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Wednesday, September 21, 2011

Elliott Wave Update ~ 21 September [Update 6:50PM]

[Update 6:50PM

Elliott Wave International said it perfectly tonight in their Wednesday update:

Quoting Steve Hochberg:

"Can the news become any more bullish for longer-dated government bonds, with today's announcement that the Fed will purchase $400 Billion of six-to-30-year maturities?  Ironically, the Fed's announcement appears to be coinciding with the end of the rally, which has already occurred over the prior 8 months. The supposed "good news" of the Fed's purchase decision is a strong bearish indicant for prices, at least over the short-to-intermediate term."

I wholeheartedly agree. Remember, rallies end on "good news" not bad. The news cannot get much better than this for bonds. However I'll go ahead and state that bonds may be working on their all-time high.

Hochberg then showed a TLT chart and I'll post my own count that pretty much looks similar. There is almost no other way to count it anyway. The count assumes today was a wave [iii] of 5 of (5) of perhaps [5].  Only time will tell of course.

A price drop back under "3" is our wave count control price and indicates a turn down. It can be speculated that a "peak" in bond prices for wave 5 will coincide with a low in equity prices wave 1.   We have not yet reached wave 1 low in equities, therefore we may not yet be at the top in bonds.  There likely will be divergence between the two prior to the turn(s).
The yield curve has indeed been flattened.  Recall that when the crisis of 2007-2008 started yields were much higher and had room to maneuver lower.  In 2011, there is little room for yields to move lower. In other words in the opening months of of P[3], Bonds may have peaked! And may have peaked for all-time.

This only means up for yields, or at best sideways for a while. But bonds are debt and the entire crisis is really about bad debt to include that of the United States!   Raise your hand if you think the US will ever pay back its national debt. Nobody raising their hand? Well that means one thing, there must be a lot of bad debt in there....

Simply put, if bonds sell off in many places in P[3] and equities sell-off, it will be a double-banger. Higher interest will beget more defaults which beget more deflation which destroy asset values (think pension funds) which beget more selling which will bring know the drill.  Just ask Greece.  Their bonds and stocks both have been selling to the point of bankruptcy.  Ask the Italians who are feeling the yields squeeze and their stocks are selling hard also. Yes bonds and stocks can sell at the same time. Its call risk aversion.

The US is no different, its just not "contagious" here yet. But the theory is that P[3] down will ensnare every bad sovereign debt eventually.  I.E.- Liquidity flows searching for "safe havens" but in the end, there can be no haven if there ever is to be a true recovery. The bad debt must be purged including national debts. At least a decent portion of it. That is P[3]'s job: To purge the system and that will take lower prices. If man refuses to take action, nature will do it for him. That is Elliott Wave theory!

Bond sentiment is reaching extremes and no doubt will get a boost with today's price action. This sentiment would coincide with a near top in a multi-month rally. But we may have some more to run if we area awaiting waves [iv] and [v] of 5.

Via Sentiment Trader, here is one composite-type sentiment indicator they use. The data includes today.  This is a long-term indicator and we should be looking for a turn down in bond prices sooner rather than later.
If you have followed my thinking on bonds over the last many months, I have proposed that a divergence in the yield curve will help us mark the all-time bond turn. The divergence is still intact.
Approaching overbought levels on the...monthly and hit a long-running trend line.
My 30 year yield count has taken quite a beating but the main count of a wave [2] is still intact.
 [Update 5:15PM: CMG. Overlapping waves up here with a double negative weekly divergence.
[Update 4:50PM: Weekly Wilshire 5000 showing the long term wave pattern.
There is still a valid continuation-type head and shoulder pattern in play I talked about in the recent past. The downside target is shown. I consider the 50 DMA "tested" and failed and the market has reacted accordingly. The internals were continuously getting weaker with each upside stab.

It may be tracing a triangle and this would be the (d) wave down.
The overall count requires a new low at least under 1101 SPX. Thats the main point at the moment.  

The NDX made a very nice rising wedge complete with "overthrow" and then with subsequent price reversal. 

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