Monthly charts

I thought to start off the new year I would take a look at a few very long term monthly charts. First off let me say that I think this bear market is different than any other bear market we’ve experienced in the last 60-70 years. I think what we are seeing unfold is a complete deflationary collapse. This was brought on of course by the Greenspan Fed’s totally irresponsible inflationary monetary policy. True to form Bernanke is following right in his footsteps.

It does seem strange that inflationary monetary policy ultimately leads to a deflationary collapse doesn’t it? Unfortunately the incredible expansion of credit over the last 5 years has ultimately led to the same outcome as it did in the 30’s. The credit bubble now is imploding just like it did back then and it’s taking down not only the financial system and stock markets but also the global economy, just like it did in the great depression.

Amazingly enough the only way that Bernanke knows to put out the fire is to throw more gas on it. The bigger the fire gets the more gas they throw. Talk about a vicious circle.

Anyway on to our charts.

I’ve included the 200 month moving average on each chart. As you can see the S&P and Nasdaq have already sliced through these very long term support levels. The Dow, Russell and transports are in the process of testing the 200. Every index except the transports has already penetrated this support so I really doubt they will ultimately be able to hold above it. I also doubt that the S&P or the Nasdaq will be able to recover these levels at this point.

I think this bear is destined to correct the entire move out of the 1980 bottom. I don’t think we will move below that level per se but I also don’t think we’ve seen the lows for this bear at 740 either.

I have a feeling before this bear is over it will change our world and I suspect that by the time the bottom is reached the average investor will never want to see another stock as long as they live.

More dollar musings

Expanding on my last post I would remind bears that the dollar is measured against a basket of currencies. As the global recession wears on other countries are going to be tempted to devalue their currencies to prop up faltering economies.

The dollar is still the world’s reserve currency. In a time of competitive currency devaluation I suspect there will continue to be a flight to what is perceived as the safest global currencies. Namely the dollar and the Yen.

As of today the dollar is on the verge of completing a 1-2-3 reversal. A move back above the 200 week moving average at 83 would confirm the dollar is still in a bull market and deflation is still in the drivers seat.

I’m starting to wonder if the dollar is going to be at the mercy of who has the fastest fingers on the computer. Which ever countries can create money the quickest will ultimately win the coming devaluation wars.

The dollar has to collapse...or does it?

Trying to find a dollar bull right now is like trying to find the proverbial needle in a haystack. Everyone seems to assume that the Feds actions will condemn the dollar to the depths of hell. I’ll be quick to point out that the Fed has been on this course for almost a year now and the dollar has continued to rise.

Let me just say I’m skeptical. First off when everyone is thinking the same thing then no one is thinking. It feels like everyone is on the same side of the boat right now. That alone would make me nervous to be short the dollar.

Sure the Fed is printing like crazy but where is the money going? Well most of it is going into the banking sector. However the banking sector is basically crippled and any money flowing this way is just going to plug the enormous holes in their balance sheets. I don’t see the banks lending when they are still using any money to just stay solvent. If the money is stuck in the financial sector how is it supposed to get into the system and cause inflation?

I’ve thought for some time now that the world is entering Kondratieff winter. During this period the world will go through massive debt destruction. Sound familiar? During this period cash will be in short supply causing the value of currencies to rise. Sound familiar?

Even if banks were able to lend, who would they lend to? Real estate is still overpriced and lending standards have tightened. The first time home owner is now priced out of the market. Sure I guess it’s possible that banks could loosen lending standards and reflate the sub prime market. Do we really want to go through that again? Isn’t this lesson painful enough already? Are we really willing to going down that road again? No I would say the odds of reflating the housing bubble again are slim.

So we aren’t going to push money into the system through that vehicle anymore in my opinion.

How about lending to business?

Well we are in what will likely turn out to be the most severe recession since WWII or worse. What business is looking to expand in that environment? I doubt we are going to see a big demand for money from that front. I suspect business is now close on the heels of the banking sector. I expect in 2009 we are going to see massive small and medium size business failures.

In the first half of the year commodity based companies were looking for capital to expand. With the collapse of the global economy and subsequent crash in commodity prices I think that one is now off the table too.

