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Saturday, January 30, 2010

Weekend Charts [Update Sun 11:11 AM EST]

[Update 11:11 EST: The story below is the kind I read every day that gets my blood boiling.
The overall gist of all the FED"s actions is to boost home prices. They constantly peddle this as good for America when we all know its bullcrap. America's wages are deflating, taxes, fees and "other" (i.e.- monopoly greed) costs are going up constantly,  and the FIRE economy jobs are not coming back. The reason people are defaulting is that homes were overpriced and overpaid for and people don't have the income to service the debt!  And they still are by far.  Why should one be a debt slave to own a home?   This does nothing to help homeowners. It of course only helps the banks.

People are not borrowing because a generational shift in mood and attitudes toward debt are occurring and the FED is lost on this point.   Banks are not lending because they too are human subject to social force moods and risk taking is diminishing.  Asset mania has likely peaked for more than a generation.

Its madness.  The FED and government  will eventually succumb to social force demands that we stop the spending/debt insanity.  But not before they have ruined us and hyped our expectations.  The sad part is that those who continually take on debt do so because they see a moral hazard and that underneath they think "who cares what does it matter anyway? I'm living for today. Someone will take care of me". There is a perfect atmosphere of "OK things are bad but I'll never go hungry. The government will take care of everything."  That is a dangerous, long-standing paradigm that is about to be shattered in P3.

The government can only "take care of things" by resorting to fascism or dictatorship. And that outcome will be very bad for all.  In any event, these are not conditions in which the stock market goes back to DOW 14K.

Education is in a bubble. Pro sports are in a bubble.  Housing is still overpriced. Government debt is in a bubble, High yield debt is in a bubble.  It is likely that health care too is bubbling. Government workers at all levels are in a bubble. Pension funds will be ruined if a drop occurs to 600 SPX and does not come back up.
All these bubbles must pop. Standard of living will revert to the mean rate of climb.  8% annual returns is a lie. Yet every "plan" and promise was based on this folly.  Raising taxes only cripples us more. Yet you bet it will happen! You can also bet that interest rates will go up. Might take a year or 2, but they have no where to go but up. A mere 2-3% rise will cripple the debt loads we have now.

How can one sleep at night owning stocks on the long side in these conditions? A coordinated terrorist hit on our fragile power grid could cripple the country for months.   Think Google will remain over $500 if that happens?

One could say this is the greatest transfer of wealth (even unintended) in the history of civilization.  The "people" didn't notice or mind as long as we got our slice of the pie. The problem is, the people were promised a lot. And breaking the promises and taking their possessions, does not go over well with the American populace.   We are armed to the teeth for a reason. Life, liberty and property must be defended.

In the end, Elliott Wave Theory explains it all.

[Update 10:15 AM: The DJUSFN's wave structure looks nice.  There are several notable things:
1. A breakaway untraced area as marked by the blue box. This blue box area occurred one subwave earlier then the rest of the market.  So the financials were leading down.  In that respect they may have bottomed for Minute [i] where the alt is marked.
2. RSI low occurred somewhere in wave (iii). Slow-rolling, positive divergence on RSI and MACD developing.
3. One thing that doesn't look right is how pink (iv) is higher than the black iv.  In  wave counting, its best that these 4's price peaks occur lower than the previous 4. Its not a hard rule that I know of, just that its aesthetically better-looking.
4. However the pink (iv) took the shape of a double zigzag up from the low which is a complex overlapping counter trend wave.  Just looking at it you can see its not an impulse.  Bearish if your a bull hoping to get a big turnaround in the market.   There is of course the possibility that where I have Minuette (iv) marked is  really a Minute [ii] (it hit the 38% retrace mark.) But no need to have that as primary count just yet.

The RUT is making nice waves.  Reviewing the entire price drop to date there are several logical things we can perhaps glean from wave, technical and price action standpoint:

1.  There are mostly overlapping waves in the entire structure save for one place where the green box area is marked.  This is the identifier for the "third of a third".  This area is also consistent with every other index or subindex so that is probably the best place to mark it as such. 

2. Since we identifed the middle third area, then placing the entire decline's 50% retrace Fib right at the lower edge of this area is a logical and typical place for this Fib marker.  This middle third area is what a wave [ii] would try and challenge in any aggressive retrace.  In simple terms, this is the area the market must not only take back, but hold to advance the bull.  If a wave [ii] came back to this challenge area and failed, then a wave [iii] commences if this is P3 like we are saying. The [iii] wave would be the real barn-burner with long areas of droppage and no retrace, of which this initial drop has really yet to exhibit.

2.  To say we have not had a wave [ii] is probably a safe assumption for several reasons:
   a.  There has been no "here comes the bull" moment to give doubt to the bears.
   b.  The wave structure does not exhibit a sharp retrace like a wave [ii] of typical 50% retrace.
   c.  The market is yet even oversold on the daily. Getting close and McClellan's Oscillator is very low, but we have  room to run a bit more.

3.  The yellow area is heavy resistance and naturally lies right below the middle third area.

4. The past few days seems to have been the playing out of the 4's and 5's to the upper half's 1's and 2's.  Sideways-type structures with a bearish tilt.

5. If a triangle indeed occurred as I have Minuette wave (iv) marked, the apex area could mark a turn spot.

6. The target for (v) would be a combination of the width of the triangle using the "Z" method (thanks Kenny - and I'm not sure I marked it quite right), the apex of triangle, and channel lines where (i) (iii) and (v) connect.  This is a powerful combination  of targets if we have the chart correct.

So there you have it.  A logical look at the wave structure and a potential turn point.  A hard down Monday opening will finally bring out more shorts and produce a bearish sentiment perhaps in the media and among traders which is probably what the market needs to go up.  

Wave structures are a game of probability, not surety.   It counts well enough and satisfies the most guidelines so now lets see how it plays.
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