And now the light shine
From the Northern star
Saw you radiate
And I don’t mean to
Be so seasonal
-So Long St. Christopher
Every 40 years something bad happens in the economy and the market. Every other 40 years something really bad happens.
The 40-year cycle is really a component of the 120-year cycle, the 1/2 octave of which is Gann’s Master Time Cycle, which ties to the Kondratieff (economic) Wave. The 40-year cycle is a 1/3 octave of the 120-year cycle.
Other cycles which comprise the 120-year cycle is the 20-year (6 harmonics of 20 years), the 12-year (10 harmonics of 12 years), and the 24-year (5 harmonics of 24 years).
The colonies were formed in the mid 1600’s in America. The Declaration of Independence came 120 years later.
The next 120-year cycle bottomed in the mid 1890’s following the first major depression in the U.S.
Note that the 120-year cycle ties to revolutionary change. The first 120-year cycle ties to a political revolution while the second 120-year cycle saw a revolution from an agricultural to a manufacturing-based economy: the Industrial Revolution.
The next trough of the 120-year cycle is due sometime between 2014 and 2016. We are 12 years from the big top in 2000. 2012 may be the 3rd drive to a high and culminating top following the top in 2000 and the top in 2007.
I started this piece talking about the 40-year cycle but wanted to put it in context. 40 years ago we had stagflation and something bad happened in the markets, accentuated by the vicious 2-year bear market decline from 1973 through 1974.
40 years before that, something really bad happened. We got the Great Depression and the crash into July 1932.
Cycles have a habit of playing out in mirror-image foldbacks to fool us at exactly the wrong time.
For example, while a waterfall decline played out into 1932 prior to a multi-year rally, 40 years later in 1972, a false breakout occurred just prior to a pernicious multi-year decline.
Recently I showed the pattern in 1937 which marked the peak of the advance off the crash low in 1932.
This showed a top in March/April like we had this year, followed by a sharp decline and a climb back up into August. There is a lot of synergy between the idea of the crash into 1932 and the crash into 2009 and the subsequent rally phases.
Given the decennial cycle from 1962 with a crash into October, IF this late July/early August period does not mark a high like it did in 1937 and the market holds up by hook or crook and somehow finds a high in late September/ early October on the 10-year anniversary of the bear market low in 2002 and the 5-year anniversary of the all-time high in 2007, then we may be running out a pattern like 1972 which saw a false breakout, which turned out to be the mother of all bull traps.
Click to enlarge
Interestingly, the triple-top breakout (Rule of 4 buy signal) in late 1972 is a near-mirror image of the pattern of the Spike & Reversal pattern in 1929.
Most market participants think 1929 was a strong year. Actually, the year was flat for the most part, with the market exploding following a breakout to the topside and then crashing once it violated the base of the ‘flat’.
We can’t rule out the idea that the market will continue to hold up as we move closer to the election, not to be too Machiavellian about it. After all, the market has refused to collapse in the face of worries about a Fiscal Cliff in the U.S., a European meltdown, a deteriorating geopolitical landscape in the Mid-East, and a syndrome of slowing in China.
When you compare where the market is this summer as Eurogeddon looms versus where it was last summer and the summer of 2010, you can’t rule out of hand the idea that the market could hold up into the fall -- if the phrase ‘hold up into the fall’ isn’t an oxymoron; it actually seems a fittingly ironic description for the environment we’re in.
The last two years followed the 40-year cycle from 1971 to 1972 quite well. As long as the S&P continues to hold the 1310-1320 price level from our secret June 27 cycle, the market may hold up. Remember, this vibration ties to the crash low on November 21, 2008, 1310 to 1320 days prior to June 27.
That said, the squareout we expected to repel the S&P at 1379 on July 19 did so. On July 20, the market gapped down and stayed down, pulling back to picture-perfect support defined by the hourly chart shown in the last report seen here again:
In addition, the range from last October’s low to this year's April high was 347 S&P points.
Importantly, I think, is that this 347-point range also squares out with July 19. In other words, July 19 is opposite the number 347, so we also have a squareout of the range.
This time/price squareout between 1379 and July 19 combined with the 347-point range squaring out on July 19 along with the fact that July 19 was the 5-year anniversary of the orthodox market top in 2007 indicates that any downside follow-through warrants caution.
Downside follow-through below the June 1363 high which ties to angular and lateral support (see above hourly chart) and then the 50 dma which ties to 50% of the April/June range is a yellow warning flag. A decline back below the above mentioned 1310-1320 ‘cycle’ support is a red warning flag.
The next trough of the 120-year cycle due over the next few years holds the potential for a third major depression. It may also hold the potential for revolutionary political change such as aligned with the cycle in the 1770’s. If a third great depression plays out, a sway towards totalitarianism in the US cannot be ruled out. Be that as it may, from the market's standpoint, a third leg down in the secular bear market that ostensibly began in 2000 certainly cannot be ruled out.
The first leg down ended in 2002. The second leg down ended in 2009 -- a 7-year period. Given the 120-year cycle, a third leg down is likely to also end 6 to 7 years from 2009, targeting 2015-2016.
Our job this year will be to identify the next big top, assuming it hasn’t hit this week, because from wherever it starts,the next major leg down, whether it starts in the next few weeks or in the fall, is indicated to be defined by 2 years of persistent selling pressure.
Form Reading Section
No positions in stocks mentioned.