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Thursday, December 22, 2011

Elliott Wave Update ~ 22 December 2011 [Update 8:19PM]

Update 8:19PM: Futures probing the big down trend line.

Update 7:49PM: I haven't looked at bonds and the dollar much lately. Bonds have done quite well this year obviously.  In fact all forms of debt have done well in the United States as opposed to some European countries.

But what happens when these debt run up trends are over?  Will money all of a sudden rush into stocks?  My opinion of course is that a great financial storm is coming and U.S. debt instruments will get hammered along with stocks and create what I call a "rising yield deflation".

Think of whats happening in places like Greece. You have bond yields that exploded and of course their stock market has gotten hammered at the same time.   You have an economy that is not functioning well (to be kind) and Greek assets are surely not soaring in prices in anticipation of some kind of wonder recovery.  Economic destruction tends to deflate the value of things.  You can say it is experiencing rising yield deflation. This phenomena is now nibbling at larger countries than Greece.

What I propose will happen in the U.S. is that debt instruments of all kinds will also explode.  Its only a matter of time and we are much nearer the end of a long trend (we reached a Fibonacci 34 year debt bubble in the making) than anywhere at a beginning. This is a mathematical certainty.  Will selling of debt instruments cause people to rush into stocks?  I doubt it long term.  If debt yields blow up and defaults begin (as they should have all along) will there be a great risk aversion across the board?

Rising yields will beget bankruptcies and reinforce risk aversion which will of course cause yields to rise more and trigger more bankruptcies. Mass bankruptcies and a collapsing financial system as we know it cannot be construed as "bullish" for stocks.  That is the theory of rising yield deflation in a nutshell.

I even think Prechter and EWI are much too bullish on U.S. Treasuries.

Lets look at some charts in a simple way; Overbought or underbought.

First, MUB, or Municipal Bonds. Overbought on the weekly:
MUB is also overbought on the monthly:
TLT Weekly. Near overbought and diverging.
TLT Monthly. Overbought.
JUNK. Cool little trick created with the circle. Right side peaking?
US Bonds:
The dollar chart is starting to come into sharper focus.  I believe a series of huge one's and two's are forming. however, the gap up should be closed first to form wave [ii] is my gut feeling.  This retrace on the dollar would in theory support the rest of wave (c) of [y] up in stocks as the inverse correlation between the two should continue in general.

The dollar is in good position long term to accept huge inflows. A swift selling of stocks to under 1000 SPX in Minor 3 down and if debt instruments are also coming to the "end of the line", then King Dollar should be in position to be the benefactor of both.

The general public has shunned stocks for good.  They are seeking returns in other areas, particularly bonds and other fixed income instruments (and flipping junk they find to each other - but thats the subject of another post to come). Yields are being chased and debt is not yielding much so its like running in mud as the charts above suggest there is much more risk to the downside (overbought long term charts) in owning debt instruments then the upside.  Hasn't Europe taught us that?

The public will be crushed if bonds sell hard.  The public will not rush back into stocks if bonds collapse because rising yields cannot be tolerated in a super-leveraged atmosphere that the world has found itself in yet again.  Bankruptcies will be triggered. Eventually a deteriorating social mood will win out.

The Great Millennial Credit Bubble will deflate as credit bubbles have always done. EW theory (social mood theory) tells us so.

Primary count is the SPX and Wilshire5000 is in wave iii of (c) of [y] of double zigzag Minor 2 up. Preferred price range for Minor 2 peak is 1293-1310 SPX. After Minor 2 peaks, Minor 3 down occurs which is a very bearish and nasty wave down. Target: sub 1000 SPX. But we are getting ahead of ourselves perhaps.

The market is reaching a crossroads. There is sort of an apex formation occurring. Some people are calling this a triangle but in the context of EW counts, it really is not counted best this way.   I could go into a myriad of reasons and guidelines on why not but all I can say is read Robert Prechter's EW Principle to learn about triangles, where they occur, and how they relate to larger wave formations.

Regardless, there is a huge downtrend line that has been again felt with today's price rise. You can see this on many charts. Here is the e-minis in which it is coming up to it:

SPX primary count is highly speculative on the series of one's and two's perhaps forming to the upside as per SPX 10 minute chart below.

KEY PRICE MARKER: 1229  is the key EW price marker to this being wave (c) of [y] up.  Any immediate breach of this price obviously would invalidate the series of ones and twos up and would confirm only a three wave rise from the 1202 SPX recent low.

If the market pulls back from here and slips below 1229, we have only 3 waves up from the recent 1202 SPX low.  That could indicate that this alternate bearish count is the true path for stocks.

We still have only 3 waves up from 1202 SPX. If the market explodes downward, well, then this count could be correct. But as explained below, its still an alternate count only to be considered.

Lets face it, there will be low volume next week between the holidays. The market is again above technical support (lets call it 1229 SPX) and the plunging VIX seems to still be indicating that even more higher prices will pan out. There are huge chunks of resistance overhead from 1256 - 1292 but if ever it can be slugged through temporarily is next week. So everything favors a continuing and (perhaps merely sluggish) rally.

The 1229 pivot will be key.

Incidentally, if the Wilshire can break over the downtrend line, a target of 13783 is an interesting spot on the  10th of January which is the 34 Fibonacci month anniversary of the March 9th 2009 SPX 666 low. That would probably equate to 1310 SPX Minor 2 high.

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