Monday, April 6, 2015

[$DJT] udate, big picture synch

The backlink warned of a potential Dow Theory sell signal.  While this has not yet occurred, the transports have clearly been stagnant to down.  The recent action could be interpreted as a 4th wave HT so I do not know if 5 or 5' will be the final outcome.  But this short term action should eventually break down to at least test the prior 4th as shown in the recent model as shown below.

At that point a major, major decision is going to have to be made by markets: follow EWI's model or follow Avi's.

EWI believes that the bounce from 2009 is a 3 wave "B of 4" of a very large degree.  They believe that the peak of dot bomb was actually the peak of a monster 3rd wave up and that what has transpired since is part of a simply massive expanded flat correction which should have the form 3-3-5. 

Here is a public post by EWI explaining their DJIA count in good detail.  This is a must read if you want to have any chance of understanding how, under EW principle rules, a higher stock market than the peak of dot bomb can in any way point to a future bearish collapse.  Keep in mind that at the major peaks we should expect the markets to be tricky.  And so they have been very tricky against the bears!

The condensed version of that link is that the peak of dot bomb was the peak of a monster 3rd wave,  the collapse into 2009 was A of 4 and consisted of 3 waves.  The current bull market is B of 4 and should also consist of 3 waves.  Once this bull peters out, EWI thinks we get 5 massive killer waves down in order to complete the 3-3-5 corrective pattern.

As you can see from below, if EWI is going to be right, the move up from 2009 cannot go much higher else it will not longer be 3 waves into B of 4.  EWI's model CANNOT account for a blue 5 wave at this point.  The most I think that DJT can do without violating EWI's model is around 10k and only that if my count is off by 1 wave.  In other words, 5' could continue up to hit the top rail at which time it would be the same length as red 1 which peaked in early 2012.  But even that is a stretch IMO.  The highest I think it should reasonably be able to go in order to red 5' is shown below at about 9400 and it's not even a given that 5' is going to happen.  The count looks perfectly complete with red 5 having occurred at 9300.

There are a few other indicators that suggest EWI is correct about their call:
  • Companies have been using debt at cheap interest rates to buy back their stock.  Low interest rates have created demand for shares that simply cannot last forever.  Company CEOs do not care about the share price after they have bailed out.  This is the nature of pump and dump.
    • Future earnings will be negatively impacted by having to service this new debt.
    • Much of the debt was borrowed short and will have to be rolled over at higher rates.  This will cause a death spiral in the worst offenders, none of which is visible to the market right now but which certainly exists just waiting for the right time to express itself.
  • Traders have leveraged up using margin, again supported by historically low interest rates.  Again, once rates begin to signal a rise that is beyond the control of the central banks, traders will de-leverage at the same time that companies stop buying back their own shares.  Supply of shares should skyrocket while demand for them plummets.  This is the stuff of declines that can happen at unprecedented rates of collapse.
  • Market sentiment is now at 30+ year extremes.  It seems as if everyone still believes in the Bernanke put even though the public is turning conservative and conservatives are adamantly against bailing other people out of their own self-created problems.  I do not believe that there exists the political will for another huge round of bail outs.  In fact, I think new conservative leadership is more likely to go actively hunting down the weak players and killing them off one by one so that everything doesn't collapse at the same time.  A slow mo collapse is FAAAARRRR more politically manageable than a rapid "we never saw it coming one".
The one thing that Avi's model has in its favor is the velocity of money chart shown below.  It has been plummeting for a couple decades now and we should be getting very close to 5 waves down being complete.  One would think that if VOM2 picks up rapidly that dollar weakness would occur and people would want out of dollars and into commodities and stocks and in fact anything but the USD would look attractive.  But given that VOM has been falling while stocks have been rising it is likely that there are other factors at play.  After all, the true fundamentals, IMO, are unknown and unknowable.

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