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August 03, 2009

Bull's Rush In
by Joseph Russo

In a recent article entitled, "June Gloom / Summer Rally" penned just two months ago, we brought to readers' attention the prospect of a summer rally following a brief period of gloom in June. We wrapped up that piece with the following remarks:

"As in 2007, July provides such opportunity for a commensurate equity consolidation. Following a successful summer/fall rally thereafter, October of 2009, the two-year anniversary of the all-time high may bring with it an echo of the blind bullishness experienced at that time."

Although the equity market decline from late June into the early July period was hardly commensurate with the massive run up from March, it nonetheless provided a base from which to launch the summer rally currently in progress. The jury remains out as to whether or not this summer rally shall extend into the fall, or if it succumbs to an abrupt failure at some point in August.

Baby breath's of Exhale into early July
Mid-way through the 790-pt 8.89% correction the Dow registered into early July; we penned another article entitled "Waiting to Exhale". In this piece, we presented the analogy of drug addiction and its related health effects as they might translate to fascist intervention upon the manmade schemes of finance and politics. We closed that piece with the following commentary:

"The most vexing concept associated with this analogous tale of intrigue, is that it remains disturbingly plausible that with continued administration of these hyper-nuclear drugs, they might just give this otherwise very dead patient, the very real impression that they are still alive and well."

"The gravity of such distortions carries the outlandish possibility of eventually delivering a hallucinogenic denial-induced rally taking equities back up toward their 2007 highs. There, we said it. As morbid as it is, until we are able to record (or admit) a time of death, so long as we remain open to constant rule changes and creative innovation, anything can happen by the hand of the wonderful wizards of Wall Street and Washington."

Shepherds of Illusion engender a continuation of the desired stampede
As the Dow approached its early July low, we offered readers opinion on what we believe might be some of the goals resident amid small ruling elite bodies which maintain full-spectrum control and order over the masses. We titled the piece "Shepherds of Illusion". Our thought summary from this piece was the following:

"In summarizing our viewpoints, the potency and effect of distortive interventionist political and monetary policies together with participants herding tendencies to "stampede" are in fact what determines that authorities' success or failure in maintaining their monopoly and status quo preferences, all of which are vital to their ongoing supreme and elite existence of full spectrum dominance and rule."

"Regimes successful in the management and chosen direction of desired policy-induced stampedes, will likely fulfill their prime directives and remain effectively dominant and in vital control of the masses."

Given the second wind of bullish stampede that occurred throughout July, it would appear that those at central command thus far remain in charge of this non-violent manmade crisis, and thus remain in firm control of their standing monopolies. Relative to the current power structure, market participants' stampeding reactions, and plausible Elliott Wave counts, how is all this shaking out thus far?

Their back - and stone cold sober as a matter of fact
The real bitch of the matter is the lost opportunity for those loyal to the basic principles of the US constitution. A missed opportunity to engender from this crises radical change of substance that might have returned the union back to the beacon of unwavering hope and disciplined leadership that it was intended to exemplify and indefinitely produce.

Instead, it appears that for now, central bankers, powerful lobby elites, and politicians have pulled another rabbit out of their mystical hats in orchestrating the coup of the century. At the precipice of total collapse, they managed to bail themselves out by fiat, and now coddle the confused peonage under their control to be patient and trusting that good fortune will too come their way - eventually.

Perennial Bull's, Armageddonists, and other such Fools
Wait long enough, and the Armageddonists are sure to rise as most prescient. After all, there is no dispute that in the end, we are all dead, as the planet upon which we subsist will one day fail of natural causes beyond our control. However, such fate may not become our species for thousands and thousands of years. To that probability, it is foolish to cling to such prospects as imminent despite whatever it is that the Mayan calendar may suggest.

On the other hand, those with a permanent belief that markets will always come back to surpass former highs despite whatever degree of systemic inoperable cancer may clog arteries of global commerce and civil equity, are just as misguided as those awaiting the impending onset of end-of-days.

Somewhere between exists another dimension of consciousness known as the reality zone of relevant probability. Recognizing things for what they are, and how they have come to be is the first step in coming to understand the world around us, especially when it comes to manmade schemes involving money, power, and finance.

Primary Wave-2 rally - again (we beg to differ - again)
Many respected Elliott Wave authorities are once again pounding the table that the force and growing amplitude of the current rally is of no surprise at all; it is after all, just another Primary 2-wave rally of course.

