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Tuesday, August 10, 2010

Elliott Wave Update ~ 10 August [Update 7:53PM]

[Update 7:53PM: Coming up on a .618/.382 time ratio. Still short of the .618 price ratio.]

[Update 7:11PM:  Here is a view of the 30 year bull market in bonds.  The channel will break some day. I propose that the peak being worked on now is a rebound wave and will be unable to match the high of late 2008.  RSI is almost overbought and this is a weekly mind you.  Also the RSI looks...strained the last few weeks. Slow stochs are overbought.

I am suggesting that the next crisis in the on-going financial mess the world finds itself in will be the popping of sovereign debt (along with all the crappy junk debt). This is the final bubble.

I said I would pay attention to bonds when they warranted and now they warrant. The prevailing view is they will continue to rise (lower yields) in a Japanese deflation scenario. I say that will be wrong. They will drop in a rising yield deflation scenario.  

Think outside the box...

Think of it this way: Its literally trillions in worthless paper promises. Most debt will not be honored. The market will test that severely over the coming years if this up channel breaks!

Let me ask you this: Do you think the world will ever honor its sovereign debts? How many say no? Most? That is Ponzi pyschology where sentiment can turn 100% bearish and a Ponzi will still collapse.

[Update 5:50PM: Added a 10Y yield chart showing wave count.]

[Update 5:25PM:
Despite the dollar getting hammered later in the day, it still managed a positive close and above its 200 DMA.  I already stated last week how the daily sentiment was very low on the dollar and over the weekend posted that even the longer term sentiment was much lower also.

Today would likely damage longer-term sentiment even more as surely people will be convinced that the monetization of debt will destroy the dollar. But I say in compared to what? After all these are competing fiat currencies and all the major powers are in effect doing the same things with debt.  Dollar down? What deserves to go up in its place? And $250B?  A drop in the bucket nowadays....

As far as bonds, bullishness is high.   Bearish dollar, bullish bonds, bullish (more or less) stocks. This is a perfect setup for Minor 3 down in equities.
There is/was now too much short term recognition of "deflation" (as has been the media theme for a few weeks now).  Today's "inflationary" move of the FED likely dampened this sentiment a great deal. Why the deflation talk lately? Well mainly because bond prices were in a bull move as of late and dropping yields brought out many comparisons to the Japan's off and on deflation of 2 decades and how low Japan rates are/were can be compared to the U.S. and that the U.S. was going through the same. That and the declining economic indicators brings out finally an awareness of the power of deflation. But as I said, today's Fed move will dampen that sentiment a bit and strengthen the inflation sentiment. Yet I think deflation will win and not the Japanese - style.

In viewing yield charts of the 10 year and 30 year, these had 5 waves up which indicates a trend change and primary wave [1] up. I still say their yield lows (and price highs) will not be matched.  The current waves are wave [2]'s and once this retrace is over, they will begin a powerful wave [3]. In short, bonds will start to unravel quicker than anyone anticipates.

Particularly since the Fed did their little announcement today. I think disaster will occur sooner rather than much later.  They want to buy junk? They want to monetize debt? I think soon the market will test them on that.  The market always is probing for weak spots. The Fed thinks they can control or even anticipate the market's many probe spots is ludicrous.

So in essence, I am with Prechter in that deflation will win out. Yet rather than locked into a "Japan Scenario" low rates (as many seem to think), I also think that yields will skyrocket and the bond market is on the verge of unraveling.  No one is really saying these things. They were (small) hinting of some rising rates at the beginning of the year at the top of wave [1] up in bonds but now the sentiment has shifted.

So now is the time to see a move coming the other way: Down for bond prices and up for yields.  Down for equities. Up for the dollar.  This is the scenario the Fed cannot control and might be blind to. If its a wave [3] it could snowball rather quicker than anyone anticipates. And it will be deflationary just the same. Lots of debt will be forced to default.

Interest rates are the true derivative monster in the room. There is no bigger derivative market than interest rates. The repercussions of this derivative market if it experiences "hiccups" will be felt far and wide.

So declining equities and rising bond rates and interest rates - a glimpse of what EWI calls "all the same markets" in which assets of all kinds will sell.  And thus a soaring dollar.

The current wave charts show that Primary wave [3] up in yields should begin soon perhaps.  Minor wave 3 down in equities (soon) and of course Primary wave [3] up in the dollar.  This is a powerful bearish combination that will leave the FED bamboozled and dazed. I believe all the pieces are in place for this to begin happening and soon at least in some opening gambit moves. The wave charts and sentiment conditions seem to fit this picture. Time will tell. Due diligence required!

Today was likely one of those "chart marking events" by the Fed, or a "top tick" thing.  Again, we'll see...

I'll just keep throwing up patterns and the "one more wave" thing until it all fails miserably. And that wave may only come on 1 index or so. 

The really interesting thing is we have elements and characteristics of many patterns such as:
1. Ending diagonal triangle (wedge)
2. Double zigzag
3. Ascending and contracting triangle elements (possible (b) wave in a second zigzag).

And these patterns exist to differing degrees depending on what index you view.

In my opinion, these patterns are all finishing patterns of a counter trend move.  All on worsening and weakening technicals and strengthening sentiment. 

The more they push this, the bigger the crash. It comes down to a bunch of stops, mental and otherwise, probably exist just above 1131 and a bunch of stops exist below 1100.  The MM's would like to snap off the higher stops then tank the market.  Thats about one way of looking at it.
Time-wise the down move from April 26th to July 3rd was a long decline over 2 months in time. Thursday I believe we reach the .618/.382 Fibonacci split between wave 1 price low and wave 2 for time in trading days.

There still exists divergences between many indexes.  We do have a valid pattern in place on all so there is no guarantee of further upside highs for any of the indexes. However light volume cannot seem to get it done to push down past the dip buy big gap up spot of 1102-1107.

When that big gap up at 1102-1107 is closed, I think that signals a wave reversal as that indicates exhaustion in my opinion.
I'll have more charts as data rolls in.

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