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Saturday, August 14, 2010

Weekend Charts and Stuff [Update Sun 11AM]

[Update Sun 11AM: Someone in comments recently asked me to put up a poll on market direction. It is something I have considered. Could it then be used as contrarian evidence?  


Well I did find something called the "blogger poll" recently via http://tickersense.typepad.com/

Here are the latest poll results, Note the low percentage of bears.
Here is the longer term data. Note in October 2008 the extreme bullishness. Yet we know the market was no where near done P[1] at that time.

This time around we still have continuous plunges of bears to below 10%. I'd rather be a bear here than a bull or neutral.
[Update 10:41PM: Let me again talk about debt.  Debt and debt defaults are a key component of P[3] down and a deflationary collapse of the financial system.  The credit bubble will not last. Every credit bubble in history has ended, and this one will too.  None have ended nicely. Indeed collapsing credit will help propel P[3] down in stocks and all asset classes.  Values of all assets will be in question particularly debt and certainly including government debt. This is what comes out of a great panic that is predicted in P[3].


Now in conjunction with the overall larger wave count in that we are in the opening stages of P[3] down, the debt bubble should be coming to an end sometime in the short term future. As I have talked about recently, the general public is certainly heavily involved via 401K's, pension funds, IRA's, etc. - quietly of course - after all who can get that excited about bonds? And we all know that once the general public is "on board" the end is not too far off. The little guy always is left holding the bag. It happened in tech stocks, it happened in real estate and it certainly will happen with the coming debt implosion.


Now exactly when will this bubble end? Well, we have had zero interest rates practically for a few years now. We have had a 30 year up channel in bond prices. Yields have consistently over the years lurched toward new lows in a non-diverged manner. 


We now have once again yet another lurch toward new yield lows across the spectrum. We have had new lows on 2 years and likely we will on 5 years. 10 year and 30 year is a question mark.  


I propose that a major divergence will occur marking the end of the bond bubble. In other words when the 30 year cannot be pushed down any lower in yield and does not breach its late 2008 yield, it will mark the end of the bubble.


Then the yields will start to reverse.  Instead of the lower end of the curve dragging down the longer end, the rising 30 yr rate will pull up the lower end. And interest rates will begin to rise.  And this movement will continue in the natural course of things. Eventually the 30 year price channel up will break as a result and things could accelerate.


And rising interest rates will help trigger debt defaults which is deflationary. And debt defaults will help trigger derivative "events". And derivative events will beget more derivative events which will trigger more debt defaults. Think of a room full of mousetraps and a loose ping-pong ball.  Contracting credit and debt defaults are deflationary. 


That is the simplest way of looking at things. When bond sentiment is "sky high" and the general public is all on board and record junk debt is at an all-time high, the end game is near.  


When they can no longer push the 30 year back under the 2008 level, the game is up in my opinion.


People are still way too comfortable with debt in general. A 30 year rise in bond prices will help do that.  Its almost time.
[Update 8:10PM: Speaking of bonds again, http://online.wsj.com/article/SB10001424052748703960004575427690901781072.html?mod=WSJ_hpp_LEFTWhatsNewsCollection (hat tip: Mick_C_Pitlick


Recently I have suggested that the 30 year and 10 year prices will not exceed the last price high. It sure feels like we are in the "end game" stages of the great debt mania of our lifetimes.  We got mom and pop piling into debt of all kinds: High yield municipal, junk and soverign. Recently an informal poll at my work supports this idea. "Regular" folk are sick of the stock market and figure bonds are finally the "safe" way to go.  The idea of simple cash is most farthest still from the minds of most. Partially that is because our 401K's are not geared toward even having cash as an option (unless you consider the money markets as a "cash account")


So no doubt, debt mania is getting its final run. Question is, will it be a complete parabolic blowoff peak? Well, we'll certainly find out as the fun and games begin.  


One chart I will be watching is this below. A simple price chart (and I have yields too).  I figure, like all markets usually, there most likely will be divergences marking the top of this all-time move in bonds.  My take is the 30 and 10 will diverge with the 2 and 5 year.   