We recall these same authorities preaching a similar such rally was supposedly underway shortly after the 2002 bear market low. After the Dow surpassed its 1999-2000 highs by a wide margin however, the early 2000's Primary wave-2 rally thesis quickly gave way to an expanded "B" wave at cycle degree interpretation. (See our chart illustration below)

Though we respect all credible sources of opinion and analysis, we must express respectful dissent in the primary wave-2 rally thesis for a second time. Here is why.

Firstly, if the Elliott Wave five-wave downward impulse structure is to maintain any semblance of classic symmetry and Fibonacci proportionality, the current primary degree bear market rally must carry well above the common .618 retracement level in advance of delivering its most punishing primary 3rd wave decline.

Why so high, because despite its remote and constant plausibility, we do not subscribe to the belief that the end of days Armageddon event is directly at our doorstep. We shall explain...

Our chart below further illustrates why the Primary wave 2 rally must travel to such heights prior to the onset of an "end-of-days" Primary wave-3 decline.

Assuming the current rally comes to rest at a .786 retracement of the entire Primary wave-1 decline, we could expect primary 2 to crest at a Dow level north of 12,500, which translates to a 93% rally off the March 2009 lows. Should it happen, great job Barack, Barney, Tim, and Ben! Such a rally will reflect a hyper-reflationary QE success and be very reminiscent of previous bubble-policy stampede outcomes.

Next comes the first part of the problem with the proposed forthcoming Primary degree 3-wave assault that will supposedly follow. From a reflationary Primary-2-wave crest at a projected Dow level of 12,500, if Primary wave-3 were to express itself at a common 1.618 ratio of primary wave-1, the most severe and punishing Primary 3rd wave decline would have to crash the Dow to retest the double-digit 40-handle, which has not been seen since the 1932 depression era low.

Short of the ever constant probability of threats associated with mega natural disasters, terror attacks of varying sort, disastrous world wars, or pandemics of extreme magnitude, we remain highly suspect that any manmade economic schemes (flawed as they may be) could take the Dow down to such levels.

The second part of the problem rests with Primary waves 4 and 5 amid the prospective 5-wave downward impulse at primary degree at this scope and dimension.

If we follow along and believe that once the current Primary wave-2 rally completes, that Primary wave-3 will proceed to crush the Dow back to the 40-level, we would naturally then expect another primary degree rally to mark a Primary 4th wave counter-trend advance.

As the chart above illustrates, if the primary wave-4 rally retraces a modest proportional common ratio of .382% of wave-3, it will reach the 4,832 level. Such a rally translates to a near 12,000% gain from a prospective 1932 retest low of 40.13. Something along the lines of the arrival of the anti-Christ must occur to inspire a 12,000% false-dawn rally in the Dow of such magnitude.

Casting the plausibility of such amplitudes aside, let us assume the anti-Christ indeed arrives sometime after the Dow retests its 1932 double-digit lows. Shortly after the miracle of wave-4 crests its 12,000% gain, the world will collectively realize they have been led by the devil himself and thus usher in the final Primary 5th wave decline, which will exact the diabolical punishment of end times, at least for the Dow if not all of humankind itself.

To close this dissent, if a five-wave impulsive decline expresses itself with any semblance of Elliott and Fibonacci proportionality, then wave-5 down will have tendency toward equality with wave-1. Such a ratio would bring the Dow to a number below zero to the tune of (-2,896) points negative. Now that is what we would call the "end of days" for the Dow. Just don't bet the ranch on it.

The oval on the right encapsulates the precise analog path the Dow would take should it follow in the same footsteps of the Nikkei. If one is a firm believer in such things, the analog model suggests very tough times ahead for all global equity indices for a long time to come.

In contrast to an "end-of-days" scenario, or a perennial bullish outlook, at least such an analog provides a credible president for what a worst case may bring, and what a realistic Primary and Cycle degree "A" wave decline may actually look like in real time.

With that, we shall close with an update on last week's charts and be on our way...

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Joseph Russo
Chief Editor and Technical Analyst
Elliott Wave Technology

Joseph Russo, presently the chief editor and analyst for Elliott Wave Technology, has been studying Elliott Wave Theory, and the Technical Analysis of Financial Markets since 1991 and currently maintains active member status in the "Market Technicians Association." Joe continues to expand his body of knowledge through the MTA's accredited CMT program. Having passed the Level I examination in November of 2004, Joe is now preparing to begin study for his Level II exams. Upon successful completion of an exhaustive level III examination he will have earned the industries highly regarded designation of Chartered Market Technician.