Special Market Update for Thursday, December 8
NOTE: Since I have the ending diagonal posted and I’ve made changes to my call on it, here’s a video explaining it all. This pertains primarily to ES (and secondarily to SPX)
|Make sure you zoom the video to full size with frame expander (arrows) in the bottom right hand corner and also set the quality to as high as your web connection allows. This is an HD quality video so the best viewing is at that level.
Back to basics. Here’s an article published way back in 1945 talking about how the stock market (through humans, of course), is affected by the Sun. There are obvious references to climate and the fact that humans have virtually no effect on it. But more importantly, there’s a discussion of how the regularity of stock market cycles are caused by the changing mood of the herd. We’ve known this for a long time, the “we” being a very small group of enlightened individuals—very small.
Other than for that small group, nobody reads history, believes in science, or can imagine anything more powerful than a human being. (big “sigh” here)
Atmospheric Electricity and the 41-Month Rhythm
by Ellsworth Huntington, from “Cycles, Rhythms, and Periodicities” (1945)
We are now ready to inquire into possible causes of this persistent and widespread cycle of 41 months. Is it due to the weather? According to Brunt’s analysis, a cycle of this length can be detected in atmospheric pressure at Edinburgh and in temperature at Edinburgh, Stockholm, London, Berlin, Paris, and Vienna, but it is everywhere weak. It is not evident in pressure at Paris or in rainfall at Edinburgh, London, Milan, or Padua. At London the average difference between the highest and lowest temperatures of the cycle during a century was only 0.4°F. In the plotted curves of temperature the cycle is so faint that the ordinary eye cannot detect it.
A cycle of 44 months has been found by C. E. P. Brooks in Nile floods. Clayton finds one of 45 months in atmospheric pressure at nine widely distributed equatorial stations. Both of these periods, however, are too long to represent the 41-month cycle. Moreover, neither they nor the European cycles found by Brunt and Beveridge seem to be anywhere nearly strong enough to produce the persistent development of the 41 month cycle seen in business. Therefore it seems impossible to believe that the weather in its ordinary forms can explain the 41 month cycle as a whole. A generally accepted conclusion as to this whole matter is well summed up by Clayton: “When one looks at the regularity of certain natural cycles such . . . as [are] shown by certain insects and fish [as will appear in a later chapter], it seems impossible that such regularity could be brought about by the irregular changes which are found in the weather.” He also says that, “if such cycles are associated with solar cycles, it seems more probable that the living objects are influenced directly by changes in solar intensity.” We would add that the effect is probably produced through changes in the earth’s atmosphere, which are induced by the sun, but are not of the kinds most readily evident in the weather.
When we turn to the sun, a most interesting fact appears. Sterne of the Harvard College Observatory has determined that the solar constant, as measured by the Smithsonian Institution, fluctuates in a compound rhythm, one part of which is 40.8 months in length. According to Sterne, there is only one chance in 250,000 that the rhythm is accidental. Dewey, by fitting a 41 month rigid cycle to Sterne’s data, shows how far the ideal and the actual cycles agree. The agreement is far from perfect, but considerable similarity is evident. This suggests a possible solar cause of the 41~month cycle. Solar heat is not necessarily the basis of this, for the solar constant, very imperfectly to be sure, indicates many kinds of solar activity, including ultra-violet light, infra-red rays, and electrical waves. Thus the 41-month cycle may be derived from the sun, but may be due to other factors much more than to temperature, rainfall, atmospheric pressure, and ordinary weather.
Before the present author knew of Sterne’s work, he had prepared the lower curve of Figure 61 (below).
This shows a significant resemblance to those of the solar constant, on the one hand, and the stock market, on the other. It was prepared in order to test the hypothesis that atmospheric electricity, influenced presumably by the sun, may affect the human reactions that govern fluctuations in the stock market, in iron production, and in other business activities. Tests of the electrical data showed that the condition most likely to be effective was apparently the variability of the electrical current (potential gradient) between the air and the earth. The lower curve of Figure 61 shows the average of this at Eskdalemuir in southern Scotland and Kew near London. In spite of minor discrepancies the electrical curve clearly fluctuates in a cycle of 41 months and its maxima keep coming back to the expected dates.
