I analyze macroeconomic issues from a fundamental perspective, and I analyze market behavior from a technical perspective. Original macroeconomic analysis can be found here and both macro analysis and commentary can be found on my Caps blog. If you like or appreciate my analysis, please add yourself to my Following List
My last post (Not All Five-Wave Moves Are Impulses: A Short Treatise on Elliott Wave) was looking at the rally since March 2009 through the lens of "Is this an impulse wave?". Specifically, we are observing a five wave move, but per my argument, a five wave move is not sufficient to define an impulse. The key is acceleration of the third wave. It must display more strength and dynamics than the first wave.
My friend Anchak asked me to look at the 1974/1975 bottom. This is a very good idea. This was the most recent secular bull market to emerge from a several year bear market, which makes for a very relevant comparison point.
The theory is that 1969-1974 was a vicious up and down bear market with a *severe* drop from 1973-1974 (about 50%). So perhaps the wave forms get distorted in an impulse wave after a severe drop? Let's see if this idea is backed up by the historical record.
First, lets put the SuperCycle Count from 1929 to 2000 into perspective. Here is how I count that wave, from my post (The Long View)
Next let's make some observations about the wave behavior, starting large and then zooming into 1975 area.
The SuperCycle Wave
As we can see, the point that I was making in Not All Five-Wave Moves Are Impulses: A Short Treatise on Elliott Wave, ... And when the market direction is determined by the herd, it does so dramatically and impulsively to break out of the tug of war. We see third wave accelerations in impulses from a 1 minute chart to a 100 year chart. And it is obvious that it is more than simply a 5-wave sequence that defines an impulse. ... does hold up. We see third wave acceleration at the Cycle Degree all the way down to the Subminuette. It is the defining characteristic of an impulse. Not the only one, but a very important one. One that, if not present, should really make you question its identification as a 3rd wave
Cycle Degree 5
Again we see acceleration in the 3rd wave. It is absolutely unmistakeable. We see it not only in Primary 3 compared to Primary 1, but definitely within the Intermediate 3 of Primary 5 extension. This is a critical (and obvious) tell that a third wave is at play.
Primary 1 of Cycle Degree 5
Okay. This is the first Primary Degree Wave after the major bear market low. So those wanting to call the move from March 2009 to now an impulse wave should pay attention to this wave closely.
We see Intermediate Wave 1 bounce off the low in an impulse. The next move, Intermediate 2, is a *very deep retrace* of Int 1 (78.6%). Wave 2's can vary in their complexity, but more often than not they are deep retrace waves (50% - 78.6%). Intermediate 3 is a very nice, clearly impulsive waveform, with Minor 3 of Int 3 *showing very clear acceleration*.
So the theory that a wave forms get distorted in an impulse wave after a severe drop is *not* supported by the historical record. The 1975 wave form is a very clean impulse with unmistakable acceleration in the third wave.
Now let's again compare to the March 2009 rally.
If a "5-wave" structure - Wave 2 retraced *significantly less that 38.2%* - Wave 3 is *substantially decelerated in comparison to Wave 1* - Wave 3 has a *very overlapping structure* that does *not* look like a third wave extension (most of the waves are sideways in overall progression, not vertically slicing through resistance)
The first wave of ANY impulse of ANY degree MUST ITSELF BE AN IMPULSE!!!. This is basic Elliott Wave 101.
Because this move is *not* an impulse, that rules out the possibility of a new secular bull market starting from March 2009. The fundamentals do not support that claim and the wave forms sure don't support that claim.
.... But then again, don't pay attention to me, no matter how relevant my observations are. I am just a permabear after all.
I am not Robert Prechter. I am not Steven Hochberg. I am not nor have I ever been a subscriber to EWI. I am not an Elliott Wave "expert".
I mention this because I come from Elliott Wave from a student's perspective. I like to figure out what the market is telling me and to try to interpret that through Elliott Wave. I pore over charts, probably more than is healthy (probably more than my wife likes). I do like looking at other people's counts, but I always perform my own counts first and see what makes sense to me before I consider how others see the waves.
