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Tuesday, September 28, 2010

Elliott Wave Update ~ 28 September [Update 7:47PM]

[Update 7:47PM: I should have realized that the great rally from March 2009 was going to produce its share of parabolic stocks.  The 2000 top had its share of course. The 2007 also had a big share.   So not to be outdone, we again have a slew of stocks that have gone stratospheric.   Bidu is perhaps the golden boy. And a "China play" to boot.

According to K. Denninger, stocks run up in parabolic rises in a 3 stage advance with each angle of attack getting steeper.  (I wish I had understood this 3 stage profile last year) And BIDU fits that profile.   The downside can be swift at times and brutal. Think OIL in 2008 which was merciless in its retrace downward.

BIDU shows the old adage " a kid with a ruler" (can make a million dollars). The HFT machines are like a bunch of kids with rulers at the moment.  But all things end.  When you run out of greater fools....

By the way BIDU is expected to "earn" .42 cents next quarter.  And pre-split, BIDU hit the nice price of $1070 today. Yes you got that right!  106 P/E and counting.  By the way even at $50 its P/E may still be north of 50.

Can it churn to $200?  The chart and theory of a 3 stage parabola suggests no.   The 3rd stage is now in play. Exhaustion will eventually set in. Reality always returns some day. That some day is likely growing closer.

Today's candle is perhaps the beginning of the crack. Apple also showed signs of cracking today.

When all the current parabolic stocks crack for good and reverse, its a sign things are ready to get bearish, perhaps P[3] bearish. Same happened in 2000, same in 2007, why would 2010 be any different?
[Update 7PM: The wave structure of the dollar doesn't quite look finished. I think we're within 8-10 days of a major bottom. Certainly sentiment is very low.
The blue shaded area would be roughly the midpoint of the wave structure down. That projects to a 78.22 target or C = .618 x A. Where will equities be by then? Hard to say. But the big moves down on the dollar should be waning. Yet we likely still have wave [v] to go.

The "control" for this count would probably be the peak of black iv.
New intraday highs on the SPX and DJIA and Wilshire but not the NASDAQ.  Weaker and weaker up volume ratio suggests the market may be ready to roll over soon.  Thats the probability.

A look at the DJIA looks like zigzag(s) pushing up which means its lost its impulsing characteristics for now which could happen at a major rally top. We'll keep throwing out squiggles until something sticks.

On the SPX, we have [c] or [y] = [a] or [w] at 1158.
The Wilshire has formed a solid upper channel trendline that it has obeyed. For now at least, there is some similarities between the April market peaks and what is occurring now.   Once there are no more buyers, well what do you have but HFT's and Primary dealers churning to each other?  Creating a no-bid situation again is my estimation.

Note the waning up volume ratio bars over the past 4 weeks.

The higher this sucker goes, the harder the fall.  When GDP prints near zero or negative and shows no signs of moving out, there could be a mad rush out the door. Remember the psychology of the first push toward 1200 is that the economy was in a "V" recovery and warranted the sharp rally.

Now the psychology is squarely "The Fed won't let this fail" which is quite a different mentality than a "V" recovery. Its what I call the beginnings of the recognition of the Ponzi.

I have a theory on why the market will crash despite perhaps a bearish tilt of most who participate. Its called Ponzi psychology.  When a Ponzi scheme is recognized to be such (when it receives its "moment of recognition"), sentiment toward the scheme goes 100% negative. Yet that overwhelming negative sentiment does not result in a "surprise upside".  In Ponzi psychology, money is pulled despite overwhelming negative sentiment.  

So in a way, having a "last resort" mentality that the FED will monetize all and not let the house of cards fail is the beginning steps toward this Ponzi psychology moment.   Everyone and I mean everyone now knows and says openly that the debts will never be cleared or repaid.  Thats right. The FED will never be able to safely clear their debts. Whatever happened to the "exit strategy" that was all the rage earlier in the year?  Now they are doubling down despite a "healthy" market! And of course it goes without saying that the US Treasury is terminal.  

No one will dispute that (but oddly its still pushed to the back of our minds). That was step one of the Ponzi Awareness.  Step Two is that the FED, Congress, and US Treasury will actually try and openly perpetuate the madness to infinity. That step is slowly coming into being as we speak.

Step three is when we realize that the Ponzi will fail despite(or because of) the Fed's efforts.

Afterall, cold hard cash is still likely to be the exchange medium of choice. A piece of paper saying you own 100 shares of Netflix won't buy you any ammo in a back alley.  A piece of paper saying you own someone's debt probably will not be any good either. And a piece of paper thats says you own Gold ETF will be viewed with as much skepticism. (Of course physical is a different story).

After all its now becoming a matter of faith. And oddly as much as they try and destroy the US dollar, the opposite effect may happen.  The only faith left will be what we can hold in our hands. And a wad of Ben Franklins still conjures up greed, desire and a feeling of safety and power.

So I propose a break in faith by the endless Ponzi nightmare will result in risk assets being dumped first for cash.  People will not suddenly look at a Ben Franklin $100 notes and make the determination its not worth anything. Rather they will view other illiquid assets as a burden.

So a break in faith should result in mankind resorting to a basic unit of cash that is still ingrained in us. At least at first during any panic.  Maybe down the road in years time that will change.

But for now, cash will be king. Thinking the market is a "win-win" due to FED perpetual backstop is just retarded.  For us little guys, we can pull our measly shares quickly. But those who have billions and billions is like trying to move a dinosaur. Someone is going to get hurt.

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