Perhaps the most remarkable thing about Figure 61 is the time relations which it indicates. Although the two curves were prepared entirely independently, their dating coincides quite closely. The regular sequence is for a maximum of the solar constant to be accompanied or more often immediately followed, by a maximum in the variability of atmospheric electricity. At almost this same time the solar constant itself drops off quite suddenly. Thus it looks as if a sharp decline in the solar constant were associated with great variability in the electrical condition of the earth’s atmosphere.
The maxima of electrical variability in turn are generally soon followed by a change from a bull market to a bear market on the stock exchange. This is indicated by the asterisks, which in Figure 61, indicate turning points in the rate of change in the Dow-Jones averages, except at the end of 1919, when World War I had disrupted matters and the solar constant itself had gone off the 41 month cycle. Each maximum in the rate of change in the stock market falls within 3 to 12 months after a maximum in electrical variability. This is about the lag that would be expected between a physical cause of this sort and its effect on business.
Above is a monthly chart of the DOW from about 1975 through 2016. The green arrows mark major turns closes to the 3.5 year mark, represented by the vertical white lines.
The jump from electrical conditions in Great Britain to business affairs in New York seems big, but scarcity of both records and funds for further research prevents a closer tie-up. Hence our conclusions are valid only on the assumption that the electrical condition of the atmosphere varies in essentially the same way on both sides of the Atlantic Ocean. There is considerable ground for this assumption. The earth’s electrical field is known to act as a unit. Auroras, for example, are evidence of peculiar electrical conditions in the far outer atmosphere. They become manifest all over the northern hemisphere at the same time. Stetson and others have shown that radio transmission is another phase of atmospheric electricity, which is closely dependent upon variations in solar radiation. Moreover, the probability that the same solar cycle dominates the atmosphere over wide areas is increased by the fact that when we average the observations at two observatories 300 miles apart, we find that the 41 month cycle is much clearer than when one observatory is taken alone. Then, too, the relationship between the 41 month cycle in the solar constant and in the potential gradient gives reason to think that we are dealing with a solar cause, which acts in essential1y the same way over vast areas. Hence, in spite of scanty knowledge, there seems to be a sound basis for the working hypothesis that electrical variations in the atmosphere of the sun induce corresponding variations in the atmosphere of the earth, and that these in turn are associated with psychological rhythms in human beings. Such close and reasonable relationships as we have seen between the solar constant, atmospheric electricity, and human psychology are not likely to occur by chance.
The nature of the physiological effect of atmospheric electricity, if such there be, has not yet been investigated experimentally, but it seems to pertain primarily to the nerves. When electrical variability increases, people apparently feel relatively buoyant and optimistic. They are therefore ready to risk their money on stocks and in other ways, with relatively little attention to unfavorable signs in business and politics. At the same time consumers, merchants, manufacturers, and others feel a similar stimulus. Therefore they increase the size of their orders, open new lines of activity, and make plans for enlarging their business. Thus the ascending phase of a cycle is generated.
The impetus thus received produces its full result quickly in some instances and more slowly in others. If it is simply a question of investing a few spare dollars, the response to the environmental stimulus may take place with little delay. The effect of this on stock prices, however, is far from instantaneous and may not be fully felt for months. How quickly it will be evident depends partly on the strength of the stimulus, partly on the previous trend of business, partly on the well-recognized conditions of the credit cycle, and partly on many other factors. Hence the amount of lag and the closeness with which events follow the solar cycle will inevitably vary greatly. Still greater variations will occur in business in general and in prices as a whole. For example, increased optimism among retail dealers in stockings, neckties, and similar articles will show its main effect on manufacturing some time after the maximum effect has been produced in the stock market. The lag in such goods as building materials will be much longer. The reverse of all this seems to occur when atmospheric electricity becomes less variable with an apparent decrease in its stimulating effect.