I think 09 is going to be all about unemployment. People without income tend to hoard cash. Basic economics 101 too much demand and not enough supply equals rising prices.

Ultimately I do think we will see the dollar collapse but I think we have to get through the debt destruction phase first.

Have we hit bottom

I'm starting to see a few articles pop up suggesting that we have seen a secular bear market low. I remain doubtful. First off remember secular bear markets historically don't bottom until fear has moved P/E's to completely irrational levels, usually in the 8-10 range.

I'll also note that the degree of the decline is often proportional to the excesses of the preceding bull. This secular bull topped out with P/E's above 40. If that's any indication we should probably see resulting bear market lows eventually reach historic levels. My guess is that we could see P/E's in the 4-5 range before this is all over. Current estimates for reported earnings next year are now down to $42. Even if we some how manage to stop P/E compression in the 8-10 range we could still be looking at an S&P trading between 350-400 before this bear has run it's course.

Here's my problem with trying to call a bottom right now. First off our economy has been based on credit and consumption for sometime now. An economy based on people borrowing money and buying big screen TV's, Hummers and granite counter tops isn't exactly a healthy economy. Now we are faced with what will probably be the worst recession since WWII and possibly even the next great depression. That means rising unemployment.

Consumers that are unemployed can't spend money they don't have. If Americans can't spend then businesses in the US that live off of selling baubles to consumers are going to start hurting. When profit margins get squeezed businesses have one option either layoff workers or go under. As unemployment rises we have less and less consumers to hold up our "borrow and spend" economy. A vicious circle starts.

The government isn't doing us any favors. For some reason they seem to think that borrowing ever larger amounts of money and spending it on bailouts will somehow cure the problem. In a deflationary climate debt is a killer. I suspect a great many home owners are finding this one out the hard way right now.

As the economy sinks further into recession taxes will continue to drop making it harder and harder for government to pay it's debt. I fail to see how adding more and more debt at a time when it's getting harder and harder to pay for it is going to help us.

If Joe Sixpack loses his job but continues to increase his spending patterns, living off of credit cards, I fail to see how that leads to prosperity. What I do see is Joe eventually declaring bankruptcy. When that happens not only does Joe go under but the credit card companies get hit also.

Is the US is any different than Joe Sixpack? Can we continue to borrow ever larger amounts of money at a time when we are less and less able to pay this debt back and really think there will be no consequences? Not only are we on track to bankrupt our selves we are going to damage everyone who is lending to us.

It seems to me that the powers that be are doing everything they can to make this worse. Until that changes I don't see an end to this bear.

Let's face it, the leg is already broken, all the bandaids in the world aren't going to fix it.

3 part rally

A great many investors, myself included, have been expecting a powerful rally to correct the Oct. Nov. crash. I'm wondering if we didn't already get it. Instead of one big rally we've had three smaller rallies all of them at least 20%.

Normally a bear market rally will last 1 to 3 months and gain anywhere from 5-20%. As you can see all three rallies have been short in duration but they have all been in the very top range of the normal percentage we would expect to see from a counter trend rally.

We're starting to see quite a few sentiment indicators pushing back into extreme levels that have signalled the end to the other counter trend rallies this year.

The only thing that suggests that we should still have further to rally is the fact that the market is still very stretched below the 200 DMA. The fact that the market hasn't been able to rally prior to Christmas, one of the most consistently positive times of the year, makes me wonder if even 27% below the 200 DMA is going to be enough to get this market moving higher.

New rates

I’ve been debating for sometime on whether to raise subscription rates. On one hand I don’t want to make prices too high to where the average investor can’t afford it. On the other hand putting out a nightly and weekly newsletter at half the rate of almost any other product on the market can be a bit grueling.

I’ve decided to give myself a small Christmas present. Starting Jan.1 I’ll be raising the monthly rate to $20. The 6 month rate to $80 and the yearly rate to $140.

Anyone on a fixed income, student, unemployed, etc that might need a little help can contact me at gsavage4997@cox.net and I'll work out an alternate rate for you.

