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Saturday, August 7, 2010

Weekend Charts and Stuff [Update Sat 8:36PM]

[Update 8:36PM: The reality of the Fed's $1.2T quantitative easing is that rates went up not down. Via the excellent Karl D.

What makes anyone think QE2 will be anything but a disaster for rates in a contracting social mood environment? The Fed got away with QE1 because P[2] was an uptrend recovery period for social mood.

If the Fed announces QE2 the amount of sellers will likely flood the market (to gladly dump their risk) and overwhelm wouldn't you think?  And the ensuing effect will likely be deflationary as rapidly rising interest rates will cause all kinds of debt defaults and strains on the system.  Therefore total money (credit) will contract at a rapid rate which is deflation. Borrowing costs will skyrocket for corporations and their  record $7.2T in leveraged debt (record cash my ass!) will be hard to rollover.  The whole system is likely to implode as it snowballs into a full-fledged panic. Millions of jobs will be lost which will again be deflationary. The already overstrained budgets of governments would implode for good. This would be P[3] and the beginning of the unraveling of the Great Ponzi.

The false analogy is Japan!  Japan got away with QE for many years because social mood of a Grand Super cycle upswing had not yet turned full force to the downside! Social mood accommodated QE. To assume that we will, at no worse, have a "lost 2 decades" and take comfort that would be the "worst" to happen is a dangerous assumption!

The Fed cannot support the entire world's bad debt as it dwarf's their ability to do so nor do they have the political capital to even try.

I repeat, QE2 will be a disaster and if your a bull you better hope they don't do it.  "Fight the Fed"? There is no need to fight the Fed as the Fed is already shooting itself in the face, ass, and legs. Just look at their crappy balance sheet.

As I have said in the past, liquidity is a state of mind

[Update Sat 7:55PM: Another example of how a parallel channel has perfectly formed in an index using log scale. The RSI wedge is interesting too. Head and shoulders target is at least 2500 points down from here.

DJIA retraced 66%. Thats a very mature retrace.

Hey if any of these charts I have shown tonight don't pan out, well you got to admit, its an awful persuasive argument that we are likely topping (or topped) in Minor wave 2.]
[Update 6:27PM: 10 year yields. It counts best as 5 waves up from the low. That means the trend is up and this is a wave [2] or (2) retrace. (This chart is not available in candlestick form).  Looking at the monthly I noticed a record extreme on the Ultimate Oscillator going back 20 years.
Daily chart shows a possible wave count of the sharp retrace pattern. I am not real married to this count as it has probably not revealed its full hand just yet. What is noticeable is the long running positive divergence on the RSI and confirmed by the MACD.
What happens when both bonds and stocks sell? The dollar should soar just as we expect. Daily sentiment on the dollar is horrible. Even long term sentiment is now down significantly again.

Chart Courtesy Sentiment Trader showing longer term sentiment is also down.
On the opposite end, bond sentiment is certainly elevated across the spectrum.  Greed. Never mind people are investing in a massive Ponzi, they simply don't care nor realize it.

Who owns the most in bonds? Well, "we the people" (households) do of course! Just when the little guy figures he would get "savvy" and invest in debt even after a 30 year run-up, the little guy will be left holding the bag yet again!

Cash baby.  The ironic thing is the time that the prevailing wisdom turns from owing "assets" to getting into cash years down the road, the stupid public will finally get on board and "get with cash" just as that trend expires again....

Mom and pop will never learn....]

[Update 5:37PM: It seems the more charts I look at this weekend, the more they seem "done" and ready to turn or have already on Friday.  Crude is but one example. Overlapping corrective up as compared to impulsive down.  Double ZZ of equal length. 78.6% retrace Fib hit. Head and shoulders potential.]

[Update 5:20PM: I have suggested on Friday's update that the indexes have room in forming a parallel base channel as shown in this chart for example

However I may be mistaken as the same view in log scale, which is probably preferred, shows a perfect base channel.  In fact I would bet the market is struggling with this very upper line.
Here is a close up view. If Monday is a tepid open and rise only to the blue upper channel line again as suggested in my squiggle chart well, that would be the short spot that the algos may sell hard.

