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The Cycle Onion
November 21, 2012 08:32 AM
2008 WAS A LONG TRAUMA
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Looking through the bent backed tulips
To see how the other half lives
Glass Onion (The Beatles)
“To trace something unknown back to something known is alleviating, soothing, gratifying and gives moreover a feeling of power. Danger, disquiet, anxiety attend the unknown---the first instinct is to eliminate these distressing states. First principle: any explanation is better than none…The cause-creating drive is thus conditioned and excited by the feeling of fear…” Friedrich Nietzsche
It was Sigmund Freud who drew attention to what he called “the repetition compulsion”, the all-too-human tendency to repeat the past.
He connected it to traumatic experience and pointed out that through their actions people unconsciously repeat the past, reenact the past.
The very nature of the trauma response determines this repetitious behavior. Over and over again, people find themselves in situations that echo earlier trauma and lack any awareness of how it happened much less how to prevent it from happening the next time.
Words and thinking become insufficient to explain the experience; consequently, people typically come up with explanations for strange and mysterious behavior because the rational part of their mind struggles to make sense of situations that hold no sense.
Unable to fully explain behavior, the rational mind flounders helplessly often interpreting behavior in a simplistic, often stupid way while re-exposing oneself to further trauma.
This is the case with individuals as it is with the great spiritus mondi of human consciousness and the mass consciousness of market participants.
The relationship between cause and effect is often times as illusory as is rational behavior on Wall Street. To be sure, although technology has condensed the decision making process, the patterns that the spiritus mondi of human consciousness carves out do rhyme.
The song remains the same. The words may differ.
2008 was a long trauma.
Technical rallies after severe oversold conditions in bear markets are as normal as sharp shakeouts in ongoing bull markets: it is easy to succumb to the music of the market and the allure of quick relief rallies, but history has borne out that the sharpest rallies have occurred in the midst of ongoing bear markets.
The most famous bear market rally in history was probably the advance that followed the October 1929 crash. In fact, stocks recovered for 6 months into April 1930. During the first half of 1930 the Harvard Barometer, a business indicator, remained flat. Consequently, many of the best minds of the time and many economists were convinced that not only was the 1929 crash merely an isolated financial accident, but that there was no recession on the horizon.
For example, some of those unconvinced of the depression that lay ahead included the following:
US Treasury Secretary Andrew Mellon stated on December 31st, 1929, “ I see nothing in the present situation that is either menacing or warrants pessimism…I have every confidence that there will be a revival of activity in the spring, and that during this coming year the country will make steady progress.” Then in February, 1930, he went on to conclude that “there is nothing in the situation to be disturbed about.”
Noting that is but a lost decade.
Lord Keynes, one of the leading economists of his day, was not concerned either suggesting that the crash might be beneficial because money which had been used to speculate on stocks could now find its way into more productive enterprises.
Sounds rational enough, right?
So you think you understand the stock market? One of the greatest traders who ever lived who amassed a fortune of 100 million dollars at that time, Jesse Livermore, sold short in the summer of 1929. However, he publicly stated in November 1929 that the decline was over. Livermore lost all his money in the 1930-1932 decline and eventually committed suicide.
The larger the sword, the bigger the fall.
Bernard Baruch, who correctly foresaw the crash of 1929 later stated: “I never imagined, in these last months of 1929, that the collapse of stock prices was the prelude to the great depression. Anyone who knew the potentialities of the American economic system, as I had come to know them, could not help but believe that the market break would just inevitably be followed by an ever greater prosperity.”
He was ultimately right of course, but timing is everything. Ultimately, of course, the
Dow Jones Industrial
) made a new high, but it took 25 years. Ultimately is a long time. Just ask the Japanese.
The question is whether there is as much confidence in the system now as there was 9 squared years ago.
In 2011, the S&P collapsed 300 points from 1370 to 1070 when the policy makers stared into the abyss.
Since then, they have done nothing to address the cliff the US clings to.
Who among us is convinced they will find qualitative solutions in the next 5 weeks?
And, that’s assuming the politicians will forego their Thanksgiving recess and their Christmas recess.
Is anyone willing to put cold hard cash on the line that Congress will do what the electorate sent them to do and stay in session and hammer out something concrete?
Who can be blamed in 1930 for believing that market would bounce back and that the economy would not collapse following the period of remarkable growth known as the Roaring Twenties?
Today, following the debacle in 2008, the trauma feels all to fresh to many participants, particularly since super stock
) has discovered kryptonite.