More point and figure charts

Yesterday I looked at the energy markets. Today I'm going to look at the general market indexes. Unfortunately the picture isn't any prettier here. Across the board we see double bottom breakdowns and bearish triangle breakdowns.

Also notice the Dow has closed back below the 20 DMA. Institutions watch this level. If this level is lost big money is probably going to be hesitant to buy.

The magnitude of the fall decline suggested that this was probably our single best chance for a big bear market rally. As of yesterday it's starting to slip away.

If all we can manage is a weak 1 month rally after the recent crash then this is indeed a very weak market.

It's been said that dumb money lost in the crash of 29 but the smart money lost from 1930-32. I see a lot of analysts calling for the bottom already. This is exactly how the market took everyone's money in 30-32. Investors tried to pick the bottom way too early. I really don't expect a bottom before summer or fall of 2010.

I'll point out that bear markets don't typically last only one year. The odds of this one now being done are slim.

Actually I suspect most individuals have not sold and are not willing to sell yet. It's the same old story that plays out in every bear market. Investors get caught with losses, they can't accept that they are going to take a loss and they hold until the losses become unbearable. Once that level is reached everyone sells and we have a bottom. We saw this play out in the 2000-02 bear market. We are seeing it still in the housing market.

It takes about 2 to 2 1/2 years before investors are "willing" to give up. That's why bear markets tend to last longer than a year. If the market rolls over here and breaks through 850 it will be a very bearish sign that we could already be seeing the next leg down. I doubt that anyone is ready for another leg down after weathering the recent crash.

Point and figure charts

I pointed out the breakdown in XOM in my last post. Today I'm taking a look at the point and figure charts for oil and the energy stocks.

It's not a pretty picture. We've got double bottom breakdowns across the board. I really thought oil would have mounted some kind of significant counter trend rally when the dollar broke down. It just didn't happen. As a matter of fact nothing except gold managed to bounce to any significant extent.

I'll say it again. Wihout energy participating it's going to be tough for the markets to sustain any kind of significant rally.

XOM

We need the energy stocks to participate if this rally is going to be sustainable. The break down of XOM today on expanding volume was not very encouraging. This on a day when oil closed up too. CVX and COP also closed down on expanding volume. I think the best the market is going to be able to do is trade sideways if energy stocks can't rally.

That's exactly what has happened over the last couple of weeks. Keep in mind that XOM and CVX are the number 2 and 3 weighted stocks in the Dow. If they fail here it is going to be a drag on the industrials.

I still think the intermediate term rally is intact as long as my line in the sand at 865 isn't crossed.

Is the Dollar correction over?

I think yesterday's big reversal in the dollar likely marked the low for the T1 correction. You can find the technical rules on the lower right side of the blog.

A move back above 80 would be confirmation of sorts that the dollar is ready to resume it's longer term rally.

I'd have to say if the dollar can't drop even after the Fed has cut rates to zero that's quite the signal that the deflationary trend is very powerful.

I included the long term weekly chart so you could see that for the first time in 7 years the dollar has moved back above the 200 week moving average. That's a pretty good signal that the recent move wasn't just a counter trend rally. If it was it shouldn't have moved above this long term average. A move back above the 200 WMA would be further confirmation that the deflationary trend is still intact.

The rally in 05 was a counter trend rally and it was unable to penetrate the 200 WMA.

If the longer term trend is reasserting then commodities are going to come under pressure again.

I think it is probably significant that only gold benefited from the recent decline in the dollar. We should have seen a bounce in all commodities. It never materialized though. That probably says a lot about the supply and demand fundamentals right now.

Gold back in bear market mode

It appears that the counter trend rally in gold has about run it's course. Yesterday GLD was rejected by the long term trendline. Today it has moved back below the 200 DMA.

Looking at the long term chart we can see the 200 DMA has rolled over. The 50 DMA is below the 200 and declining steeply. That looks like a bear market to me.

I trimmed my core position in metals even further yesterday.

There is a T1 pattern that may be playing out in the dollar which would suggest that the decline there may be about over. If the dollar is ready to resume it's upward trend then gold is probably ready to resume the longer term down trend.