The final test of this electrical hypothesis of mental activity must await prolonged experiments. Meanwhile its probability is increased by recent studies of electric currents within living organisms. The measurement of such currents between one part of the body and another has already led to significant results. As Burr puts it, “wherever there is life there is electricity.” Stated more specifically, this means that every “animal possesses a true [electrical] field …. Changes in biologic activity [of the kind associated with] growth and development produce just as significant variations in the electrical pattern as do heart and brain waves, … ovulation, [and] cancer. It is inconceivable that such a widespread phenomenon should be a by-product of life, for it is so intimately bound up with fundamental biological processes that it disappears at death.” If each organism is thus the center or source of an electromagnetic field, it seems inevitable that alterations in the general field of the surrounding atmosphere must influence the field of the individual organism. Thus there seems to be a definite mechanism whereby atmospheric electricity may influence mental activity.
Here, for the present, we must leave the matter. We have seen that cycles of many lengths and kinds are widely prevalent. Some, such as the 35-year cycle of Bruckner, are primarily evident in the weather and in its effect on crops. Their influence ramifies outward, however, into public relief work, politics, rebellion, migration, and many other matters which are thus influenced. Other cycles, such as those of 7 years and 8 years, present fruitful fields of study but are beyond our present line of investigation. The 41 month cycle is so widespread and clear in literally hundreds of types of business that we can scarcely pass it by. In searching for causes we find this cycle only vaguely in ordinary weather. On the other hand, it is evident in the variability of atmospheric electricity and in the solar constant. Thus we are led to the working hypothesis that variations in the sun influence the electrical conditions of the earth’s atmosphere. These in turn apparently exert a psychological effect upon man. Or perhaps some more pervasive cause influences the whole solar system and shows its presence by means of changes in the sun, in the earth’s atmosphere, and in human reactions.
New to Cycles?
You can read “Cycles” (by Edward Dewey and Og Mandino) online here. If you haven’t read it, it will be well worth your time to do so.
We continue to work our way through the ending diagonal.
Ending diagonals suggest a market that is extremely weak and barely able to trace out a new high. Although it falls under the banner of a motive wave, it has properties more aligned with corrective waves. Ralph Elliott described an ending diagonal as occupying the fifth wave position of a motive wave when the preceding move has gone “too far too fast.” He maintained that it indicates “exhaustion of the larger movement.”
Projection for a Top
Based on the ending diagonal we’re currently in (which is the pattern playing out in all the major US indices), I’m projecting a final top to our five hundred year set of Supercycle waves at the end of the 2016 year or into early January. I’m leaning towards the end of December or early January.
Here’s the latest daily chart of ES (emini futures):
The “top end” for the 3rd wave is 2237 (where wave 1=3). In other words, the red third wave cannot exceed this level. The third wave cannot be longer than the first wave (a hard rule in Elliottwave). I’m expecting a more likely turn at about 2222-4.
Wave 3 also has to reach a new high (higher than red wave 1). We’ve now achieved that. The previous wave 1 high is 2184, and it’s been exceeded. You should begin to look for a top to wave 3.
However, right now, I put us in wave 4 of the C wave of the third wave of the ending diagonal. We still need to complete red wave 3.
Summary: We are completing the third wave of the ending diagonal before zigzagging to the top of the largest bubble in history. The long awaited bear market is getting closer.
Sign up for: The Chart Show
Thursday, December 8 at 2:00 pm EST (US market time)
Get caught up on the market from an Elliott Wave perspective. You’ll also get Andy Pancholi turn dates for the balance of the current month. There’ll be a Q&A session during and at the end of the webinar and the possibility (depending on time) of taking requests.
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