Friday, January 20, 2012

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.

25 comments:

  1. stop it ...you're scaring me ! Nice post though AR.......I will stay an anxious bear and keep it in mind...nothing is impossible in this kabuki world.

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  2. Thanks for checking it out bud.  And thanks for not completely crucifying me for at least investigating or questioning the unthinkable and totally illogical alternative.  The single most damaging word one investor can call another person is "capitulator".  The connotations of that word are so negative, so accusatory, so polarizing, that many investors are afraid to even look that the alternative for fear of being brought before the court and being judged a traitor.  Smart investors are singles.  They are not married to any one camp.  In real life I am single, so why have I had such a difficult time being smart about it?  I dunno man.  But regardless, out of respect for others and a deep conviction that everybody has every right to change his mind without criticism, I have never once, not once in my life, ever uttered that word to another, for that very reason.  He has a right to change his mind.  Who was it who said: "When the outlook changes, I change my mind.  What do you do sir"? (or something to that effect)

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  3. Thanks for checking it out bud.  And thanks for not completely crucifying me for at least investigating or questioning the unthinkable and totally illogical alternative.  The single most damaging word one investor can call another person is "capitulator".  The connotations of that word are so negative, so accusatory, so polarizing, that many investors are afraid to even look that the alternative for fear of being brought before the court and being judged a traitor.  Smart investors are singles.  They are not married to any one camp.  In real life I am single, so why have I had such a difficult time being smart about it?  I dunno man.  But regardless, out of respect for others and a deep conviction that everybody has every right to change his mind without criticism, I have never once, not once in my life, ever uttered that word to another, for that very reason.  He has a right to change his mind.  Who was it who said: "When the outlook changes, I change my mind.  What do you do sir"? (or something to that effect)

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  4. When the facts change, I change my mind. What do you do,
    sir?


    - Keynes, attributed

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  5. Blow me down - Alberta's turned BULLISH!!!!

    In all seriousness, though, if the mood on Daneric's site is anything to go by, this is a hell of a fractured market. Plenty of anger, defensiveness and plain rudeness. Finding its not really worth sifting through these days.

    It's certainly a big week next week, what with various purported cycle turns, Fed meetings and Euro crises. Don't know if any of you follow Steve Koteles and his "animal spirits" projections, but next week onwards is a big period for him too. I've started layering in shorts for the first time in a few months based on a number of things. Disappointing Prechter put out a sell alert the other day but I think EWI has lost a lot of credibility - Hochberg has been telling people we're jujutsu

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  6. .....juuuuust about to fall off the cliff into the abyss, aaaaany minute now. No, now.... hang on, NOW!

    Anyway, I'm off to learn how to work this iPad before I do any more damage. "Jujutsu" I ask?? Enjoy your weekends.

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  7. AR, maybe the market will finally drop now that you have turned bullish, just to mock you. But there is certainly a lot of hurt and angry bear who capitulated on this move up. The consensus seem to be the market will not drop. So many longs are waiting for a pullback to get long again. And yet the market keeps going up. Maybe when they chase the move it will finally reverse

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  8. Thak you AR,
    for reminding us of those upside possibilities. I am short, hoping for a (small) bearish turn next week. But have been flirting with the long side before, unfortunately without the necessary stamina and follow-through. Examples bot XIV @ 5.00 (over 8.00 today) and SLV @ 27.30 (over 31 today), but either got stopped out or sold too early because of my bearish bias. So your reminder that the bull side is very much a possibility is most timely and welcome.

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  9. Solid AR and really appreciate the posts - you are way too kind to share. Gosh darn it's hard to wrap my head around more upside from here, but this damn thing has been a meat grinder of late and wouldn't be surprised if indeed we do continue to churn higher.
    Gotta take it one day at a time in the Land of Oz - inch by inch is a cinch, but yard by yard is hard

    Be careful out there

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  10. Thanks for at least looking at it KB03.  I doubt many people could put up a good an argument as I can why we should be bearish.  But god damn it, we've seen this rodeo before.  I'm so suspicious that the shadow banking system is up to some very dark and very dangerous shenanigans that none of us are aware of.  Having said that,  I am still expecting the level of 1267.06 to be taken out in which case the bear is very much alive.  Maybe I'm nuts, but I'm short.  All I'm doing here really is asking the question "but what if" that level (top of yellow wave ((1)) isn't taken out and the market surges for another high?  And in the process puts in a very clear 5 wave sequence higher.  That would an impulse no matter how we slice it.  Please see how I responded to WaveFour just below.  I could copy and paste that same reply right here.