Bond bubble

Bonds now appear to be the last bubble waiting to pop.

Unlike the dollar this parabolic move is occurring at the end of a 28 year bull run. This looks like an ending move to me. Either way this is the definition of a parabolic move and as such it’s prone to collapse. For the last 8 years the world has jumped from one bubble to the next. First it was tech, then housing, then commodities (specifically oil) and now its bonds. We have become incapable of moderation. I’m not sure if there has ever been a time were investors have been so irrationally controlled by their emotions that they have to produce multiple bubbles one after the other.

I have got to think anyone with a lick of common sense can look at that chart and see the same process going on that pushed oil to $147 this summer. Namely everyone is jumping on what they think is a sure bet. The current thinking is that since the Fed has threatened to buy bonds and target long term rates then bonds are a sure thing.

But lets think about that for a second. Can the Fed really accomplish this goal with no consequences? Is it really as easy as turning on the printing presses? Has the world really seen a paradigm shift and we can now get something for nothing?

Let me just say I seriously doubt it. There is always a consequence. If the Fed goes down this path the dollar will likely crater. Since we need to borrow over a billion dollars a day to keep our country solvent what is going to prevent our creditors from dumping our bonds if the value of the currency comes unglued? What's the point of holding a bond that pays 2% if the value of the currency depreciates 10, 15 or 20%. Not much I would think.

Anyway back to our parabola. If this collapses like all parabolas do I think there's a good chance the money that's been going into bonds will go back into stocks and commodities.

Still stretched

I'm already hearing targets for where the rally is going to top out. I guess it's not surprising given the incredible beating investors have taken over the last 3 months. We are understandably gun shy. I doubt anybody thinks this market can rally more than another 50 to 75 points before the bear takes over again.

Let me just remind everyone that all markets regress to the mean. There are no exceptions. Sometimes it may take a while but they all do it.

Now I want to revisit a trade that some of us put on back in Oct. That would be the 20 under the 200 trade. Usually bear markets aren't able to stretch much more than 20% below the 200 DMA before snapping back at least close to the mean. We witnessed extraordinary times this fall. Markets got more depressed than just about any other time in history. We saw breadth extremes that have never been matched in history. At the bottom the S&P was 40% below the 200 DMA.

I think the regression to the mean is now underway. However the market is still 24% below the 200 DMA even after today's rally. So by any historical standard this is still a market that is extremely depressed. I still think we have a good chance of moving back up to the 200 DMA before this rally finally rolls over.

Setting up for another breakout?

Last week I pointed out the crawling action of the dollar and the mining stocks. Often this precedes a strong break either up or down depending on the setup. Both the dollar and the miners did in fact break strongly above the 50 DMA in the case of the miners and below the 30 DMA in the case of the dollar.

We now have a similar situation setting up on the Dow and S&P. Both are crawling along the underneath side of the 50 DMA. Since I think we've put in an intermediate term low the odds are probably good that this will also break strongly to the upside.

I thought this was an interesting article and it ties in nicely with my recent Guru post. With out risk control even Nobel prize winners are ultimately doomed to failure.

dollar woes

By closing below the Nov. 25th low the dollar has now completed the 1-2-3 reversal I've been watching for. We now most likely have an intermediate term decline starting. We need to correct the parabolic move out of the July lows.

As we can see on the weekly chart that rise is now starting to fail. Parabolic moves are never sustainable and they invariably end in collapse. This one certainly looks like it's going to be no exception.

I'm already starting to hear comments in the media and especially from the gold bugs that the dollar is toast and the run is over. If this parabola had occurred at the end of a multi year rally then I would be inclined to think this was indeed an ending pattern. However this move came out of a severely depressed multi year bear market. This is more likely a beginning pattern and not an ending pattern.

The rally in the dollar is due to one thing and that is deflation. That process is hardly over. I dare say it's just beginning. Once this correction has run it's course the odds are that the dollar will turn and head to new highs.

More in the weekend report for subscribers.

gdx

In the last post I pointed out the "crawling" pattern on the US dollar index. I noted that often this pattern leads to a swift breakdown.