I have read Frost and Prechter's Elliott Wave Principle many times. Probably over a dozen. It is an absolutely fantastic and indispensable resource. I have also read Robert Balan's Elliot Wave Principle Applied to The Foreign Exchange Market many times as well.
I mention this also because these two resources give you everything you need to understand wave movements. If you are rigorous in your charting, and a reasonably intelligent person (and I believe I am one), then de facto you are an "expert". The truth is, the concept is just not that hard to understand, which is the way any *true* concept should be.
So let's talk about waves for a minute.
Not any wave is strictly impulsive, nor is it strictly corrective. The are impulsive components to corrections and corrective components to impulses. I expect, I am hearing "no sh*t binve" through the internet backbone right about now. But what I am getting at is there is never a "perfect" waveform. But we derive meaning from the waves and how they develop and assign them labels.
The crowd doesn't get together and say "today lets be bullish" and from an impulse wave, nor does it say "time to correct". The waves are always a tug of war.
But when the tug of war sees one team getting stronger temporarily than the other team, we get an impulse. But more specifically we get the third wave of an impulse
This is the *biggest* defining characteristic between an impulse and a correction. ACCELERATION ON THE THIRD WAVE!! Otherwise it is just a tug of war, more or less evenly matched. A FIVE WAVE STRUCTURE IS *NOT* SUFFICIENT TO DEFINE AN IMPULSE! ACCELERATION OF THE THIRD WAVE IS KEY!
Like I said above, this concept is just not that hard to understand. We all know there are bulls and bears acting all the time. And when the market direction is determined by the herd, it does so dramatically and impulsively to break out of the tug of war. We see third wave accelerations in impulses from a 1 minute chart to a 100 year chart. And it is obvious that it is more than simply a 5-wave sequence that defines an impulse.
A 5-wave structure, that does not exhibit true dynamics in the third wave: acceleration (faster channel) compared to the first wave, increased breadth and volume, long candles that slice through resistance, etc. is nothing more that a complex correction (a triple-three). It is important to look at the subwave behavior, not simply the overall structure
What I am getting at, of course, is the move since March 2009. Currently it is exhibiting a 5-wave structure. But is it an impulse? As my chart below shows, no it is not. I have heard many people argue for it, but it does not make any sense to me.
Let me make this more explicit why I love this chart so much. I have two fast MA's that act as triggers and then a slow MA that is a trend follower. The McClellan Oscillator is a fast indicator. So I chose the slow MA such that it flattens out at the peaks! I was messing around with this chart and the MA's about 6 months ago and found this combination, and I love it! And what is the trend MA doing right now? It has flattened!. The triggers are there to help signal that things are slowing, and that is exactly what we got last week when I was writing about the MO (ad naseum). And it wasn't until Wednesday that we figured out that the pattern was an ending diagonal (it didn't impulse higher, even though it looked like it was going to early in the week). This is powerful stuff !!!
Trendlines are showing a nice breakdown from the orange line and finding support at the blue. If the MO is telling the truth (and I think it is) then we will break the blue line next week.
First things first. I am still bearish, very bearish. I am still very short (painfully so and deep in the red) from the shorts I established in mid-February. But before we get to the big picture, lets talk about the near term (next couple of weeks)
Minor Degree Wave up is Done (IMO) and Now we have *at least* a Minor Degree Wave Down
The McClellan Oscillator has been forecasting a trend change like I was pointing out in Mr. Plow, Rhizome and Tubers. The trigger MAs have definitively turned down and crossed and the trend MA is flattening
The trendline chart was showing serious weakness. One the orange trendline was broken, it was never really recaptured. Now we have at least a lest (and break I suspect of the blue trendline)
What this is telling me is that the next few weeks will be DOWN!!
... But is it the "Top" (of P2)?
