By Thomas Henning

       The late American treasure, Duke Ellington, once wrote in one of his essays on music: “There are only two kinds of music: good and bad.”
       As in music, there are two kinds of technical analysis: good and bad.
       Good technical analysis first analyzes the long-term structure before the short-term picture. Bad technical analysis analyzes the short term, generally ignoring the long term.
       The long term and short term can and should be harmonized to move to a higher plane. Let’s do that and then apply the concepts to the market.
       Markets are a continuum of supply and demand. Market action of a hundred, or even a thousand years ago, has influence – albeit a minor one – on today’s action.
       This concept implies that each individual tick is unique, but related to the other ticks within the giant continuum, part of a wave sequence never to be repeated.
       The late W.D. Gann made profitable trades in wheat at the turn of the last century. Those trades were influenced by the price action in English wheat in the year 800, which be researched in London. This approach stays humble to the continuum.
       In contrast, the pure short-term mechanical approach, which ignores the long-term forces, is usually a back-tested set of market data of never-to-be-repeated ticks, to derive a static formula in an attempt to forecast future dynamic, never-to-be-repeated market action. My experience suggests that these static formulas are usually right about 70% of the time. As the formula is used, the technician will commonly modify it a myriad of times to try to increase the profitability rate, trying to compensate for the non-repetitive action of each unique tick, and subsequent pattern of ticks.
       Thus, the perfect formula, the Holy Grail, is searched for, but never found because these are static formulas based on a fluid, never-to-be-repeated set of data, the continuum.
       Back in 1974, I ran across a relative strength formula published by a brokerage firm. Frankly, it was outstanding and I used it profitably. However, when discussing the service with the originator, I questioned the formula, which was back-tested ten years between 1964 and 1974, cyclic bear market. The question that I asked was, “If a set of parameters were developed during a cyclic bear market, how well will they work during a cyclic bull market?” He had no answer. The formula was static based on a cyclic bear market and, in 1974, the continuum said, “Bye, bye bear market, now we have cyclic bull market.” Oops.
       A reconciliation of the two approaches – the long term continuum and the short term formula – is needed to try to reach a higher plane.
       I suggest that the continuum must first be defined followed by an overlay of the formulas that either validate or invalidate the longer-term conclusions regarding the continuum. The immediate “buy or sell” signals as suggested by the mechanical static formulas should occur in harmony with the longer continuum before a trade is positioned.
       Thus, the two approaches are harmonized, the mechanical validating or invalidating the analysis of the longer continuum.
       Knowing that this may be an oxymoron, technical analysis is an art form because it is indeed based on a sample of never-to-be-repeated data of a giant continuum.
       To do otherwise, to use the pure mechanical approach alone, is like trying to produce another Picasso with a computer.
       To apply this more harmonious approach, it was suggested in recent reports that the wave count on the Rasbucknic indicated that a #4 rally within a bear cycle was due. Of course, the anticipation was a lot of hot air until the Rasbucknic market itself validated this assumption with some mechanical buy signals.
       After diddling around for a month longer that I had anticipated, the internals at the bottom of the chart, which are based on hard market action, turned bullish and the anticipated #4 rally took off in what appears to be a standard up-down-up corrective form up to the low 80s. The mechanical indicators validated the continuum.
       To continue to the next step, if the longer term conclusion is correct, that is to say that this is but a rally in a larger downtrend as counted out on the chart, then the mechanical indicators should start pooping out about here.
       This indeed has happened, and at this point, to validate the continuum, that is to start the anticipated downleg to the mid-60 area to complete the favored count, the Rasbucknic needs to close at about the 79 level. Until that happens, the near-term rally must be respected because it exists. (Incidentally, the Rasbucknic C.O.T. numbers are bearish, Euro numbers are bullish.)
       Da Bilderboyz have recently set up currency swaps to hold the Euro together in another kick-the-can move. This will probably goose the Euro in a terminal up-wave, Rasbucknic in a down-wave, until about mid-year if the count is right.
       The bond market is at the tail end of a cyclic bull market that started in August, 1982. The terminal phase of that bull cycle is shown on the monthly Bond chart with the illustrated wave count.
