The Macro Implications of the 6.8 Extension S&P 500SPCFD:SPXholeyprofitI've posted a lot of stuff here in the past about using fibs as decision levels and the macro decision at the 4.23 of the 2008 drop. My original premise was that would be a bear level. It was for a tiny while but not anything significant. I've used the 4.23 model a lot and I know 4.23s can fail as resistance and when they do the move is usually strong but it happens rarely. It happens so rarely with the breaks being so hard to qualify how far they go my rules used to just be if that happened go to a bigger timeframe or sit out until a new swing comes. But you cant do that off the 2008 crash. So instead I just vaguely posted about it going parabolic. (Link to previous post) The forecast of SPX going parabolic turned out to be right but my plan for what to do in a big 4.23 break was very poor. If I'd continued to post content and forecasts on it I'd have been just saying, "I think it might go up more" - and what's the point in that. Its very washy for a trading plan. So I decided I had to do a full study of all times 4.23s broke in major trends. Every Major DJI Study I decided the first thing to do would be to study everything in the history of the oldest indice so I went back to the start of the DJI and then went through everything that has happened in the last 140 years. Took a really deep look into this. Building simulations to replay the moves, marking in the fib levels and overlaying the news major global news events of the time. I looked at all of the main full cycle rallies, all of the rallies out of crashes and I also looked at all 42 of the DJI drops in history over 10%, 38 of which I could model. And through this I found my idea about the 4.23 being a top in equities trends was entirely incorrect. With very few exceptions the 4.23 was never a big top. In 100% of the full cycle swings it was never a big top. It always broke. I went on to test this against various stocks during the Nasdaq bubble, currency crashes and commodity booms/busts. I generally found inside of a mania, the 4.23 should not be expected to be a top. That was something I'd assumed and then supported with what in hindsight was bad swing selection for my limited historic study. After doing a full historic study and spending months working on automated swing detection and refining rules to draw fibs I found something far more interesting. To keep this post inside of scope I am just going to focus on the major trend cycles of the DJI. There are many more supporting things I could add and much more expansion on the range of decisions that can happen after a 4.23 break but to explain the main concept I want to explain today only the three major DJI bull markets in history are needed. The First Full Rally (Late 1980s to 1929) I started zooming in to the very start of the DJI and found the first full complete trend leg, retracement and continuation. This is what I used for my starting fibs. When I zoomed out on that what I saw was the 4.23 on this broke and then we went parabolic. We went parabolic to the 6.8 extension. I'm not going to sidetrack into the story of why I added a 6.8 extension but this is the next logic ratio in the sequence. It took me longer than it should have to think of trying this. The Second Full Rally (1932 - 1987) For a consistent rule for drawing the fib once I seen the 6.8 pullback I decided from here on I'll use the pullback of the 6.8 as my next anchor swing. So now I'll draw it on the Depression and if there's any pullback in the 6.8 area I'll use that for the next leg. Then when you zoom out that is the 1987 high. Again notice here when the 4.23 breaks we go parabolic. Like in the Roaring 20s there are two main sections to the move and it then ends at the 6.8, with a small spike above. So now the 1987 crash is the next fib anchor. And the 6.8 of that was the high of the Dotcom bubble. This didnt present as big a crash in the DJI as expected though, with previous ones coming to (or close to) the 4.23. But this would ultimately prove to be a false low, with 2008 crash giving a 2009 low on the 4.23. This was highly concerning when it comes to modelling the move because 29 is a perfect hit, 87 is a slight spike out and 07 is a very complex set of actions above the 6.8. All of these do crash 40% or more, but the variance in the topping pattern gives a lot of strategic problems to solve when it comes to actually betting on this. 2009 is where the real low is and the 4.23 hit so the 2008 crash is now the anchor. On that swing, we are just under the 6.8. With SPX being at it already (as shown in the feature image). Note what has happened above the 4.23. It's went parabolic as I vaguely explained before but with this added context we can also see its moved in two main legs and then it started to slow down at the 6.8. Now we are inside of a 6.8 break or a fake out of it. Bubble Break Instances As per DJI history there has always been a drop from around this zone and it's been 40/50% or full Depression. Clearly bear porn stuff - but here's the caution to my bear friends. It is a BUBBLE DECISION level. I could gather so much evidence for this I think it almost amounts to proof (although you can not prove the future of a probabilities based game). It can be a huge short level but if bears are wrong, they are screwed. Here's Nasdaq fib swing. Here's Nasdaq at the 6.8. Here is the Nasdaq bubble... ================================================================================== I did a huge amount of work on my model over the last year. Initially I thought the model was just wrong and I was working out what I got wrong about it. The finding was more that the model was fine but incomplete and I'd made some dumb assumptions. Overall it has not changed my core thesis that we are inside of a bubble. And that we are at the decision point where we get a fat tail soon. Either we are close to a 40% (min) drop. Or indices can double or better in the coning years - with FAR more aggressive trends. This is a brief summary of a large study which would take 100s of pics and many thousands of words to fully explain. I'll follow it up with some more info on what happened inside of a bubble and planning trades in it, crash or correction examples and then ultimately my long term decision tree of outcomes and trade plans based on this.