The phony valuation of a credit juiced market is about to become obvious

Just this past Wed at 8:30 am central time before the markets opened I posted another warning about the shape of the chart of the S+P 500. That same day the S+P went into a nose dive and there was follow through again today.  As a result of this chart action, the the ending diagonal pattern that I wrote about has received its first confirmation: break down below the lower support line of the diagonal.

The chart below/left is the multi-year chart of the S+P 500.  It shows a clear ending diagonal playing out complete with a throwover on the "E" wave and now a breakdown below the lower green support line.  The inset chart on the right is a zoom in of just the final bit of the larger chart.  It shows the throwover running above the green resistance line, and then forming what most traders probably was a flag formation indicating more fun to come.  But instead of breaking out and up, it suddenly broke down and caused non-confirmation of the flag.  That is a run signal to any trading computer and so the computers sold the markets off.

If my Elliott wave count model is correct, we are playing out the 3rd wave of this 1st small wave down.  In the right hand inset I drew on the chart to model one possible outcome that is fairly common to see in cases like this: the so called "goodbye kiss" scenario where after breaking down through support the chart will rally back up, back test the support-turned-resistance (STR) line from below and then head down to a lower low.  I'm not saying that will happen, just that it's common and so it would not surprise me.  If this were to play out, I suspect the 5th wave will bottom at 1350 and then get a rally back up to kiss the STR line at around 1400.

This is when it would get interesting.  With waves 1 and 2 formed we would be facing a massive breakdown 3rd wave.  The power of this wave could easily crash the S+P 500 back below 1300 and in fact if it were an extended 3rd it could do far worse.  We are likely to see quick downward moves in this scenario, what I would refer to as "cliff diving".  Or perhaps more to the point this time, "fiscal cliff diving".  If that happens then it would be a 100% confirmation of the ending diagonal breakdown and anyone still in stocks at that time should have their head examined.  Of course I think stocks have been a really bad bet for some time now.  Despite the rally in nominal terms they have been selling off for a long time in relationship to real money (gold bullion).  Bottom line: I think this is a remarkably scary time to be owning any type of paper asset.  The deflationary forces at work are far more powerful that most people even dream of.  The stock market is little more than a Ponzi scheme at this point.

Click on picture for high resolution view.