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Tuesday, October 12, 2010

Elliott Wave Update ~ 12 October [Update 11:30PM]

[Update 11:30PM: The BPSPX chart has quite an extended RSI which is a decently reliable oscillator-type indicator. One cannot time a trade from this but its more evidence that the trend is quite mature (yet still 50 SPX points from just matching April's high).  Sure we can grind up from here longer still but it will only argue that it is going to new extremes and begging for a harsh, swift correction.

My Minor 3 target band remains.  That is a lot of ground to cover. If the market makes new highs, the amount of negative divergences that are already showing up is likely to be glaringly bearish to the point where a flash crash is a near certainty.

My point?  It would be better for bulls to correct here a bit rather than take it straight to extremes the market cannot handle. But the market doesn't necessarily work that way anymore. Its all about momo. And momo can be down too. The robo traders don't really care which direction.
[Update 10:33PM: I read Karl D. just about every day. Particularly his work over the year(s) on the mortgage mess and the fraud involved. ( I learned about MERS some 18 months ago via blog). Well the fraud has gone mainstream a bit finally.  But as he says and I agree, the real issue is not with foreclosures with "faulty" paperwork as largely described by the mainstream media, its rather taking the argument one step further in that all the MBS products developed and sold (to your pension funds) and derived from the MERS system are in question. Thats a lot of paper.

Most huge pension funds are underfunded by the tune of hundreds of billions. They smell blood in the water. Lawyers will have an uptick in employment.

The bottom line is the MERS system was a bad idea, unregulated and churning out paper for Wall Street.  This story is not going away and sooner or later the entire mess with MBS may actually be explained to the American people.

This issue is not hard to grasp for the regular folk. After all, many hold mortgages. Many understand the greed of Wall Street. Most can imagine the worst fraud involved.  All I need to do is explain it this way:


1. Millions of mortgages were made to people during the boom years to include a huge swath of subprime. Real Estate mania was in a bubble.  People understand this they seen it first hand.

2. Wall Street bundled these loans in "MBS" (mortgage backed security) and sold them to your pension fund. This is why many American's mortgage changed hands so many times over the last 5 years. People understand this as their mortgage payments always seem to change hands on who they pay.

3. These loans went "bust" as expected. Wall Street placed a (derivative) "bet" that they would fail as housing was in a bubble and loans were given to anyone who could sign an "X".  Americans understand exotic betting.  Just look at betting the over/under on Monday Night football.  We are a gambling culture now.  Many Americans loaded up on credit themselves of course.  They are having buyer's remorse. And finally people understand bubbles, they bought stock in NASDAQ in 1999.

4. Banks got bailed out due to the mess and mostly of their own doing. This is a well-known source of anger for Americans.

5. CEO's got multi-million dollar bailouts. See AIG. Another source of anger.

At least some or most of the points above is basically known in some form or fashion by most people. If not, it only takes a few minutes to explain what I wrote in the simplest terms.

What is new to the mix is the fraud angle of the mortgages themselves and how they (MERS and ultimately Wall Street) processed them.  But Americans understand "puppy mills" (and don't like them). MERS is the puppy mill of mortgages. 

And here is the final point that nails the coffin in the banks that ties it all together that is not yet mainstream: The mortgages were fraudulently packaged by Wall Street into MBS and other such products and sold to your pension fund (which is underwater). This is the point that most media is not yet hammering on. But you can bet the lawyers know.

And since most MBS and their derived products are still on the balance sheets everywhere by the hundreds of billions, what is the outcome?  And if most or not all of those products were put together with huge underlying mortgage fraud issues, what happens from here? Who is going to pay hell? How much are they worth? 

The American people can understand this if its explained. I just did it here.

Bonus question: Does the foreclosure moratorium constitute a "credit event" that will trigger some derivatives? I would think it will somewhere.

Derivtives are like a room full of mousetraps covering the entire floor....set one off...

At any rate, the underlying fraud is the beginning of an wide-spread admittance of a  "Ponzi" sentiment underpinnings for the marketplace.  When one does not trust, one does not risk. When one suspects there is nothing there (Ponzi mentality) one will pull his money out despite overwhelming negative sentiment toward the scheme. This is my "there is no upside surprise in a Ponzi scheme" statement I like to make.  So far its been "ignored" by the marketplace. But its only getting started.

The mortgage fraud is but one piece of the puzzle. And that will likely spur more rocks being turned over. Why? Social mood demands it.  It ain't going away folks. If your in a cushy job getting huge paychecks and kickbacks, social mood is in the mood to see why and turn over your little rock you hide under.  This process has been ongoing and is picking up steam.

Just read your local paper front to back and see how many stories involve someone looking under rocks....

[Update 9:25PM: The banks are the bear market leader. This likely will not change until the bear is over.  At key times, it shows downside leadership. It may be one such time.

Now even if the market continues on to make (perhaps) diverging highs (DJIA and NDX make recovery highs for instance above April and other indexes do not), the banks (at least the BKX index) would be hard pressed to make a new high above its April mark.  But as it stands now, BKX is below its Oct, Sep, Aug, Jul, June, May and April peaks while the DJIA has already taken out its May peak. Thats bank leadership in action best case maybe just a laggard. Go ahead you load up, I'll watch.  This is one to keep an eye on.
[Update 8:25 PM: The breadth thrust indicator has telltale divergences, both positive and negative.   Though not a perfect timing tool, the negative diverging setup here seems favorable to a decent decline.
Price and Volume Trend seems to be diverging more harshly than at the 2007 highs. This doesn't seem to support the notion of a Primary wave 3 UP, its more supportive of what I have been advocating - P[3] DOWN.]
[Update 6PM: There is a decent chance that the market will wipe out many weeks of advance within a matter of a few days if this ED count is correct. ]
I'm counting an ending diagonal (ED) triangle in some form or fashion.  Likely either one more small pop or an up/down sequence. We have enough waves "as is" to call complete though.

Other examples where I have counted ED's:

1. The market experienced an EDT in the DJIA and SPX at the January highs. 
2. The April peaks was tracked as an ending diagonal expanding triangle.
3. The August peaks was largely a wedge shaped move that could have an ED count mixed in there. (although it appears the entire move from 1010 low to 1129 peak was a LD count perhaps)

So we have a few instances this year where an overlapping ending diagonal is certainly probable. The results of each was a price collapse down to where beneath where they started. This is why its important to "respect" the potential of an ED pattern. Its an exhaustive pattern and a quick price reversal is the norm.

78.6% Fib marker
Wilshire shows a potential count. Perhaps one more down/up.  It has retraced 77.87 % from the July low back toward the April peak.  12366 is the 78.6% Fib. remember, per EWP, "A leading diagonal in the wave one position (in this case Minor 1 down)  is typically followed by a zigzag retracement of 78.6%. So it is in this light I try and keep perspective on this count.
And a more detailed look reveals pushing up in zigzag threes which is a telltale sign.
And a look at the SPX potentially in a simplified manner. Perhaps a small rule violation on the SPX  ED but the Wilshire viewed thru the same lens does not.

But its the spirit of the pattern we are trying to capture here. 
So again, if the market is not in an ED count, it'll let us know. But if it is, likely the price drop will be very quick allowing no shorts on the bus and trapping as many bulls it can. Sentiment-wise the market is "ripe" for an ED interpretation and harsh reversal. A rapid selloff to under 1100 is a potential to fill all those open gaps.

Wilshire again and in log scale:
The updated NYAD count.  Again, we are likely getting close to the top of wave 3 on this chart. Then looking for a wave 4 pullback, likely to the lower red channel line.  Market high may occur on wave 3 for all I know...

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