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Saturday, March 6, 2010

Examination of the Large Technical Landscape / Possible Paths

Okay, we are at point in the rally where Technical and Fundamental Analysts need to do some soul searching. Obviously nobody can see the future. Even those that called this rally up to date correctly could not see the future. All you have is risk/reward and probable outcomes. And those that have been bullish have been handsomely rewarded.

But is this a new secular bull market? Is it a bear market rally?

So let's discuss the options. Obviously these are my opinion. No way around that. In fact any analysis is an opinion: Regarding Economic Debates and Opinions: The Fallacy of "Purely Objective" Analysis. Bulls can tell the bears that they have not been objective during this rally, or vice versa, but that is quite plainly untrue. We all have to call things like we see them. And some people will see things correctly and some won't. Just part of the game. Pure "objectivity" has nothing to do with it.

The options are:

1) We are in the midst of a secular bull market
2) We are at the top of a counter-trend bear market rally and will begin crashing soon
3) We are still in the middle of a rally - cyclical bull market in an overall larger bear market

** Option 1 - We are in the midst of a secular bull market

I have to be honest, I find no evidence of this. Besides a lot of bullish rhetoric, the positive economic developments either result from government stimulus or from an inventory rebuild cycle. Neither one is sustainable or fundamentally healthy, or even begets fundamentally healthy behavior. All the great bull markets throughout history have started from the savings of the the citizens of a country making large capital investments. Practically the exact opposite is happening today.

First, here is my argument fundamentally for why the economy is not in a recovery and why we are not in a secular bull market - The Long View

Second, here is my technical argument for why this is not a new bull market

The move off the bottom is not an impulse wave. Just because the market goes up, and goes up a lot, does not mean the move is impulsive. Corrective rallies can be steep and bring tremendous returns.

The next great bull market will begin with an impulse wave. But to be an impulse, the internal wave structure has to conform to one. And this one does not.

** Option 2 - We are at the top of a counter-trend bear market rally and will begin crashing soon

This is my preferred count and the one that I lay out here: The Long View. It is fair to say that I am very bearish on the economy.

I will not discuss it in-depth here, because I have done so comprehensively many other times. Here is my current count:

** Option 3 - We are still in the middle of a rally - cyclical bull market in an overall larger bear market

However, what if we don't crash soon? What if we wind higher? Wouldn't we be in a secular bull market then?

Not necessarily. We could easily be in a Cycle Degree X wave. It is an option that I have discussed briefly in the past. Here is what it might look like:

Here is how the "fast" Cycle Degree X Wave might pan out:

I do have a basis for this wave count. If you want to see a stock market that has been in a painful correction for decades, witness Japan's NIKKEI:

Notice that there are times of sideways activity and even rallies that last for a couple of years. But the long term direction is clearly down.

Japan had a huge bull market run, and after the peak has been correcting for the past 20 years. Mired in government debt, high real estate prices (artificially propped), and an aging population increasingly going into retirement in a higher proportion.

So for the bulls who think this is an honest to goodness new secular bull market: after a 67 year rally we are done correcting in 9 years? And despite the myriad of problems we face (similar and in many ways worse than Japan) The Fed and the Treasury wave their magic wands and we are ready to start the next major bull run? Just a question.

I am not saying we have to crash next. I am showing a possible continuation of the rally in the charts above. But it is important to realize that it is a bear market correction (which are volatile and subject to abrupt endings) and not a bull market.

As always, just my $0.02.
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