So far there is a divergence with the 2 year versus the 5,10 and 30. I suspect the 5 year will make a new price high. But again, I maintain the 10 and 30 will not.  The 10 may be iffy so we'll see.


Simple but should be hopefully effective. I am thinking the top of the debt bubble will show a simple negative divergence on this chart. Notice there has been no divergence before on this chart. 




[Update Sat 6:55PM: 
THE GREAT INFLATION-DEFLATION DEBATE
I continue to hold the long-term view that the financial system will experience not a Japan-style low interest rate off-and-on deflation, but a high interest rate (eventually) deflationary collapse. This is pretty much what Robert Prechter more or less has suggested.  


This article in ZH got me thinking again http://www.zerohedge.com/article/buffett-vs-gross-or-inflation-vs-deflation-who-right


Now having never read Prechter's "Conquer the Crash" book, I have seen enough EWI-promoted quotes from it to have practically read it in its entirety three times over. (yes that is a snarky comment). 


But again, I think in general, most thinking at the moment is that the lowering of treasury yields across the yield curve has signaled a Japan-style deflation to come. http://globaleconomicanalysis.blogspot.com/2010/08/former-bank-regulator-william-black-us.html This is the general viewpoint.  And per the opposite end of the argument if rates rise, and rapidly, its signalling an inflationary event perhaps even hyperinflation. You could probably throw the term "stagflation" into this rising rate camp.


I think things will happen "outside the box" and we will experience a deflationary collapse with rising interest rates. Basically sovereign debt will start to default worldwide causing rates to go up. Therefore credit will continue to shrink and panic will set in. The value of everything will be severely questioned particularly the value of debt in general. A snowball effect could easily happen causing more defaults, derivatives to blow up and the entire world's financial markets to seize and stop functioning. This is of course deflationary because total money = credit + money.


THE EFFECTS OF A COLLAPSING PONZI IN SLOW MOTION - DEFLATION AND INFLATION AT THE OPPOSITE ENDS OF THE PYRAMID
The sucky thing is, that until that penultimate panic spot happens, the Ponzi pyramid will in effect crush the little guy in the form of a "price gouge" on the quality of living.  Many will call this inflation but I simply call it the effects of the collapse of the Ponzi pyramid. Or a great "price gouge" on the lower classes in order to try to keep the upper class inflated.


Think of it this way: Lets suppose that the entire "wealth" system is one big pyramid (which it is by the way) with the super rich in the tip of the pyramid and at the bottom is the unwashed masses.  On the one hand you have deflation caving in the pyramid from the top which causes those with "assets" to lose significant wealth. Naturally our banker-run system is out to protect that class and pumps in inflation. But that inflation can only be pumped into the pyramid via the bottom of the pyramid to try and counter act that deflationary pressure.  


Now being that the unwashed masses are at the bottom of the pyramid, they feel the effects of that attempt to produce inflation. They get taxed more, they face higher fees, they feel the effects of  higher commodity prices relative to 15 years ago, all the while their  paychecks are shrinking or they are being laid off. All this has a great  inflationary effect (cost of basic living takes more of their smaller paychecks) particularly on the lower/stagnant income they receive.  


In a nutshell, the lower classes have massive inflationary pumps blowing hot air into their faces at the bottom of the pyramid brought on by monetary policy of the banker/political class.


So the Fed has the air pumps blowing and the immediate effects are at the bottom of the pyramid blowing hot air on all the masses in an attempt to keep the tip of the pyramid from collapsing. They feel the air. Yet the get no benefit as they are unable to catch any "benefits" of the hot breeze. Their paychecks are not inflating (true inflation) and thus they cannot do their part in the pyramid. They are being sucked dry and getting burnt with the hot bypass gases. Combined with the lurch toward higher fees and taxes and deflationary wages, the lower classes are getting squeezed very hard. They see this as inflationary. Less money + higher cost of basic subsistence = they see it as inflationary. This is particularly true when the lower masses have no assets to speak of.  An example: Implementing a "sin tax" of higher liquor and tobacco taxes hurts who? Certainly not the tip of the pyramid!