It could be. Until we see 5 clear waves down in a impulse structure, with acceleration down on the 3rd wave, that is absolutely an unambiguously discernible on a 60 minute chart, there will not be a crash. That is the opening salvo. And even if we do see this, it DOES NOT guarantee a crash. But there is *no way* a crash will commence without this pattern. P3 is an impulse, and so the first move of P3 *must* be impulsive.
So if we see this, then I will be a *very happy bear*
.... But, my gut says the next move will not be an impulse. Here is the large count I think we are in. I think the next Wave down is Minor B of Int Z of P2.
There is another reason for why I think this. The NYSE Cumulative Advance/Decline Line has not been diverging. By diverging, I mean that as a measure of the internal strength of the wave, we should be seeing *weakening* internals. The A/D line should be making lowers highs near the top as price makes higher highs. That would be clear divergence.
Neither the A/D Line is diverging, nor is the High/Low line. Nor is the TRIN in any meaningful fashion.
But an indicator telling is we are getting close is that the daily breadth *spikes* are getting smaller and more infrequent. This move is *very* tired. ... But not dead yet IMO.
Many people in the EW blogosphere don't agree with my long term assessment of the dollar. That's fine. Most people don't agree with me on anything. I suppose I am a universal contrarian of sorts :) [is the word I am looking for contrarian or idiot?] ... anywhooooo.....
But just because I don't think the dollar is in a new secular bull market doesn't mean I think we can't be in a cyclical bull market.
So even though I am a long term dollar bear, this is still the time to be bullish on the dollar and I think this move has further to run up. A look at the DX today shows a sharp breakout (viagra-ish, you might say) out of the consolidation last month
"Mr. Plow, That's my name. That name again is Mr. Plow"
I was showing my the McClellan Oscillator in these posts of mine recently (Rhizome and Tubers). Here is my update, the fast trigger broke below the slow trigger as I was showing on Friday, and now it is below the trend following MA. Things are in the process of turning at the Minor Degree (or higher, but one step at a time :)
And an update from my trendline post Break and Retest shows that we are still churning under resistance. Very bearish.
12:30 - Sitting right at a resistance crossroads. Next move is critical
2:30 - Comparing August Rally to this rally (i.e. no comparison)
And there is another big reason why I am bearish on the Dollar long term: the EUR/USD count.
Now don't get me wrong. I am not Euro bull at all (being bearish the Dollar does not make me a de facto Euro bull. There are much better currencies out there). But there is a very interesting long term fundamental stack up between the Euro and the Dollar:
The Federal Reserve Note (the US Dollar)
-- The Dollar is governed by the Fed who is headed by politicians posing as economists and will *always* turn to the politically expedient action of debt monetization. Despite any rhetoric to the contrary, these are the Fed's actions. Until this is proof to the contrary, this should be the assumed going forward position. -- "But the monetizing cannot keep up with the rate that debt is collapsing and therefore we will have deflation" ... I don't buy this for a second. QE-I was the opening salvo, and if you don't think there will be a QE-II then I think you will be surprised. -- Essentially the US Dollar will be treated by our policymakers as economic toilet paper, who are not inflation hawks and will continue to perpetuate the myth that monetary inflation = price inflation and if we don't experience price inflation then monetary inflation is "ok" (THIS IS **WRONG!!!**. Monetary Inflation is a cause and price inflation is an effect. And like any cause and effect in economics there is a lag. By the time price inflation is generally detectable, the rampant monetary inflation will have created vast amounts of damage. These cycles have occurred many times and will occur again)
-- Right now the Eurozone is a mess of failing economies and unhealthy economic activity -- But painting Europe with a broad brush is not only misleading, it is incorrect -- Germany is not only by far the strongest economies in Europe, it is one of the strongest economies in the world. Germany is a saving society. The Mittelstand companies (small/medium firms, mostly family owned) is exactly the economic model that most of the western world should be following. High exports and a strong currency. -- So let me lay out this for a scenario: The Euro continues to have problems based on the constituent parties that have economies in rough shape (Greece, Spain, Portugal, etc.). But Germany and Switzerland, and to a lesser extent France and Belgium are in much better shape. What if the Euro morphs into a "consolidated" Euro based on the currencies of the stronger economies -- While still fraught with problems, I would still say on a relative basis the Euro has more future opportunity to become stronger than the US Dollar. Especially as the ECB is much more hawkish on inflation than the Fed.
