DJIA update

Bottom line: when the DJIA chart fell into the channel of the ending diagonal model and then popped back out, that was the first sign of real trouble for that model.  Today the options expiration volume helped push the DJIA to a higher high. Not much higher, but even 1 penny higher breaks the model.

So back to basics on the DJIA model.  Here is what we do know:

• The market prices are mainly driven by record amounts of credit.
• The federal reserve is behind it all but its balance sheet is stinking like old cabbage left in the sun.  As a result, interest rates are rising along with the real cost of living. 
• The fed helped pump up the markets with artificially low interest rates hoping to create a false sense of wealth that would cause people to go out and spend more money than they normally would.  They hoped to re-ignite the Keynesian "animal spirits" of the consumer.
• The powers that be are starting to understand that no wealth is trickling down.  All that is happening is that the wealthy are spending more on high end luxury items like art which benefit very few average workers.
• Unfortunately, the pumping is not free and the unintended consequences (or at least the ignored ones) have been that the wealth divide is getting bigger.  Many companies require a healthy middle class in order to thrive and the middle class is dying.
• Long story short, the fed is screwed if they do and screwed if they don't.  There is no "right answer" or "pain free/soft landing".  No drug addict avoids withdrawal pains and debt based consumption is a psychological drug in every sense of the word.  There will be withdrawal at some point.
• Rising interest rates (the 3rd wave up) is what will put the final sword into this bull.
• The fed will soon have to choose between sacrificing the asset valuations of the rich and sacrificing the value of the money (which really means sacrificing the middle and poor classes).  
• When rich get screwed they don't take up arms and kill public officials in the streets because they have too much to lose.  
• But poor and soon-to-be-poor people can feel hopeless as if money is everything and hopeless people don't care if they live or die.  
• Hopeless people are the root cause of domestic terrorism and other civil unrest.  Hey, don't shoot the historian on this.  The fault is with the pump and dump money supply!
• The long term chart of the DJIA (and the S+P) is clearly showing an expanding triangle in 5th wave throwover.  It has everything I would expect to see in terms of wave shape, time, symmetry, etc.  This model is the right one IMO and there is little that can change it given the already extreme sentiment and the extreme amount of margin debt already in play.
• All of this day to day chart watching is simply good fun for me.  Anyone who wants to make a killing without staring at charts all day long simple needs to wait on the sidelines with a pile of cash until the throw over breaks back down into the channel.  When that happens there will be little hope for this 5.5 year long bull market and shorts will have their way with it all the way down to the bottom rail..

 

With the failure of the recent ending diagonal model, I'm now looking at other things.  First off, the amount of throw over that is in effect right now is really about the minimum I would expect.  It would not surprise me to see it go a bit higher.  That's just an impression, no hard and fast rule there.

Now check out the blue vertical lines which measure the height of waves 1 and 3.  Right now, wave 1 is a bit longer than wave 3.  This is important because if this model is right it means that 5 cannot be the extended wave lest wave 3 be left as the shortest wave which is a clear violation of EW rules (that one is a rule, not a guideline).  If 5 grows to = 3, the chart would top out at 17925.  That's 1000 points from now.  If that happened it would cut TVIX by at least 30%, perhaps more.  This is why I'm out of TVIX for now, too much risk relative to more fertile ground in JDST.  Besides, if TVIX would go down to $2-$2.20 before really bottoming, what a gift it would be!  I'm not saying it will go there but we have to be aware of the possibility (see more below).

Many, many stocks have peaked already as documented in these pages and many of them have done so with ending diagonals.  I think that this C wave is still likely to end this way as well. Thus, here is my new model.  I'm not in love with it but we have to start somewhere.  It will not surprise me to see this change which is again why I am not in TVIX right now.

I do feel that Monday will begin a downward movement because the shape of the past few days is clearly corrective and you can see the a-b-c flavor of the most recent thrust in the picture below.  You can also make out what looks to be an ending diagonal at this viewing level. It could also go up. kiss the upper rail and then come back down.  Either way I think it will likely be a trade-able move but we have to watch for support at the lower rail.

If DJIA will do an ending diagonal upward, perhaps TVIX will do one downward and bring the price down to the mid $2 range where I really do think it should have a better chance of catching a bid.  But given the fact that I have no clear model right now for this, I am on the sidelines.  I just need to see some more chart data and, by the way, that is how it is supposed to be near turns. 

External observers are supposed to be confused at times like this.  If it were not true then the crocs would have an easy job of taking down the 'beests.  The wave clarity will return once the direction has changed because there will at that time not only be no need, but also no possible way to hide it anyway.  So instead of being obscured at that time, it will be flaunted. Bottom line: I would not hold this without a model I believed in but good luck to those who decide to do that.  Sometimes bravery is rewarded but usually short sellers are like pilots: there are old pilots and there are bold pilots but there are no old, bold pilots.