So at the opposite end at the tip of the pyramid, we have the super rich. Raising the sin tax on alcohol or cigarettes has no effect on them, yet a 20% deflation decline in asset prices certainly does!   So the Fed pumps the pyramid yet the pyramid is what it is:  A Ponzi built on the backs of the masses.  This is why deflation and inflation is in a death struggle yet deflation will always win. Ponzi's always collapse.


But until then, the people residing in the lower part of the pyramid will keep feeling the monetary taxes and higher fees and monetary effects of the Fed and the price gouging. They will not fare well at all. At the same time the upper half of the pyramid will start to collapse despite the government's attempts to pump in inflation. 


Thus you will have inflation pumps at the bottom and deflation pressures wiping out the wealthy and thus the pyramid will start to collapse in on itself despite the monetary attempts to keep it inflated. This will suck on everyone.  Eventually the pyramid collapses as deflation always wins out once your past the point of no return (which I think we are) and Ponzi schemes always collapse. 


THE END RESULT
The end result is that the lower half and middle of the pyramid, who have less assets than those at the top will be sucked dry in the attempt to save the entire pyramid from collapsing. Of course this will fail as the very act of sucking the bottom dry will in fact help collapse the top of the pyramid itself!


So in the end the inflation/deflation debate is almost a moot point. Like Einstein's theory of relativity, it depends on where you reside currently in the pyramid.  


The bottom line is that the very act of trying to pump in inflation at the bottom will ensure the bottom "foundation" of the pyramid is terminally weakened. Thus the top will collapse in deflation and a destruction of credit and debt will eventually win out.   


And at the end of the day, it will be both inflation (attempts) and deflation that destroyed the pyramid. Yet when the pyramid is a collapsed pile of rubble in the end, we can say that deflation truly won.


But tell that to the little guy...


[Update Sat 5:40PM: Old nemesis BIDU. Finally showing some weakness on the weekly charts.  An eventual move to the $62 range seems doable or at least the $65 pivot. Volume is low though.]


[Update Sat 5:15PM: Visa is one unusual chart pattern.  Perhaps a mega-triangle is forming which the [e] possibly forming its own triangle. I have it as a bearish triangle with a breakdown imminent.  Notice all the gaps down and cover.]


[Update Sat 12:53PM: Don't think I am going bullish with my opening post remarks (hey I don't want to alienate any market bull readers of this blog.) 


Because certainly things are looking very good for bears.  First, the "must defend" zone for the bulls, using the Wilshire which I prefer, is pretty much upon us. Should we get a downdraft come Monday/Tuesday that breaks this zone, a lot of bull stops will likely be broken, mentally and otherwise. But it of course has yet to actually happen. Yet we have good reason to expect it will. An ED wedge pattern predicts that it will happen quickly. 


Even if we get a wave (ii) bounce, as long as it is an a-b-c "three" we should be ok. Certainly 1100SPX, if nibbled upon again, should bring out a ton of sellers and present difficult resistance.  


This is an extremely fractured market as the triggering of a "Hindenburg Omen" has attested. In addition we have a nearly perfect base channel on most every index in log scale which is probably preferable.  
The weekly candle is a bearish engulfing.  The 13/34/50 compares remarkably to the 2007 downdraft. Indeed things are bearish.]
Original post:
PRECHTER'S APRIL EW THEORIST CALCULATION
I  have blogged recently on how Robert Prechter (in his April EW Theorist newsletter) recently and brilliantly computed a time ratio in comparison to the 1929-1932 decline. He then applied this ratio to the 1930 rally peak and correctly targeted the recent April 26th, 2010 peak using this ratio. Taking that concept one step further, I wondered if the same ratio can be applied to subsequent bounce spots after the initial 1930 rally peak.

