But What If?

A couple of days ago I presented the chart below showing the 6 day moving average of the S&P.  It was more or less an effort to remove the noise and try to get a picture of the skeleton of the market.  It's just a rather unorthodox way of trying to see what's really happening here.  As one commenter (who shall go unnamed) politely suggested, in his opinion by using a moving average on which to base a wave count, I was probably removing valuable information (our friend doctor_jr. is always polite) .  And he's right, from the perspective of Elliott Wave Theory.  But nonetheless, for simplicity sake and in order to just get a picture of the basic DNA of this thing, it's a helpful approach.  So please bear with me... it's just for the most basic of  discussion purposes really.

So far, the count I came up with hasn't been blown up in any way but the more the market melts up, the more I have to admit that it appears that nothing, and I mean absolutely nothing matters anymore.  A 100% total Greek default?  "So what!".  France and Spain get downgraded with much fanfare and fear at the horrific consequences... and what do the equities markets world wide have to say about that?  "So what!"  On August 5th, the USA's credit rating was downgraded for the first time in history and what did the markets do?  Nothing that it wasn't going to do anyway.  The S&P simply continued lower at the exact same pace it was already dropping and ultimately, the wave pattern that was going to form anyway, formed anyway..  [ It was headed lower at the time and you can see where the downgrade of US debt occurred in the second chart ]

This is the count which I presented last week as one possibility.  For a rather handy perspective, left click on this chart directly, and then in the "lightbox" you can toggle back and forth between this chart and the one immediately below.

And then in early October the markets found a bottom and took off in a sparkling rally, the rally that we're still currently in and which so far is a 3 wave structure.  Most EW practitioners seem to consider the move up off the October low as a wave 2.  Not
all of them but I think the majority do.   As most of you know, wave 2's are usually very sharp, often getting very close to retracing 100% of wave 1 but never exceeding it.  Wave 2's are supposed to shake the bears to their very core and to convince them that something else might be happening.  I'm just normal I guess, because that's the exact effect it's having on me right now.   And I'm fully cognizant that I'm being effected by it in this way.

But one has to ask how it's even remotely possible to see a wave 2 develop like this in the face of the worst developments in economic history.  That's not an exaggeration or any attempt to add some sort of needless drama to the current situation.  We are hearing literally the worst news of all time regarding the global credit situation.  If anything, these worst developments in economic history should be coinciding with a market drop, not another run-of-the-mill meteoric rise.  Is this the type of thing that should be happening during a wave 2?  No it is not.  Markets don't peak on good news, they peak on bad news that just wasn't good enough.  A wave 2 is the wave that coincides with that phase.  So where's the good news that should be coinciding with this wave 2?  In a nutshell, it doesn't exist and there is absolutely no way it's forthcoming.  The markets appear to be rising for some other reason which strongly hints that we are not looking at a wave 2 here.  A reason that stinks of squid.  Criticize me if you wish for pointing the finger at the squid, but when you do that just make sure to include your own valid explanation for why the market is rising like this on bad news.  A wave 2 should be rising on good new, but news that just isn't quite good enough.  A word of warning... "the economy is improving" will not be accepted.  I said "valid".

So what follows is an alternative that I'm so incredibly reticent to even entertain.  Logic tells me it's impossible.  But neither am I blind.  Most of you who know me, know full well that I have a strong bearish bias.  And I have that bias for very good reasons.  I study.  I analyze.  I do my homework. I know what happens to the money supply when credit contracts.  And every study I've done in the past year tells me the same thing... the markets have to crash in either scenario (the deflationary (for obvious reasons) or the inflationary (because any further inflation in the commodities sector will crush the entire global economy even further and obliterate the disposable income of nearly every human being on this planet.  Bankers are exempt of course).  That is not to say that I don't go long... I do. But very reluctantly because it's the scariest and most illogical thing to do that I can think of.  So rather than suddenly tossing me in the bull camp and labeling me as a "dirty rotten capitulator and traitor to the cause, an enemy to the bear camp", I just urge you to consider what I'm being forced to consider.  That's what discussion is all about.  That's what rational people do.  That's what survivors do. It's what friends do.

What if the S&P 500 takes the path drawn in blue in the chart below?  What if the market ends up putting in one of the cleanest 5 wave structures that we've seen in months off the October low?  Once it completes... what if the ensuing drop lower does not drop below the top of wave 1 of lesser degree, yellow wave ((1)), and then marches higher?  That would complete the fiver I'm talking about.  A complete and perfect 5 wave impulse higher off the October low and ending at red 1.

Click here for a live and updated chart.

From where I sit, the implications would be enormous.  It would alter the entire flavour of the move off the October low and render it as a 5 wave structure.  Not only that, but if it were to evolve as I've drawn it (or fairly close) then waves 1 and 3 (pink) would be the same length, implying that pink wave 5 would likely extend.  Of course we could also be looking at the beginning of a nested 1-2,1-2.  The common mantra is that those things very seldom pan out, which is so true... to the downside.  To the upside, oh yeah... they pan out just fine.  So at this time, there is currently no more important level on the S&P 500 than the top of yellow wave ((1)).  As seen in the chart below, that level is 1267.06.

Click here for a live and updated version

Don't forget to check in for today's update on BullTart's 10/80 weekly MA signal.  It's suddenly painting a very, very bullish picture as well.  It is just one more very good reason to seriously consider the argument you've just finished reading.  And finally, no matter how it all evolves, this is unquestionably the healthiest analytical exercise I've done in two years.  All investors who have a bearish leaning should be willing to at least entertain these type blasphemous thoughts far more often than we do.  Who knows, it just might be good for the account. 

Have a great weekend.  Wishing you the best of success going forward.