. Elliott Wave Theory aside, the stock market has been following a sequence of alternating 15-20 year secular bull and bear markets for decades. The real debate begins when the question is asked: "How low will the market go before the next secular bull market is born?"

From an Elliott Wave perspective, two very divergent camps of thought have emerged: 1) Robert Prechter and his followers; and 2) Glenn Neely and his followers. Prechter practices traditional Elliott and has applied it to the social sciences in the fascinating 2 volume book "Socionomics". Neely has extended Elliott's original work into a discipline he calls "NeoWave". Both Prechter and Neely are highly creative thinkers.

According to Prechter, the year 2000 marked the start of a Grand Supercycle bear market to last almost a century. Prechter's preferred count has Grand Supercycle degree Wave IV as a contracting triangle, of which the first wave (A) will take the DOW to below 400 before 2015. This, of course, will be accompanied by severe deflation and a global depression. There is not much wriggle room in this count; the US market should start collapsing fairly soon if it is to reach the bottom of an A wave zig-zag within the next 10 years. This should then be followed by a fantastic B wave zig-zag towards the year 2000 highs, followed by C-D-E for the remainder of the century. Such a volatile count presents the trading opportunity of a lifetime.

According to Neely, however, the year 2000 commenced a Supercycle degree Wave IV. Under this count, the stock market is likely forming a flat, a triangle or some complex combination of such corrective patterns to end around 2015. Neely's present count has Wave A down from 2000 to March 2003 and Wave B from March 2003 to present (but presently unfinished). Neely, in 2004, stated: "the 2002 stock market low in the Dow and S&P will not be broken for the next 50-100 years. Structural clarity on a daily time frame is very low, so I prefer to reserve specific forecasts on that time frame." He said the same thing about the crash low of 1987 back in 1988 while most others were convinced that a depression was imminent. Following this Supercycle Wave IV correction, Neely's forecast calls for a final fifth wave to commence and bring the DOW to at least 100000 and the S&P to 10000 by mid-century. Neely's NeoWave approach is followed by a much smaller contingent of analysts than Prechter's traditional approach as most find its complexity daunting, myself included.

Neely's work is often dismissed by Elliotticians based on the supposed argument that "it is not even Elliott" or "it is a twisted version of Elliott". However, this is not an argument against NeoWave but rather an observation that it is not the exact same as Elliott. It is like saying "Quantum Theory is NOT General Relativity, therefore it must be dismissed."

Both Neely and Prechter are bearish on Gold for the next few years. They are both expecting an ultimate secular bear market bottom in Gold around 2009/10 at approximately 200 USD or under followed by a new secular bull market in gold that will bring it to all time highs.

Prechter is a deflationist. Neely believes there could be a period of deflation soon but not to the same degree Prechter does.

Both their views on Gold and deflation appear to be consistent with being in a Kondratieff Winter phase, which is overdue since the last one occurred in the 1930s. The present credit bubble adds credence to this view.

Prechter's view on the Stock Market is consistent with a population crash around mid-century as wave C in his contracting triangle draws to an end, bringing about a major world conflict, as per the socionomic perspective. Neely's view that mid-century will mark the end of the long advance from the 1700s is also consistent with the end of a growth phase and a dramatic restructuring of the human population.

The view that economic output and population growth will come to a sharp end by mid-century has been articulated in a paper by physicists A. Johansen and D. Sornette entitled: "2050: The End of the Growth Era?". In this paper, the authors state that human population and economic output have grown FASTER than exponential, especially in the last two centuries. Further, this super accelerating growth is consistent with a spontaneous divergence at the same critical time (2052 +10) and with the same fractal patterns. As the faster than exponential growth approaches this finite time singularity, the system will become unstable. This is explained by an interplay between population, capital and technology producing an explosion in the population and in the economic output, even if the individual dynamics do not. The authors claim to have used their model to predict the April 2000 crash in the NASDAQ within a one month time horizon, in a paper released in April 2000 entitled: "The NASDAQ Crash of 2000: Yet another example of log-periodicity in a speculative bubble ending in a crash". This work is compatible with the DOW reaching 100000 or more by mid-century (The Neely view). D. Sornette will be publishing a paper on the US Housing Bubble in the coming weeks on his web-site.

The next five years should point to whether Neely or Prechter's view is to be preferred from a wave perspective. For decades, the US stock market has been following a decennial cycle of single and double bottoms each decade, e.g., 1962; 1970/1974; 1982; 1990/1994; 2002; (2010/2014?). The notion of a double bottom in 2010/2014 is consistent with both the Prechter and Neely's counts. As an amateur technical analyst, I see the price action since 2000 as corrective in nature and think it unlikely we will see DOW 400 in my lifetime; thus, I prefer the Neely count, if I must choose. Perhaps this is evidence of the unsophisticated majority's false hope?

Time will be the judge.


Author: Eric Noel

Eric Noel LL.B., LL.M.

Copyright © 2005 Eric Noel

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