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Wednesday, February 9, 2011

Elliott Wave Update ~ 9 February [Update 9:31PM]

[Update 9:31PM:

RISING YIELD DEFLATION
Again, I'd like to talk about what I think will happen when the bond Ponzi collapses. My theory is simple: Bonds sell hard, rising yields cause massive defaults and potential massive disturbances in the huge interest-rate swap derivatives market and that causes more defaults, etc. It will not be bullish for anything except cash in your pocket. A collapsing financial (credit and leverage) system is a risk-averse event. 


A collapsing credit bubble is deflationary.

Those calling rising yields bullish are likely to be very dead wrong. There are such massive imbalances now built into the financial system that only need a small wind to blow them over.  10% mortgage rates (yes they can go even higher than that!) is something they fear.  The housing market which is still in a downturn will not react well to higher mortgage rates. Who can buy overpriced houses still when the rates are no longer "cheap"?  A rising mortgage rate at this stage of the game will bankrupt a lot of banks.

Mild rising yields in a credit bubble that is still expanding is doable as it has been in the past 20-25 years. But that will likely not be the situation now.

Rising yields (collapsing credit) in a credit bubble that is topping and popping is devastating and Benny may know this all too well. Hence my term "rising yield deflation".

PONZI AWARENESS
I touched on this main theme of mine the other night here http://danericselliottwaves.blogspot.com/2011/02/ponzi-psychology.html

In a nutshell, if a mass "wake-up call" occurs in the population to the fact that the government is running a de-facto pyramid (Ponzi) scheme, the markets may continue to collapse despite very bearish sentiment.  This is the point where "contrary investing" (buy when there is blood in the streets) gets slapped around and doesn't work well. At the very least, it could be the lubricant that allows a massive fall in the markets. (And no the PPT can not prevent this even if they make all the rules against it!)

Postulate #1 of Ponzis: When Ponzi' Schemes are realized to be such, they collapse quickly despite maximum bearish sentiment.  I postulate the Fed and big banks are running a Ponzi scheme of sorts http://www.zerohedge.com/article/stunning-10-year-auction-closes-indirect-bidders-coming-all-time-high-directs-disappear  From the left pocket  to the right.  Its all an illusion. And all magic shows come to an end.

How can a "mass awareness" occur? Well we cannot be sure but we can be sure that things can happen quickly and out of the blue. Just look at Egypt and Tunisia.  Lets suppose they are forced into QE3. Will a third time be a charm?  Or the breaking point where people wake up and realize the end game is near and panic all at once? Can this occur near a top?  Certainly the 1987 crash was "unexpected" (except by Prechter)  and occurred not far from its top.

I personally feel we are living a mass delusion. People say the Credit Bubble can go on for a long time. I say it has been going on for a long time already!  Courtesy http://market-ticker.org/
The above chart's steady rise has been disturbed. We are already extremely distorted to the point of mass delusion. As someone once postulated (forget his name), human brains have a hard time with logarithms.

THE EFFECTS OF A RISING YIELD DEFLATION
I propose pretty much what Prechter theorizes (because it all makes sense). That all asset classes will sell off vigorously in a devastating deflation and massive defaults will occur.  In a nutshell the greatest credit bubble delusion of all time will pop with a bang.   Its nature's way of re-balancing for man what he is unwilling to do for himself. We are a creature of Nature's mysterious Fibonacci.

So if bonds sell off, and equities sell off, who will be the star?  King Dollar. We seen that demand occur already in the crash of 2008.  Here is a simple thought test anyone can try: Ask your co-worker if cash is a good investment and they invariably will tell you "cash is not an investment and it earns nothing".  This has been drilled into our heads for a generation or more so it is to be expected.  I of course say that cash may be the next great investment. I try and explain how if a big deflation occurs the dollar will buy more in 5 -10 year than it can now and they still do not get it.

So I say the next "big thing" investment is cash, at least through the meat of any mass panic.

But Dan, if its a Ponzi scheme, won't dollars, particularly issued by the FED, be worthless?  Perhaps they will someday but I don't think it will right away.  We may realize that the debt is a Ponzi but still separate out the dollar as "safe" at least for a while.  At the very least since its our only means of exchange even if they are converted to something entirely different it should all be relative.   We can only make our best guesses. But NFLX at $220 is not likely to be a "safe haven" in a panic.

I am not sure about Gold and Silver. If you have physical I would definitely be hanging on to it for the most part (yet we need to eat and live). It has afterall, lasted an eternity as a medium of exchange in good and bad times. However, if you own 1000 shares of paper GOLD then you might want to think if you could ever possibly cash that in for real stuff. The metals market is rife with fraud in my opinion.  But its up to each of us.  In a panic having your life's work stored in a computer as a bunch of 1's and 0's half way across the country or globe may not allow you to sleep well at night. Particularly when they can cut the internet as has been proven in Egypt!

This is not investment advice, this is just what goes through my brain in what may happen.  Due diligence. This is my opinion of course, you will form your own.
[Update 8:10pm: Yet another look at the proposed Minor 5 using the SPX.
ORIGINAL POST
Primary count is that the market needs one minuette (pink) sized wave (v) of [v] of 5 of (C) to complete this five wave structure up from the July 2010 lows.
 Is this a correct count? If I labeled it something else, I would have to presume I am only seeing a partial structure still.  But yet everything counts nice how I have it and fits in with the technical picture.  

Its nice to be able to spot Minuette sized (pink) waves on a chart this big.  I also highlighted each subwave Minute [v]  so you can see that it "looks" correct as we have it. As I said, I'm not trying to be smarter than the wave structure here. It looks like 5 waves, counts nice in Fibonacci expansions, so we must go with this as the primary count.   If it turns out to be only 1/2 or 2/3's of what we are going to see then so be it. But for now I don't have any ridiculous looking counts going on here.
Even the NYAD count looks nice
This chart looks piggish.

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