       Near term, the count is terminal. The Daily and Weekly studies are loaded with bearish divergences, while the monthly studies have bearish divergences as illustrated.
       This suggests that the wave count is probably correct and the continuum suggests that a major down cycle of about a decade is due. A close at 138 or lower would signal a breakdown.
       Higher interest rates would break the back of the debt monster. It’s a cinch that the Bilderboyz don’t want that bond market tanking because that will kill every financial balance sheet in the world. That would be like smashing a rotten egg with a ten ton punch press, busting their phony central bank hustle.

       The gold stocks have been in Elliott Wave hell as the metal itself has waved up cleanly and has thrown on a lovely A B C correction, consolidating the 5-wave upleg off of the 2008 low. (Gold not shown.)
       The favored wave count is shown on the XAU. As the 5th terminal wave moved upward in the metal, the gold stocks essentially moved sideways having roughly tripled off of the 2008 low.
       So far, the illustrated count looks right as the Silver and Gold C.O.T. numbers have turned very bullish and the immediate internal indicators at the bottom of the chart have not confirmed the corrective weakness of the XAU Index. This configuration suggests that the correction was indeed the 2 of a III wave with the 3 of the III becoming due. Of course, this is hot air until the XAU Index confirms the wave count by closing above 187 (which it already has), then 210 and then above 235. As of this writing, this is just beginning to happen, so stay close to this market.
       Meanwhile, don’t get cute and trade this bull cycle. It’s the only way you can mess it up.
       The stock market is at the end of a bull cycle that started in August, 1982. The upleg off of the late 2008 low is the 5th wave within the cycle. A bear cycle of about a decade is due. This is the continuum.
       Nearer term, mechanically, a Dow’s Theory bear divergence evolved in 2011, which was followed by a bust below key lows as illustrated on the comparative Dow/Transport chart. After a bottom in August, which terminated a corrective 4-wave, the 5th of the smaller degree legged up as shown.
       As is typical, in addition to the Dow’s Theory bearish configuration, the internal studies are nothing short of putrid. Major Supply/Demand studies are bearish to put it mildly. Positive/Negative volume studies, internal momentum, breadth, New Highs/Lows, ad nauseam are screaming that this is a market under distribution. This is only for starters.
       However, to turn all of this offal into the start of the anticipated bear cycle, the Dow and Transports have to close below the levels indicated on the charts. The market has to confirm the analysis, and until the market confirms downward, the uptrend must be respected.
       In sum, the Rasbucknic looks like the anticipated rally is about done; inversely, the Euro bullishly complements the Rasbucknic, and the gold correction looks old, complementing the currency analysis. Early buy signals have flashed. Bonds look waved out with internal divergences, and the stock market has been under severe distribution suggesting that the bull cycle is almost complete.
       Obviously, the analysis is hot air until these markets confirm the analysis by busting specified critical levels. Again: the markets must confirm the analysis.
       For the record, we have a conflict here. There has been an inverse correlation between the Rasbucknic and the stock market. (Stocks go down; Raz goes up and vice versa.)
       However, both look very bearish. Will this inverse relationship continue or rupture?
Remember that we’re probably at the end of an epoch and old relationships are questionable. In a situation such as this, the only path to follow is to let each market signal its intention and act accordingly.
       From the market conditions, one derives the overall fundamental picture. Market conditions are an expression the Curmudgeon’s first rule: “Truth is the ebb and flow of money to the exclusion of all other factors.”
       This type of market action would imply the end of an inflationary epoch that started in 1913 with the founding of the Fed.
       The one-world-order is dependant upon an inflationary Ponzi scheme. Given a massive debt default, the banking structure will implode along with the governmental structures that these boyz set up to feed the banks through inflation and taxation.
       Of course, the zombies, who love the free lunch but complain about the debt, will look for a Messiah to save their folly. This is noise. Only the ebb and flow of money is important. It gives history “swing.” And as the Duke wrote: “It ain’t got a thing if it ain’t got that swing.”
       Editor’s Note: Thomas Henning’s column, “Musings of a Stock Market Curmudgeon,” appears regularly in The Bull & Bear Financial Report, in both print and online editions.