Compounding the fact that in the world of Debt Saturation, economies and currencies that are based on real goods (such as the Canadian Dollar and the Australian Dollar) will outperform the US Dollar.
So, based on this argument, and the links at the beginning of the post, I am bearish on the US Dollar Index, and a number of Dollar currency pairs for the long term, and am more bullish on the Euro than the Dollar (not enough to *actually* be bullish, just as a relative measure) over the long term.
Here is the technical picture of the EUR/USD that backs up that story:
The move from 200-2008 looks like a very clear 5-wave move and we are in the middle of an ABC zigzag retrace.
The EUR/USD could do a double bottom for the C wave at ~1.20 (50% retrace), but I believe it will make a run for the support zone at 1.12 (62% retrace).
This means my long term forecast for the US Dollar is down (and no, that is *not* bullish for stocks over the long term as I explain here, as the stock market and the Dollar will resume their long term stance, which is positive correlation)
Just an update on my VIX thoughts. Is it done going down? Who knows. It is bottoming into strong support, but it has broken all kinds of support previously.
The charts I show below go along with my post Update on My P2 Projection. Specifically, I would be very eager to see some positive divergence on the VIX prior to a market top (i.e. the VIX start making higher lows [as an inverse indicator] before the market starts making lower highs)
But my preferred P2 count is that this thing will continue to wind up for the next several months, eventually reaching the 62% retrace of P1.
I believe we are in the middle of an Intermediate Wave up. I don’t believe this current Minor degree wave marks the end of P2. I do believe we will get a pullback next (maybe to 1100-1120 on the SPX), but it mostly likely will not be an impulse. Which means that it cannot be the start of P3 down if it is not an impulse.
Wave structures have meaningful Fibonacci relationships in both price and time. And the end of this wave has only trivial relationships with respect to P1. From my post: O Mandelbrot, O Mandelbrot
P2 might not be done. It might rally up to the 62% level (1240) and take us out to July (100% of time as P1). That is another scenario where P2 would still be a viable proportion to P1.
This (IMO) is the most likely terminus of the next big move. The 62% retrace level.
Right now the rally is tired. Both volume and breadth are decreasing on the way up. Tired rallies are a good sign that we are entering into the capitulation phase of P2. Bulls are in charge only because the bears are not putting up a fight. This is just a pathetic winding up of the tape. That said, I think we have a few more months of it after a pullback. I think P2 wants to head to the 62% retrace (~1230) in April/May/June/July. And I think it will be an even more tired winding rally than this one.
It won't even be a bear killer, the bears are already dead. This one will be a bull killer. Euphoria will peak. It is like the "Vomit Comet" (the plane NASA uses to acclimate astronauts to weightless conditions) at the height of its parabolic trajectory. At the top, the euphoria of weightlessness is exhilarating ... until your lunch starts sliding around in you. The bulls will have a similar "euphoric-yet-something's-not-quite-right" feeling around then.
Once the wall of worry is climbed and the bears offer no more resistance, only then will we have *the possibility* of crashing. And not before.
I have a pet theory that I have been noodling around with for awhile. One of the major tenets of Dow Theory is the idea of confirmations[that the continuation of uptrends and downtrends need to be confirmed by both the Industrials and the Transports (both making higher highs or lower lows together)] and non-confirmations[when divergence between the Industrials and the Transports take place (one makes a higher high / lower low while the other does not) it often signals or foreshadows a major trend change]
I have been watching the Transports start to make much different wave patterns than the Industrials at the Intermediate Degree for months. But I was confused because I thought the January top was likely the top of Primary 2.
But as of a couple of weeks ago I abandoned that idea and I now have a projection of how P2 can work out from an Elliott Wave perspective and still fit with the non-confirmation idea from Dow Theory.