On the other hand if there is a mega-gap Monday up (exhaustion gap?), look for the non-log scale to prevail perhaps. Also notice the falling volume on Minor 2. This is pretty straightforward, simple TA I am showing today.]
[Update Sat 5PM: VIX daily. Still working on closing that gap up. Fear has retreated for months. Bollinger Bands are tight. I dunno, looks wedgy. ROC has a subtle long winded positive divergence.]
[Update Sat 4:33PM: Everyone better keep buying stocks to keep this negative divergence from pestering. It might be hard when mutual fund cash levels are still near a record low of 3.8%.

Looking at this chart I am very comfortable being short.]

[Update Sat 12:10PM:  Last weekend I shoehorned a 5 wave down pattern that was a bit too creative in the end. One "failure" (hey it was my alt count) does not mean we should never look at another. The market conditions us to not look too hard after it has set us up and failed.  At least it was known within the first 5 minutes on Monday that the chart was not going to pan out.

Think of the July 2009 and recent 2010 head and shoulder patterns in the equity markets. This has conditioned us to completely ignore the (even better) H&S pattern developing now.  At the very least it will throw so much doubt in the situation as to render a larger group of people into a state of paralysis which is what the market would want.

Anyways the previous weekend chart has 7 reaction hi/lows and seven waves are considered a corrective pattern.  However this weekend squiggles has simply 5 which suggests a motive wave at least. A leading diagonal in the expanding spirit (wave 5 was longer than wave 3 which was in turn longer than wave 1) which  can happen from a significant high.   So a deep retrace was to be expected.

Additionally we have a little ending wedge that exists on many of the indexes. Wedges usually mark significant tops, not the tops of merely an (a) wave or a nested series of 1's and 2's.

So suffice it to say, although last weekend's squiggles didn't work out for the bears, it is no reason to ignore this weekend's squiggles. In fact, as a matter of the way the market typically works on our psychs we must force ourselves to look at the squiggles from a very bearish manner yet again.

And this time around it is way more agreeable to the bear view of things.

Will it be correct? Well at the least we need a wave "map" in case it is and that in itself is a useful endeavor.
Original Post:
We'll start off with some European charts.

The FTSE turned first at the April high compared to the American markets. Technically it sports the same patterns.  This is one reason why I think this Minor 2 for the American indexes is on its last "hurrah" if it has not topped already.

The FTSE sports a negative divergence on its daily RSI and in the context of a bear market Minor 2 retrace, that is bad mojo indeed.  The slow stoch has crossed and sports a negative divergence, the Ult Osc is a double negative divergence and the ROC shows the same divergence.  Its also hit serious resistance.
The DAX has a nasty daily candle coming off its top.  The fact that the DAX topped and the other European markets (and American) are no where near topping is a serious divergence. At any major peak like P[2], there always seems to be that one index that manages to defy and tops on its own accord.  Why is this?

Is this because like in the sinking of the Titanic all the people shifted to one end of the ship just prior to going under? Is the DAX the stern end of the Titanic? Certainly the U.K. is running a serious Ponzi scheme and the French aren't far behind. Can there be safety found in the sturdy Germans? Social mood suggests not.  Their banks are certainly poisoned too.
Finally I'll link again to the Consumer Metrics site for updated charts.
What can we glean from their charts? I only glean one thing: Overall consumption is contracting and less risk (less loans and big ticket items) is in vogue. This to me confirms a contraction in social mood. This is the very basis of Elliott wave theory as applied to economics and financial markets: A contracting (negative trajectory) social mood manifests itself in contracting economic activity. And Consumer Metrics seems to capture this in real time better than any government service ever will.

The question is, how accurate will the information be? Well their limited history has a good track record aligning with the BLS (eventual) numbers.

There is now a full 6.5% point or more spread between reported GDP (+2.4) and the numbers that Consumer metrics (-4) shows.  The market is still probably trading at the +2.4 number.  It will take a huge drop to catch up with reality (-4).

The closing of the spread would be Minor 3 down in equity markets just as it did in late 2008. 

This is my analysis only that I came up with on my own. I may or may not be correct in this. Due diligence is required.   At least Consumer Metrics is not arguing against the idea of a nasty Minor 3. If anything its supportive.

The rate of contraction is challenging the 2008 contraction event. The length of the contraction has certainly already surpassed that of 2008 and shows no signs of a bottom. This is consistent with the view of P[3] being a bigger and stronger wave than that of P[1].

Only time will tell if this is a valid way of looking at things.
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