There's been a lot of talk everywhere in the blogosphere in recent months about Prechter's dismal forecasting record, and much further talk about how this has demonstrated that Elliott Waves are useless as a forecasting tool.

Well, maybe, but it is perhaps a mistake to blame EW rather than Prechter himself. Prechter's forecasting record over the last twenty-five years is so poor that his decision to continue publishing his forecasts is a tribute to his dogged persistence rather than his good judgement.

I grew up in a shooting family, and to my embarrassment was always a very indifferent shot. As luck would have it my younger brother was a very good shot indeed, which was a bit dispiriting for me whenever we shot together as children.

Now an outside observer watching my brother shoot then would have concluded that whatever he was shooting with was an accurate weapon. Watching me shoot the same weapon instead might have led the same observer to conclude that as a way to make a hole in a barn door at fifty paces, it was a poor substitute for a bow and arrow, but that would have been to mistakenly blame the tool rather than the workman. 

In the same way it would be a mistake to discard EW just because Prechter is a much better writer than forecaster.

I was looking at a very interesting chart this weekend, which was the chart for the 1937 crash and subsequent rally and decline:

Now that rally did an almost perfect 61.8% fib retracement of the previous decline, which led me naturally to compare that the recent high at 1150 is much less satisfying as a top for Primary 2 from a fib retracement perspective. I have been expecting 1230 for a similar retracement after the 50% fib was convincingly broken. That might still be the case, but a lot of technical damage was done last week, and I haven't seen this many longer term channels break since March/April last year so …

I had another look at P1, looking at SPX rather than Dow, and found something that looks interesting there:

Ignoring Prechter's oft-stated view that there were a perfect five subwaves down between the high in October 2007 and the low in March 2009, I came up with a different and to my eye at least, more convincing interpretation that there were only three subwaves down to the March low.

On this reading the rally since March has been a fourth wave retracement of the third wave that has made an almost perfect 61.8% fib retracement of that third wave.

That would be good news for bears because it would mean that this rally has most likely topped now. The bad news is that we are only now starting the fifth subwave down of P1 rather than P3, though a new low would still be more than likely.

That would fit my longer term expectations much better. We are in a secular bear market that is likely to last several more years before a new secular bull market cycle begins. Private deleveraging after this massive credit bubble has only just got started, and the public credit bubble has yet even to make a peak. 

On my count above we would spend the next year or so finishing P1, and would then have a P2 'bull market' lasting a couple of years, and then the P3 decline would start at a time when government finances and creditworthiness are too degraded to allow a repetition of the interventions that we have seen in recent months. 

After P3 had then completed in 2016 – 2020, we would then have see the equities revulsion low that would be the prelude to the next secular bull market cycle. 

If one were to take the all-time highs in 2007 as the (non-inflation adjusted) bull market high rather than 2000, which I have seen many analysts do, then a nine to thirteen year secular bear market cycle might also give a perfect 38.2% to 50% fib time retracement of the 1982 – 2007 bull market.

I have always had trouble seeing the final wave down of this secular bear market starting now or even soon. I take the view that we have seen a three phase debt bubble over the last fifteen years, of which the private corporate debt bubble phase took place in 1995 – 2000, the private personal debt bubble phase took place in 2003 – 2007, and the government debt bubble started in 2008/9 and is still expanding fast. Until this last bubble bursts, which shouldn't take more than two or three more years by the look of it, then no broad-based rebalancing of the western economies away from debt can really get going.