    Have a great weekend :-)

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  11. You and I both know you have to keep an open mind in this business...consider all the options ...course the trouble is that can lead to paralysis ! bit of a razor's edge but that's the nature of the game.
    BTW I remembered the name of that Canadian "anarchist" I mentioned,it was Jeff Berwick.Expect you've come across him

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  12. A top formation is a function of all the trades placed in 'anticipation' of a top. It is therefore, imho, largely a function of the greed (as opposed to fear) that still dominates the market(s). Computers, trading algorithms, leveraged/inverse funds, lack of historical perspective, unhealthy obsession with gambling and patterns, inability to properly assess risk, moral hazard, excessive margin, online trading...just to name a few of the elements in the wrong hands contributing to stock market (and now real economy) dysfunction. The market is being manipulated all right but not by the Fed or any of the big investment banks to the degree asserted by the bears who, like Pogo, will eventually realize "we have met the enemy and he is us." Once a critical mass gets 'religion' (hopefully before getting broke) and stops uselessly expending resources trying to pick a top (or a new bull market), they might be surprised (or shocked) just how dramatically, true price discovery begins to reassert itself. Unfortunately human nature, being what it is, virtually guarantees when assets eventually mean revert or undershoot very few will be left standing to take advantage.

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  13. Hi AR. Belatedly, thanks for that long reply to my question about refinancing my mortgage. You didn't have to make that long, second post since I understood clearly what you said in the first post. What I was trying to understand was what made you think credit would become tight. But...let's move on.

    This article about another view on the EW count is very interesting. As usual regarding the future, we mortals simply don't know. I'm going to keep my mind open to all possibilities.

    With regards to the question, will it be a deep, totally demoralizing deflation, or will it be a shocking, super inflation?....I have to admit, I'm very wary of the inflation scenario. Which is why I'm kinda anxious to lock in the rate in a refi. I don't know enough about macro econ/finance to know whether it's possible to have a simultaneous deflation/inflation scenario - deflating hard assets like houses and inflating assets in other classes like stocks, food, gasoline, and loans - but in my very confused, ignorant mind, anything is possible in this crazy world.

    As for trading, it seems to me that the only modality that is sane is day trading, with no strong directional preference. Because it just seems, at this particular juncture, very unclear.

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  14. It's a compelling argument and the clock is ticking on the bear case.

    Here is Elliott's grand supercycle count from "Nature's Law" with a peak this year

    http://oi40.tinypic.com/1563i3m.jpg

    He didn't have complete records from the 1800s but it looks like wave II would have had to be a rare running flat

    http://oi40.tinypic.com/efmgw7.jpg

    Lesson for us now is there was a worldwide deflationary depression from the mid 1870s to the mid 1890s but the market still marched up

    http://en.wikipedia.org/wiki/Long_Depression

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  15. always easier to be an anarchist if you're a self-made millionaire ! but I watched a couple of vids and he seemed like a good guy ! night pardner its late here !

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  16. Geez... I didn't even realize that the market marched higher during the first great depression.  The first part of it ran from 1873 until 1876 and in that period, the Dow crashed about 35% before it found a bottom.  But

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  17. The ~35% sell-off from 1873-1879 was certainly nothing to sneeze at!

    Where'd you get the 19th century DJIA data?  Are those monthly closes?  (II) was pretty messy.

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  18. AR, There's no doubt that the greater severity of the Great Depression compared with the panics and depressions of the 19th century was due to the Fed's monetary polices in the 20s.

    The boom bust deflationary cycles of 1800s came at a time of rapid expansion of new technologies and industries displacing old ones. Asides from the ones you mentioned which were diffusions of earlier developments, steel production and electricity really took off in that period. In a lot of ways, technology was far outpacing the social and political frameworks (especially in England). In other ways it was simply creative destruction at work.

    The panics were apparently triggered by attempts to manipulate the money supply, so the banksters figured they would do a better job? Not likely.

    One thing's for sure. I'm going to watch S&P 1267 level like a hawk. We're pretty overbought here so a pullback is in order somewhere soon. I think we'll know soon which way that count will pan out.

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  19. Sorry for not properly attributing the source. That was from Pater Tenenbarum's blog. He doesn't usually mention EWT, but last year he did a study on it. I thought that was one of the clearest charts of that period I've seen. I assume it's monthly but I'll ask. If you have a copy of Pretcher's At the Crest of The Tidal Wave, in chapter 2 he shows a monthly & yearly chart from that tike period and it appears the waves are similar, although he counts the first power trough as the end of wave II.

    http://books.google.com/books/about/At_the_Crest_of_the_Tidal_Wave.html?id=xvLpnGKVNHEC

    Most of the book seems to be available for free on Google Books

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  20. Thank you much.  My intent wasn't to be critical; rather, I thought you might have access to the raw data, which would be fun to play with...

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  21. You two are the type of people who are a pleasure to have around here.  Just sayin'. :-)

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  22. AR, thanks for both the links to the long washingtonsblog article (fairly persuasive thesis but with a few weak points, imo) and the 2 hour youtube program. That program was *very* interesting. It was *the most* thought straightening statement on the gold versus fiat debate. Thank you much!

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  23. I'm more pleased that you took the time to watch the video than you are for the link, lol.  And you're more than welcome.  Just in case you're interested, I'd also highly recommend Chris Martenson's The Crash Course.  This video is a 45 minute condensed version of his 3.5 hour original.  If you wanted to see that one, just hit his "home" link.

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  24. http://blogs.parc.com/blog/2011/10/the-second-economy/

    More on what could possibly cause the stock market to grow while regular people get left behind

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