Scaling Perceptions Amid the Global Equity Boom
LONG TERM TREND CHANNELS
Price Channel Analysis is a highly effective method by which to monitor key pivot points, trajectories, and the general boundaries within a given trend. No matter the time frame, from 60-minutes to 60-years, applying price channel analysis yields accurate account of trend integrity.
Channeling price data also happens to be one of the essential components of Elliott Wave Theory. Channeling is the only way in which to monitor the classic five-wave impulse pattern identified by Elliott.
Value is clearly a subjective perception. General investment postures (long, short, or flat) are contingent upon an (assumed accurate) perception that future values will continue to rise, go nowhere, or fall.
As such, price charts are essential in monitoring the present and historical nature in which the marketplace collectively perceives value. In this vain, it is critical to be aware of how the chart data under observation has been scaled. This is especially critical when studying longer-term price series. In many instances, the difference between arithmetic, and log scaled data will have profound effect on the general historical perceptions portrayed by the series.
DEGREES OF TREND
Further, such significant differences pose a great threat of inaccuracy to the Elliott Wave analyst, or chartist who fails to study trend channels and wave structures resident in both series.
Unique to Elliott Wave Theory, are several designations noting specific degrees of trend. The smaller fractal trends accumulate in advancing harmony to comprise the larger Primary, or long-term trends.
Incorporating dual scaling into ones analysis will provide broader perception as to the potential longer-term intent of the market.
EQUAL WEIGHTS AND MEASURES
We can view price data in either arithmetic, or log scale. Arithmetic scale measures the progressions from the lowest data point on a chart to the highest in equal increments.
In contrast, the log scale measures the lowest to highest data points in percentage terms. To attain the broadest perspective of past and current price behavior, both studies are essential to observe.
HOW DO MANY OF THE GLOBAL INDICES STACK UP?
Shortly, we shall present some brief examples of our proprietary Elliott Wave Analysis. We have included a number of international indices that are participating heavily in the global equity boom. We will look at each monthly chart TWICE, from the two different scaling perspectives. The charts on the left plotted in Log scale, and those on the right in Arithmetic scale.
DOTTING THE "I's" AND CROSSING THE "T's"
In studying both series, we have made strident effort to crosscheck and reconcile the analysis collectively. In doing so, the wave structures perceived in both scales are in harmony.
Failure to take both price scales under collective study, may lead to flawed perceptions in wave counts, and trend channels. More importantly, failure to observe both may dramatically skew assessments relative to the degrees of trend currently in force.
At the end of the day, the goal of this piece is to assist in broadening perspectives of general perception relative to amplitudes, durations, and numerous degrees of trend currently at work in the global market place.
Before we get to our charts, let us first explore some insights on both scaling and channeling from the very founder of Elliott Wave Theory, R.N. Elliott.
TIPPING THE SCALES OF PERCEPTION
Exclusive use of the log chart on the left would persuade general perception toward fitting the upward choppy price action from '97 through the '03 low as that of a "third" and "fourth wave" terminals of sorts. In fact, this was our prevailing view prior to taking the arithmetic scale under collective observation.
Since we do not yet have fourth waves with which to connect the 2-4 data points for channeling purposes, we simply connect the anticipated 1-3 data points until a 4 wave invariably materializes and is confirmed.
The arithmetic chart on the right goes a long way in helping define degree of trend. From the '91 low, both scales show five smaller degree waves (the fifth of which extended). In the both charts, the terminal to this extended fifth in '97, at the time, conveyed a very real perception that the preceding five waves up comprised a potential "end" to the entire cyclical bull market. We can see how such a wide spread perception may have tried to manifest in observing the big decline that followed into the "w" wave low.
Fast forward toward 2000 using either scale, we are still likely to assume an ending diagonal to the larger move, or that wave three is extending in some fashion. It is not until well into the explosive recovery from the 2003 lows that the arithmetic scale (right) puts the count in a fresh perspective. The arithmetic chart clearly reveals the nature of the power thrust from the '03 lows as that of a "third wave." Given the tendency of alternation in corrective waves, we can assume with reasonably good chance that the (4) wave down to come is going to be sharp and potentially deep.
Contingent that our degree of trend analysis is generally correct, and that equity markets are not in some type of "blow-off" top similar to the NASDAQ in '99, once (3) tops, we can expect (4) down to last at least 16 months or more. This is a minimum .236 duration response to the time span of the long and sideways (2) wave correction.
The most recent correction in May lasted only two months, and trimmed just 11.69% off the index. Within four months from the May low, the market is already back up printing fresh historic highs. Such a quick and rapid recovery leaves the door open to a blow-off upon continuation of general parabolic advancement.
Because we have both charts labeled uniformly, India's BSE does not appear to show that much discrepancy in comparative scaling at first glance. However, if the arithmetic scale were absent in the analysis, one could clearly see how the log chart (left) may persuade the observer to count the first leg up off the '01 low as a first wave up vs a -d- wave within the larger 4 wave down.
Another notable difference is the perception of severity relative to the crash like 30% decline to (4) occurring in April and May of '06. The decline to (2) in '04 was a tad more severe, lasting a total of five months, and registering declines of 32%. However, the "number of points" lost in the (4) decline were far greater as illustrated via the arithmetic chart.
In total, from the 2001 low, the BSE has risen over 400%. Given this amplitude percentage advance, in concert with time maturity off the '01 cycle lows, odds favor the primary or intermediate bullish advance is nearing an end vs a new beginning.