We have the same thing occurring in the mining stocks as the GDX has broken up after crawling along the underneath side of the 50 DMA.

I pointed this out to subscribers several days ago in one of the nightly updates. I think the action in the precious metals sector is warning that the dollar will break down soon. When it does I wouldn't be surprised if the GDX tests the 200 DMA.

Dollar crawl

We've been looking for weakness to develop in the dollar as a necessary ingredient for any market rally sustainability. I've been pointing out the "crawling" action in my nightly updates as a sign of a coming break. Yesterday the dollar finally broke down out of that pattern. Often when this pattern breaks a quick move down to support will unfold. Support for the dollar would be at the consolidation zone of the T1 pattern between 76 & 80.

A move back to that level would likely correspond with an impressive rally in stocks and especially commodities.

Just another sign that we have probably seen the bottom and are starting an intermediate term bear market rally.

Searching for a Guru

Investors are always on the lookout for the next Guru . That special someone who has the market figured out. I can tell you it's been going on since time began.

So what should we look for in a Guru? Usually they are men. Often young men. Almost all Guru's think the way to beat the market is with a very high success rate. When a Guru gets on a hot streak they almost always want the world to recognize their ability. This is where the peacock dance and chest beating come into play as they proclaim to the world their superiority over the masses. If their streak lasts for a while they will gather quite a flock of sheep to lord over. Invariably they come to believe that they have in fact mastered the markets.

History is full of these Gurus, some of them legendary. Unfortunately history is also full of the broken bodies of Guru's whose system quit working and they didn't see it coming.

I've got news for you. No matter what Guru you follow, what system or indicator or technical analysis you use, it will eventually quit working.

Whenever something starts to work too good the market will discount it and it will stop working. The more popular a Guru becomes the shorter his lifespan usually is as the market will start to fade him. A good example is CNBC's Jim Cramer.

I have to shake my head when I see investors touting this or that system. Usually they can point to an impressive record of calls as proof that their particular Guru or system is the only system for making money in the market. If these people had actually studied history they would know that when any system starts to produce amazingly accurate returns then you are getting close to the top.

Examples are everywhere. Look at the tech bubble in 2000. At the time it was obvious that we had achieved a new paradigm shift and tech stocks would continue higher forever, earnings or no earnings. We have the same picture in real estate in 05 and 06. It was obvious to all that we had a shortage of available land and an excess of population. If that wasn't a combination for ever higher real estate prices I don't know what is. Recently it was oil. The world had reached peak oil and everyone knew we would never see $100 a barrel again. This theory while it sounded very plausible as oil was hitting $147 may have had a leak or two in it. The collapse of commodities recently took down oil Guru Boone Pickens when he failed to recognize in time that the assumptions he had based his investing on weren't entirely valid.

We can find similar examples with indicators that suddenly fail to work like Joe Granville's On Balance Volume indicator. For a while back in the 70's Joe had a hot hand. When Joe spoke markets moved. I guarantee you that any system, whether it be the COT, cycles, technical analysis, pattern recognition or following the latest Guru's prescient calls is destined for failure once it becomes too popular. As a matter of fact once a system starts working really well you would be best to become very nervous.

There are ways to become rich in the market. One of them is by compounding over a long period of time. Another is to get in a the beginning of a secular trend and hop off at the top. We've just seen how hard that is to do as many investors got caught in the commodity collapse.

I can almost guarantee you the way to get poor in the market is to follow a system or guru with a very high success rate. It sounds counter intuitive doesn't it? The problem with having a very high success rate is that we become convinced that we have in fact discovered a way to beat the market and we start to bet too big. So that when the market decides to take away our system or kill our Guru we quickly lose all of our hard earned profits.

I invariably see the hot Guru's talk about "betting big". Once you start seeing those kind of statements you know your Guru's life expectancy is short.

Freak out meter

To say this has been a tough market would be an understatement. As I browse the blogosphere I see just an amazing amount of indecision and yes outright fear that we might have another leg down. From a contrary point of view that's probably a good thing.

I think all we need to get a rally going is for oil to bounce. It's funny that last summer high oil was killing the market and now we need oil to rally so we can sustain any upside in the market.

