XES update (deflation watch)

Leave it to a con man to use every single trick in the book for trying to obfuscate his moves.  Bernanke tapered in December to stay under economic RADAR. Of course, everyone expected a so called Santa Claus rally and all of the big traders take this time off of work.  So we really don't know how the market will react to even just $10 bn of tapering.  But it's a cinch that when the fed pulls back the punch bowl that there are going to be repercussions.  Nobody stays around long after the party is over.

I wonder if XES is starting to signal this.   In this previous post I modeled the XES chart as an ending diagonal.  Since I published that original XES chart (direct link), it did a 5th wave throw over and then came crashing back through the triangle's body and is now testing support from below.  At this point the ending diagonal chart model is still my top percentage pick.  The 5th wave throw over helped my case for an ending diagonal.  The break down (as you can see from the zoomed inset) happened in 5 clear waves.  The first wave down stopped at the top support line.  Then wave 2 up and then a very forceful 3rd wave down took out top support (just as one would expect to occur).

The fact that the wave has actually done a retracement back up into the channel is a minor detractor from this model but this would become insignificant if the chart finishes its a-b-c retracement (into wave 2) and then uses the power of the 3rd wave down at the larger degree to take out the lower support line for good.  In fact, I'm surprised that the first wave down from the top of the ending diagonal was able to take out both  top and bottom support.  That is bearish folks.  Most often I see that top support is taken out and then bottom support holds and the chart rebounds up in to wave 2.  Taking out both supports with 1 motive wave overshadows any bullishness gained by moving back up into the channel.  In fact, it had to go back up into the channel in order to a-b-c to the level of the prior 4th (which it is very close to right now).

So here is where the battle really starts.  Either the market retakes that top channel line in the next 5-10 trading days or it is going to flip south and break down big time.  Right now I give it a minimum of 80% chance of reversing south very soon and breaking down into a 3rd wave down.  If it breaks back below the lower support then those odds go up to 90%.  I think that would be just too much technical damage to recover from.

I don't think that XES is going down alone.  I see the entire market pulling back (and have been on S+P 500 and DJIA topping watch for a couple of months now).  With the threat of tapering starting I suspect that the markets will turn south and eventually force the fed to do more "accommodation" (money printing).  Gold and silver could take another whacking if the markets go down but at some point the government and the fed will have to tip its hand regarding stimulus: there is no way out that doesn't cause great pain.  They will choose to stimulate more since it seemed to work for the past 2 years but this time all it will likely do is send the price of gold and silver up again in a massive 3rd wave.

Bottom line: the federal reserve is not magic.  It cannot fix what is wrong with our economy or with the global economy (and these are now tightly coupled).  In fact, it created the problems in the first place by herding us all into a fraudulent money supply and everything it does to save the game only makes the final outcome necessarily more dire.  The fed can posture and pontificate and praise itself all day long but at some point the world will be saying in one clear voice that we have been running a global debt Ponzi.  When that day comes, expect major global upheaval.