The McClellan did wind down just a little bit more last night and this is looking like a clean trigger. A lower close today will all but cinch it.
The pattern chart is very interesting. Pink Trendline is broken and the Orange trendline is provisionally broken. We don not have a complete candle yet. But right now it is just churning under the line.
I am starting to get a whiff of a trend change
...... or maybe I ate too much broccoli last night.... change sure stinks ... :)
2:55 - still consolidating under the trendline .... interesting
3:40 - NYA has some nicely bearish developments. Lets see if it can muster a break of the blue support early next week
A lot of people have their pet theories on what a steepening yield curve means for both economic growth and the response by the stock market. I am no different, I too have my own pet theories. So lets dive in.
Let first talk about the current market on US Sovereign Debt ... The Yield Curve is STEEP.
This is not a simple "if the yield curve says this, then it means that". Anybody who refutes this statement is blowing hot air. There are a lot of factors that affect the yield curve behavior, they all work together and none of them are completely independent. Here are a few:
1. Inflation expectations 2. Debt Supply 3. Investor confidence especially by Foreign Governments 4. Artificial signals / curve manipulation
In this environment it pays to keep one aspect front and center that puts the rest of these factors into perspective: THE US GOVERNMENT IS RUNNING *MASSIVE* DEFICITS. The amount of supply is saturated. Budget control and fiscal restraint is out the window. So in this environment, the government is running the biggest deficit that the market will let it get away with.
What this does is that is biases the interpretation (in my opinion at least) in the realm of increased inflation expectations. This is why the long end of the curve is so high. The government is planning on solving the problem with more debt. This is no secret. This is the published game plan.
But there is another aspect that is much more interesting:
Since mid 2008 the short end of the yield curve went effectively to zero ... and it has stayed there ever since. Even after this "magic" recovery in the economy and the stock market, the short end of the yield curve stayed low.
Now why would that be?
Is the Treasury tightening the supply of debt? Nope. Like I said above, the government is issuing as much debt in all times frames, as much as it can get away with.
So why isn't the yield curve flattening they way it normally does in a recovery.
Because foreign Governments and large bond investors have been routinely buying the short end of the curve and dumping long term debt for short term debt. The US Economy is in a period of high unemployment and declining tax revenues, and spending is increasing not decreasing, and deficit spending is expected to be a bigger problem in the future, not a smaller one. The bond market is looking at this "recovery" very skeptically and keeping its money is short term assets, which are short term T-Bills/Notes. Essentially the bond market is staying in cash.
This should be most troubling to equity bulls who are fundamentally engaged in the recovery story. (Many have been bullish since March 2009 from a long "trade" perspective. Those bulls have made a killing and a very good call. I am not talking about them. I am talking about the Long Term Buy and Hold types)
So What Does This Mean for the Yield Curve Going Forward?
I think it is going to continue to steepen. I think there will be continue to be strong demand at the short end of the curve and I think the long end of the curve has higher to go.
And no, this is not bullish for equities:
Gary at biiwii has been talking about many of these issues for years, informing and educating. And he has been noticing some ominous patterns take shape on the yield history for many government debt symbols on the long end of the yield curve for the past several months.
Take a look at the possible inverted head and shoulders on the 30 year yield from his post: Inflation
Things will start unravelling in a hurry if this pattern comes to fruition.
Please feel free to comment, disagree, discuss. However, antagonistic or belligerent comments directed toward myself or any other commentator will not be tolerated If you like or appreciate my analysis, please add yourself to my Following List
The binve standard disclaimer:This in no way constitutes investing advice. All of these opinions are my own and I am simply sharing them. I am not trying to convince anybody to do anything with their money. I am simply offering up ideas for the sake of discussion. As always, everybody is expected to do their own due diligence and to ultimately be comfortable with their own investing decisions. Any actions taken based on the views expressed in this blog are solely the responsibility of the user. In no event will MTaA or its owner be liable for any decision made or action taken by you based upon the information and/or opinion provided in this blog or in any associated RSS or Twitter Feeds.