Prechter's Deadly Bearish Big Picture

The 7-Year Crisis Cycle Explained

Fri, Jun 18, 2010 - 3:26pm

(Editor's Note: The following article is an exclusive for Financial Sense readers from the desk of Robert Prechter. He and Jim Puplava arranged this excerpt as a special supplement to the Newshour interview on Saturday, June 19.)

The March 2004 issue of The Elliott Wave Theorist postulated a 7-year crisis cycle going back to 1973 and used it to predict another crisis in 2008. Here are the table and the forecast from that issue:

1973: Arab oil embargo, with spillover into 1974 stock market low of wave IV.

1980: peak in the inflation rate; top in gold, silver and mining stocks, interest rate spike, stock-market “massacre” and low of wave 2 (circle).

1987: stock market crash and low of wave 4 (circle).

1994: “Republican Revolution;” suspicion of government due to Waco attack (1993), “black helicopters,” etc.; stock market breaks uptrend line at low.

2001: successful terrorist attack on the World Trade Center; low of wave (3) of 1 (circle) [actually 3 (circle) of a].

Seven years after 2001 is 2008, so that is the next year to look for an extreme in social fear.

There was certainly a crisis and plenty of social fear in 2008, so this cycle performed as it should have. This rhythm prompted me to wonder if there might be a 7-year cycle in the stock market that would explain the regular appearance of these crises.

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The 7.25-Year Stock Market Cycle

I do not recall anyone talking about 7-year cycles in stock prices. I’ve heard about 3-, 4-, 6-, 8-, 9-, 10-, 11-, 12-year cycles and longer but not a 5- or 7-year cycle. As it turns out, seven years has been the most important cycle duration since Cycle wave V began. It marks the lows of 1980, 1987, 1994, 2001/2 and 2009, as shown in Figure 5.

This cycle was not readily evident, partly because the 1994 low occurred at such a high level. But that is the only low after 1982 that broke the lower line of the trend channel (not shown) for Cycle wave V, and the market’s acceleration out of that low confirms a strong cyclic upturn. The double lows of September 2001 and October 2002 are also a bit anomalous, as the market straddled the ideal time for the 7-year cycle to bottom. But we can easily attribute the first low to the 7.25-year cycle and the second low to the 20-year cycle, which is also responsible for dual lows in 1920/21 and 1980/82, as noted in Figures 5 and 6. For the most part, it is about as clear a cycle as we generally see.

The average length of this cycle is very close to 7 years, 3 months. The next major bear market bottom is thereby due 7 years 3 months after the March 2009 low, i.e. in June 2016. This is the same month that the 16.6-16.9-year span and the 34-year cycle end for the constant-dollar Dow. We will give this target five months’ leeway because of what happened in 2001/2002. But with one straddled cycle low behind us, the next cycle bottom should provide a singular low. Thus, we have quite a narrow expected time zone for the final bear market bottom, in both nominal and constant-dollar terms. To summarize the outlook, the bear market will continue for another six years. We can be fairly confident about this time target.

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Get Up to Speed With Robert Prechter's Latest Perspective. Elliott Wave International is now offering some of the best nuggets from Robert Prechter's desk for free. This free report includes excerpts from Prechter's latest Elliott Wave Theorists, including some of his most important insights since January 2010. Please click here to download Prechter's special excerpt report for free now.

Or, if you prefer to read the full report titled "Deadly Bearish Big Picture" from which this article was adapted (Prechter's two-part, 20-page, April-May 2010 Theorists), please click here to learn how to get risk-free access now.

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This article was syndicated exclusively to Financial Sense by Elliott Wave International. EWI is the world's largest market forecasting firm. Its staff of full-time analysts lead by Chartered Market Technician Robert Prechter provides 24-hour-a-day market analysis to institutional and private investors around the world.

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