According to R.N. Elliott, wave (5) will typically end at the top of the trend channel when the arithmetic scale is used. Should (5) exceed or throw over substantially prior to completing all required subdivisions, then use of the log scale is preferred. Further, if inflation is present (together with a glut of global liquidity in our present situation) wave (5) on the log scale (left) should too reach its upper trend channel boundary. Such projections would take the BSE up toward the 16,000 level.
As we can see by the arithmetic chart, the sharp parabolic ascent in the BSE is much closer to touching the upper channel than the log scale. In fact, if we were to slightly lower the upper channel line to the high in March vs the April top, the BSE would be within striking distance of the upper channel as of this writing.
Russia presents the most startling comparative contrast in observing arithmetic vs log scaling. From the 1998 lows, the RTS is up an astounding 4,500% in just eight short years! The log scale left is deceiving in that at first glance, it appears the most recent highs are just marginally above the 569 levels attained in 1997.
The '98 Primary "C" wave crash low occurred inside of 14 months, and destroyed the market entirely with a 93.2% wipeout. The famous US crash in 1929 of similar destruction took over twenty years to reclaim its former highs. The Russians did it in just five. Given the immense amplitude of the relatively short eight-year advance from a virtual "starting over" point, we must assume the RTS is putting in a first wave of cyclical advance.
This is where the arithmetic scale comes in quite handy relative to observing "degrees of trend" in proper perspective. When we view the chart on the right, we can follow five waves up of intermediate degree to the crest in 2004 marking Primary Wave 1. Thereafter, what would otherwise appear in log scale to be a fourth wave triangle in 2005 instead marks the base of Primary 2. The immense power and parabolic thrust of the ensuing Primary 3 is unmistakable in the arithmetic chart.
More importantly, it puts the context of any future correction of magnitude in proper perspective. Note the horizontal yellow band we have placed on the log scale. Visually, it would appear that if the RTS were to correct down into that band, that it would not be such a big deal. On the contrary, a touch down into that band would represent a formidable bear market to the tune of 50-60%. In contrast, the powder blue horizontal fibonacci retracements located on the right within the arithmetic chart shows just how devastating a 50% or 60% retracement would be.
Similar to India, the Russian bourse lost over 30% in the two-month period of May/June 2006. The RTS has yet to better its historic May high as of this 11-13-2006 writing.
Brazil is another scale comparison that does not change perceptions all that much. One rather subtle but quite notable advantage offered by the arithmetic scale is its trend channeling attributes.
Thus far, the Bovespa appears to be ensconced in an extended x(5) wave of intermediate degree. Connecting the (2) - (4) touch points on the arithmetic scale appears to capture the bullish uptrend from 2002 much more efficiently than log scale.
The Bovespa is also up in excess of 400% from the 2002 lows. We suspect fair chance for a turn point of significance in March, April, or May of '07. These three months mark 55-months (+ / -) from the previous cycle lows.
The arithmetic scale has already thrown over the upper channel once, and is not that far from a second attempt. Of interest in the log scale, is the "back test" of the underside of its (2) - (4) channel line concurrent with the arithmetic scales "throw-over."
Another general advantage of incorporating arithmetic charts is the ability accurately measure pattern targets. We have noted a large inverse head and shoulder pattern on the arithmetic chart. We have drawn its slightly rising neckline in dotted green. From the arithmetic chart, it is easy to graphically measure the price objective for the pattern, and project it on the chart with proper reference perspective.
Per this patterns measuring objective, the Bovespa has breached this target intra-month for the second time. This first time was in May '06, and the second in November of '06. Thus far, the market has not yet bested its May high, nor has it been able to register a monthly close above the H&S patterns minimum target.
Second only to Russia, the Mexican Bolsa represents another stark example of how log vs arithmetic scaling may skew perceptions. In eleven years, the Bolsa is up over 1,500% from its 1995 lows.
Similar to Australia's scale comparison, one may have been inclined to perceive the sideways movement from 2000 - 2003 on the log scale as that of a fourth wave triangle of sorts.
When looking more closely at the channeling attributes resident in the five waves of minor degree comprising the larger x(3), the arithmetic scale is at or near a boundary touch of the upper channel. Since the first wave of this Minor degree subdivision appears to have itself extended, the corresponding 5 in progress should not.
No doubt, the past eleven years have posted stellar gains for this market. It is undeniable however, not to sense a parabolic blow-off top in progress due to the lion's share of those gains coming in just three short years from 2003 - 2006. Such rapid parabolic excesses are not readily visible in the log scale hence the benefits of observing both.
DOW JONES WORLD STOCK INDEX Monthly ARITHMETIC SCALE
We thought it prudent to end with a composite of all the worlds' major stock indices in attempt to garnish a diversified and balanced view of the Global Equity Boom.
Like most individual Country Indices, the DJW also appears to be advancing off a 4th wave of primary degree. Here too, we are looking for a potential turn point in March, April, or May of '07. We have noted upside price targets based on fibonacci projections and pattern objectives.
Do keep in mind that all such turn markers may represent either potential highs or lows of varying degrees.
"We'll Be Back"...
Elliott Wave Technology will continue to hone and offer its proprietary brand of technical analysis across the entire financial sphere. We consider ourselves amongst the fortunate few in having acquired the resident knowledge to impose a rather unique and highly proficient technical fix on all of the major price series'.
Until next time,