Is the market on the brink of reenacting something all too similar to 2008 in 2013?
Was the recent slide following 3 drives up from the March ’09 low a shot over the bow?
With the 100 year and 120 year cycles going off the cliff in concert with several other big cycles, that is the question we have to ask ourselves going into the 7th squared month from the November ’08 crash low.
Was last weeks low another low in an ongoing bull market such as we saw in June or will a rollover and another leg down below last Friday’s low act as a point of recognition for market participants that there is a change in character in the market.
Clearly, the market is at a pivotal point following 3 large drives (since 2009) to this September’s peak:
1) As we noted in this space the 808 range of the advance from 666 to 1474 ties to this week. In other words, the range of the run vibrates off this week on the Square of 9 Wheel.
2) the advance from March ’09 to September 2012 was 42 months and 42 is 90 degrees square of this week on the Square of 9 Wheel.
if you are interested in being able to make these same kinds of calculations as W.D. Gann did using a Square of 9 Wheel, I have a 2 ft X 2 ft Wheel available (along with a private phone consultation divulging what I have discovered about how to use the Wheel over the past 20 years) email me at
On Tuesday, the Weekly Swing Chart and the 3 Day Chart turned up eliciting a quick knee-jerk pullback followed by a walk back.
from Friday’s low shows the reaction into Monday’s Momentum Gap snapped a very short-term trendline followed by a backtest into the key 139 level . This ties to the
1388 ‘target practice
level flagged the other day.
It looks like the snapback into the runoff suggests another pullback, which may be followed by another test of massive resistance that stretches from 1388 all the way to 1403, the Monthly Swing Pivot where the Monthly Swing Chart turned down with authority on November 7th.
Click to enlarge
The low of the November 7th large range distribution day was coincidentally 1388. The close was 1394, which ties to the overhead 20 dma---for a possible Holy Grail sell signal if tagged.
The first rebound to the 20 dma following a dramatic selloff (or the first pullback to the 20 dma following a dramatic surge) usually offers a solid risk to reward setup---in this case a short.
Whereas the Harvard Barometer mentioned above went flat for the first six months of 1930, in November 2008 manufacturing had contracted to a 26 year low---back to the levels of 1982 where the bull started.
You wonder why the Fed kept the pedal to the metal?
It is entirely possible that business conditions were contracting at a faster rate in 2008 than in 1929.
However, given the amount of stimulus and crazy glue being smeared over Humpty Dumpty, it is not surprising that the contraction convulsed over the last 3 years.
As The Bernanke stated yesterday, there are no tools left if policy makers allow us to go over the Fiscal Cliff.
So the question is if the market rallies/holds up into year end will it simply be pulling Congress’ feet from the fire allowing them to kick the can down the road?
. When we look back over the panorama of our lives, there are moments that are indelible that act as markers in the timeline of our journey. So, too the great Spiritus Mondi of mass consciousness imbedded in what we call The Market responds to markers in history, to cycles, patterns, and time /price harmonics.
I would not listen to the prognosticators who assure us that the worst is over. Most people prefer the security of the ‘known’ over the instability of unknown change.
I would be careful about what explanations you accept here.
The only judgment I would accept is the market’s own verdict: price is the final arbiter.
The ability of the market to bungee from a deeply oversold condition for a period of time is not a guarantee that the worst is over.
This was proven in the 6 month rally into April 1930.
It was proven in the multi-year rally into 1937.
In order to take advantage of the great buying opportunities offered by bear markets, one must have the powder to do so after they’ve peeled prices back to historic cycle troughs.
Throughout the summer, we pointed to the convergence of the 25 year cycle (300 months), the 50 year cycle (600 months), and the 75 year cycle (900 months) due to exert their influence before the end of 2012.
That pressure came to bear in earnest as the 4th quarter began.
. Once the momentum dies out the bear will return and the S&P should satisfy our 1325 projection.
Whether an undercut of Friday’s low will mirror the pattern from June (and will be a fractal of the October 2011 undercut) remains to be seen, but the longer a rally phase carries here, say for weeks into year end, the more likely it is that the S&P will be tracing out a Wave 2 rebound to be followed by a powerful 3rd Wave decline.
A rebound toward the 1400 level could be followed by a Measured Move of the recent 131 point S&P decline.
This suggests a Ski Jump pattern, a round trip back to the June low (1400-131 points= 1269).
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