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Wednesday, June 8, 2011

Elliott Wave Update ~ 8 June 2011 [Update 10:16PM]

[Update 10:16PM: Lastly lets talk currencies.  Here is my scenario long term:

1. The Euro will break up before any dollar crackup. Its simple really: You cannot have monetary union without social, fiscal, or, and no one ever mentions this one: military union. United Europe is a big illusion and a sham foisted on the people by unelected autocrats who will get whats coming to them (thrown out of their jobs when the Euro fails). How this Euro breakup effects everything is unclear. Obviously countries will go back to their own currencies and some will win big and some will lose big.

2. The YEN will experience hyper-inflation before any danger of the dollar doing so. The average reader thinks this is crazy because you have been ingrained with Japanese deflation for 2 decades now.  The Yen is not the world's reserve currency although its a very important one.   But it will lose first against King Dollar. Japan leads. Their deflationary cycle may not be over but it is closer to being over than many think.  In any fiscal panic over the next few years, the Yen is in danger of collapse.  The Japanese have been so used to (in effect) printing and getting away with it, they will ultimately pay the price first.

3. The Chinese Yuan. If you trust the Chinese for anything you are a fool, particularly their banking system. Selling defective, fraudulent products, ripping off intellectual property, cyber attacks, no basic freedoms, polluting their environment for the enrichment of a select few.... The rot and corruption is great. I admire Chinese hard-working people but the government and its corrupt institutions should be abolished with extreme prejudice.

4.  British Pound. For hyper-inflation to occur, you must first be able to isolate a currency vis-a-vis all the rest. Zimbabwe and Weimer Germany had hyperinflation because they were isolated as currencies. It was possible for other choices.  I argue mostly the dollar simply cannot be isolated at this stage.  That is why I think the Yen would be more vulnerable first.  But even more so vulnerable is the Pound.   It probably can be isolated. Therefore the Pound is probably a major candidate for hyperinflation in any financial collapse.  The Brits will have a harder time than Americans giving up the nanny state!

I know I left other major currencies out such as the Indian Rupie, Australian dollar (I think will do well) and others but I don't have a strong enough opinion at the moment.

CONCLUSION:  So you see, its not that I am in love with the fiat Dollar, its just that all the rest have their own extreme problems that are likely worse than we have going on with the dollar.

A currency can never be looked at in isolation unless it can be isolated!. This is the mistake that people make with the dollar. And they never have a better solution as opposed to the dollar.  And yes gold and silver (physical) are always nice, but they have and can confiscate it, devalue it at will, or outright ban bartering with it in the name of "social order".   So to say its the ultimate solution in a thoroughly fiat world at this stage is vastly premature.  But then again, it has survived the test of time.
[Update 9:40PM: Another look at the SPX daily.  There are 2 things that very much support the notion of a Minor 4 triangle still:  1) retracting volume  2) retracting volatility. This is straight out of Prechter's own studies and EWP. This is why if this is instead a third wave down, we need to see a panic spot and VIX spike.

The retracting volatility and volume support a Minor 4 triangle count. Now all we need is a [c] wave low and a big [d] wave bounce.
[Update 9PM: Haven't shown banks in a while. BKX is certainly a leading index to the downside. This is as it was from the 2007-2009 decline and as I have said many times in the past, the bear market leader (aka - the banks) will remain the bear market leader until the entire bear market is over. Thus, it was expected that the banks lead downward again for P[3].

I am best guessing a count, but BKX may be in the midst of a thrid wave down. Which means it needs a lot more waves like all the finishing fours and fives.

I've had this BKX chart for a while. The wave degrees are not important at this point. Its the form that counts. And the BKX had an A-B-C countertrend rally.

PS: This is the one chart that makes me seriously doubt any wave 4 triangle.  If this has a lot more downside to finish 5 big waves down, then the rest of the market shouldn't be faring much better.

[Update 8:54PM: A look at DJIA supercycle channel line. I like to use the breadth thrust indicator to look for possible positive divergences but there is none yet. Doesn't mean the market cannot post a decent rally of course, but its better to have a small divergence in your favor first. There is none at the moment, at least when it comes to breadth thrust.
[Update 5:55PM: What is the worst possible scenario that could occur within our financial markets long term?

I will reiterate my long term outlook answer: A rising yield deflation for the U.S. There are not many at all who would subscribe to this outlook. People such as Mish favor a Japan-style deflation. I say that is not possible as Japan had on and off deflation while the rest of the world was in a cycle wave 5 social mood top-out.  They started not in debt and they had goods to sell to the world. The US simply is not in that positon as Japan was.

My thesis is not unlike Prechter's but even he still hints Treasuries will be "safest" in any deflationary collapse and yields likely low for some time. I wonder.

The unwinding of the credit bubble will lead to 3 things:  1) Massive default   2) uncovering of massive fraud  3) A self-reinforcing economic defensiveness as the Great Unwind proceeds.  Each of these things should reinforce the need for the safest instrument around: King Dollar.

If we throw in an "unexpected" rise in interest rates you can add these horrors: 1) Unwinding of the massive interest rate swap market.  2) Counterparty deflaults   3) Access to credit literally dries up

Once that ball of horrors gets rolling, each bad point above will reinforce the other.  Thats why the DOW is more than capable of eventually dropping to 1000 points or lower! (No one seems to ever fully think about this point - that a DOW market that drops below a certain point threshold with a rise in interest rates will accelerate any downfall - an apt analogy is when nuclear rods are exposed - meltdowns can occur)

The 30 year yield chart supports my outlook at the moment. Langoliers. As the ground falls away, there is nothing there.  The long end pulling up the short.  .

Not much to add today except I am having doubts if our triangle count is going to work out.  The market has dropped straight down from 1045 SPX. Yet there has really been no panic at all to speak of. This is revealed within the lame VIX readings.  Complete complacency?  If so, and this is a third wave, we need to see a panic spot.

In other words the "point of recognition" within a third wave to the downside has yet to occur if in fact this is a third wave at all. Perhaps it is in afterhours as I see futures are dropping pretty good. (nevermind). But I will remind the last panic bottom in mid March at 1249.05 SPX occurred with a "flushout" in A/H's and then futures recovered prior to the next day's open.

The market has been unable to rally with any strength from oversold and in a bull market it should.  It feels as if the nature and longer-term trend of the market has indeed changed. But its not yet confirmed with a 5 wave  pattern down at Minute degree.

With all that said, we are still solidly in the triangle [c] wave range, so we need to see what happens overnight and tomorrow.
Trendline hit with the futures
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