Friday, February 22, 2013

Charts 02-22: Setup for the top

When the recent retrace stopped at 1397, instead of crossing the larger channel to the SPX 1480 area, it suggests that it belongs with the recent set of waves, and not the action before the New Year.

i.e. the move up from SPX 1343 looks more and more like it counts in 3 waves -- A, B, and C -- with a strong possibility of C finishing up this week into the coming turn date.

Monday, we should pull back on the UK downgrade (released after market close, of course) and then rally midweek with the Bernanke testimony, just, well, just because.  We'll look for an ending-diagonal shape and will especially dig it if it can terminate off the bearish wedge overhead.  That's the setup.

SPX 02-22

Stay frosty.  And listen to Burt!


Sandor said...

Christian, as I'm new here, why are you wedded to the Elliot Wave theory? Do you have experience with successful forecasts using it? Our physical reality perception is structured on probability waves/fields. I'm not a fan of 'determinsitic' theories like EW as quantum physics has exposed determinism as a narrative fallacy. That said, I generally agree with your forecast, to a point. I'm not sure if the waterfall begins in earnest this spring, summer or fall. I'm also not sure why you think the S&P goes all the way back to 500? This would require the central banks abandoning QE because they start losing too much money on their bond purchases, no?

Also, I don't think the UK downgrade is going to mean much as the market has been expecting it as inevitable and the pound has already been plummeting in sympathy with this expectation and further QE. I think if the Italian elections fall right with Bersani managing a coalition that will be much more meaningful. If the election leads to a hung parliament, watch out below in the coming weeks.

Bicycle said...

January petroleum demand lowest in 18 years

"ultra-low-sulfur distillate deliveries (down by 4.4 percent from January 2012)"

Ultra low sulfur distillate is their fancy name for diesel fuel. That's so you don't realize that semi-truck traffic is down 4.4% YoY.

Bicycle said...

The graph here:

...also does a great job of showing how relatively insignificant the US production increases referenced in the API report are.

Bicycle said...

Cars, Charts & The End Of The Road

Christian Gustafson said...

Yes yes yes. Poor Jim Kunstler is going to work himself into a coronary over the energy propaganda and lies coming from our leaders these days.

Christian Gustafson said...

Sandor --

I am fascinated with E-W and how the fractals of impulse waves and corrections play out over time. Whether we are watching human emotions of fear and greed, or the guts of algorithms behind the scenes, somehow the tape plays out in patterns that fit very consistent rules. Even the algos have human controllers, who will pull them or reverse the rules at some point.

The closest thing E-W has to an "exception" or a mulligan is the X-wave. "Um, here something happened, and then we got back on track again."

The Big Question is to what extent E-W has any predictive power. I maintain that you have to marry it with quantitative analysis, other chart work, creatures like the McClellan Oscillator. It's part of a toolkit, all of which we need to use to make sense of this. That's McHugh's approach, too.

I'm still really operating in the outlook of the old poster NoThing from TickerForum, banned long ago, who held that we would see a period of severe deflation (the "priceless dollar" theory) before we reached a bottom and it would become "worthless". I use NoThing's avatar image as the favicon for this blog, as a small tribute to "her".

I remain fascinated with the tape from 2007 to 2009, and am using it as a baseline for what may lie ahead. Unlike a lot of E-W people, I count that cycle as ABC, and NOT a 5-wave impulse down. I think that is an important distinction. Waves A and B are the bull and bear fight, which happens with the SPX holding above 1000. Collapse follows (C down) when the bears win the argument.

So here's my thinking here. We're in this giant bearish wedge, which begins at about SPX 1158. If it holds, that is our target for its initial break -- SPX 1158. This is our "A" wave, and it will be violent and contentious. The bear market rallies will be fierce.

From 1525 this would make an "A" wave of 367 pts. The "A" in 2008 was 320 pts, giving us a fib-friendly ratio of 1.146x between the two waves.

I took the rest of the 2008 tape and expanded it by a ratio of 1.146, while keeping TIME consistent. Amazingly, the resulting model nails areas like 1370 and 1220 as important future highs, and takes us down to SPX 482 in a final screaming collapse.

On this model, the "waterfall" central waves of "C" down begin at the very end of December, 2013.

So I ask myself, what could that mean? Germany pulling out of the Euro? That would do it. The Fed pulling QE? Hmm, only if they are forced to do so, it would have to be only in desperate defense of the $USD. Something like that. If we get to this point on the charts, some crisis will find its way out of the box.

The coming collapse is an important event, the last chance to use the equity markets in a way that matters. It is simply magic that you can transact shares or contracts in this virtual place, take your profits, and go out and buy a bag of groceries.

I'm dug in, I've got my model and a healthy dose of skepticism, and I'll do the best I can with this.

Blogging and posting my charts is a way to remain accountable, to my ideas and my mistakes, to reach out to fellow-travelers and friends, to share ideas and compare notes.

Sandor said...

Outside day #2. Sell signal confirmed. The battle has begun in earnest. Italian government bonds and JPY crosses now driving the ship. The deleveraging that would crush equities has to come from forced selling to cover bond portfolio losses. The Central Bank war is in the government bond market. If Italy doesn't play political ball with the ECB/IMF mafia, things will go haywire in a hurry.

Christian, thanks for your thoughtful reply. For me, EW is too messy. Since it's subjective anyway, I tend to think about triggers and market structure rather than specific price targets. But yes, S&P going to 500 print is conceivable, if only to the small band of market observers that see a deflation tsunami 50 miles out beyond the veils of fog. The 99% is still looking for 1600. There will be plenty of dip buyers on the way down.