In 1930, the 5+ month rally after the initial 1929 panic dropoff peaked on April 16th, 1930.  After the 16th of April 1930 peak, there was then an initial sharp decline. Then the markets rallied for a small double-humped retrace that topped June 2nd, 1930.

So applying Prechter's methods outlined in his April 2010 newsletter, I calculated a time ratio from 16 April - 2 June 1930.  I then applied this ratio to the current market and came up with a time span of 123-128 calendar days.  This 123-128 day time span would correlate to the April 16 - 2 June 1930 time span.

So using this calendar time span and applying it to the 26th April 2010 top we come up with a retrace rally time window of 27 August - 1 September.    Calculations: 26 April + 123 days = 27th August.  26 April + 128 days = 1 September.

So far we have the rebound marked Minor 2 high at day number 105 (August 9th) which is short of my 123-128 day ratio calculation.

WHAT THE BULLS MUST DO TO KEEP THIS MARKET FROM FAILING
August has no doubt been a low volume month for the most part and yet the tape has taken some recent inflicted damage.  But all is not yet won for the bears. The market is still above the 1065-1072 "must not crack" zone. Back on
http://danericselliottwaves.blogspot.com/2010/03/p2s-buy-dips-key-marker-days-and-gaps.html I had an epiphany event that made me understand support/resistance in a much better way.

Basically taking the things I talked about in that post linked above, the "dip buy" spot is pretty much here. In short 1065 pivot should not be breached.   So this is what the bulls need to do to regain the upper hand.  They must defend the dip buy spot of 1065-1072 at all costs and the bullish daily candle that produced the 1070 gap up area.

Now it goes without saying that the recent wedge ending diagonal means that prices should quickly collapse back to under from where it started. No matter how you count the ending wedge, using this principle of "exhaustion" the SPX should fall under at the very least 1056 rather quickly. If it does, then that confirms the larger bearish picture.


THE BULLISH COUNT WOULD BE A DOUBLE ZIGZAG FOR MINOR 2
If the market mnanaged to hang on and take out the recent 1129 high, the best count would likely end up being a double ZZ.  This is another reason why the 1065 pivot (which also happens to be the flash crash day price low) must be defended.  Why?

Because a double ZZ should have the second ZZ start from a price point above the (b) wave in the first ZZ as a minimum.  That is my general guideline.  A double zigzag is meant to advance prices and falling below key pivots of the first ZZ would be a violation in the spirit of this count.

CONCLUSIONS:
1.  In order for the bulls to save this tape from further irreparable damage, they must defend the 1065-1072 dip buy spot and the bullish daily candle that produced that 1070 area gap up.

2.  If the bulls are not done with Minor 2, the recent correction down would be an [x] wave and take the form of an expanded flat.

3. The time window for Minor 2 peak would then be from 27 August - 1 September based on using Prechter's calculations from his April 2010 newsletter. Middle of that range would be 30-31 (Monday - Tuesday) August.


4. An ending diagonal triangle should always prove itself to have been so by a rapidly collapsing prices back beneath from where it started. Depending on how you count it, this is either 1010 SPX or 1056 SPX. Should prices go that low, then that confirms the bearish picture of Minor 2 high on August 9th is likely correct.

5. Low volume in August could be used to the bulls advantage if they can defend 1065-1072.

6.  Additionally closing beneath the bullish daily candle that  produced the 1070 area gap up is another sign of exhaustion.  A close under 1065 would be better.  This chart is rendered null if a price below 1056 occurs. 
Again this is not a bullish prediction, this is a "what do bulls need to do to turn this around?" scenario.  In the end we must heed what the tape tells us.  If the bulls are not quite done yet with 1100+ then we must consider it.  In the end, the tape will let us know shortly w
hat its intentions are.


Lastly the Squid recently said we'd have a "meaningful decline" http://www.zerohedge.com/article/charting-next-weeks-bearish-action-goldman-warns-meaningful-decline-stocks

If GS is saying we are going down....then I must consider the up option and what it would have to look like.
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