As always human emotions are in control. Back in June and July oil was obviously trading purely on greed with no regard to fundamentals. As always these extremes are eventually reversed and now oil is trading purely on fear, again with no regard to fundamentals.

I do think oil is destined to reverse soon. Actually I know it's going to reverse because nothing just goes straight down forever. At the low today oil was trading almost 60% below the 200 DMA. Let me say that again. 60% below the 200 DMA. That my friends is just incredible. Not even silver or sugar which are both far more volatile than oil have moved that far below the mean. As a matter of fact I don't know of anything off hand that has stretched that far below the average. It's even fairly rare to have an individual stock trade that far below the 200.

The gold:oil ratio is now at 17 barrels per oz. Again levels we've not seen in 10 years.

I'm seeing stories in the media predicting ridiculously low prices for oil. I saw similar predictions for $170, $200 or even $300 oil at the top this summer.

Now for an explanation of the title. I've noticed that very often when I get an uncontrollable urge to sell into weakness it usually ends up being either the exact low or very very close to the low. Today I had an almost irresistible urge to sell all my energy positions. On top of that a lot of subscribers emailed me freaking out about their energy stocks.

I have to ask myself does it really make sense to sell with oil 60% below the 200 DMA? Is oil really going to $25, $20 or $10 in the near future? Does the world really have any other serious alternative to oil?

Just like high prices are the cure for high prices, low prices are the cure for falling demand. With gasoline priced under $2.00 in most areas and under $1.50 in some I have to wonder are we really still seeing demand destruction?

Recommened services

I often get asked what newsletters or services I like. Of course there are a ton of them out there but here are the ones I like.

http://sentimentrader.com/
For sentiment data and historical stats Jason Goephert is the best in the business in my opinion.

http://www.cyclesman.info/
I've sampled many cycle proponents but I think Tim Woods is at the top of list. I use him almost exclusively for anything cycle related. Whenever my view of the current cycle doesn't match his I get nervous.

http://ww2.dowtheoryletters.com/
For Dow Theory Richard Russell is the only one to go to. If I'm not mistaken Dow Theory Letters is the oldest continously published newsletter in exsistence.

http://www.lowryresearch.com/
Lowry's service is indispensible for money flow data.

The many blogs I read are mostly posted under my blog list.

Where are we headed?

Yesterday was another 90% down volume day. That makes twelve 90% down days so far. This is just an incredible amount of selling. I continue to believe that this is trying to tell us one thing and one thing only. The next depression is heading our way.

But things aren’t that bad you say. Sure you probably can’t sell your house but we don’t have 20% unemployment and we don’t have bread lines…yet.

However, the extreme left translation of the current 4 year cycle is suggesting that we will. We simply cannot create the largest credit bubble the world has ever seen and expect to escape unscathed. (I tend to believe we can’t escape without a train wreck). Depressions aren’t created overnight. I suspect by this time next year we will have at least 10-15% unemployment.

Here’s the thing though. I hear some talk about a depression in the media and from the average American but at this point I don’t think anyone really believes it can happen. I get the sense that everyone thinks we learned our lesson in the 30’s and we will never make those kinds of mistakes again.

Here’s the problem as I see it. It appears that everyone thinks the depression was caused by the Fed’s actions after the credit bubble started to deflate. Namely reducing the money supply, protectionism and raising taxes. However, in my opinion the actions leading up to the depression are what caused the hard times and no action by the Fed after the fact was going to stop or help the situation. Maybe we won’t make those mistakes this time around, although I think the government is probably going to resort to protectionism and higher taxes. I get the feeling the powers that be, namely Bernanke, believe that as long as he expands money supply we won’t go down the deflationary path that we did in the 30’s.

What I don’t see is any one acknowledging that we already have gone down the same path that created the depression in the first place. Namely, we created another huge credit bubble. That’s what caused the depression in the first place and we obviously weren’t smart enough to avoid that mistake all over again. Instead of Bernanke studying the 30’s maybe he should of studied the 20’s. If Greenspan and Bernanke had paid more attention to what caused the Great Depression in the first place - instead of the measures used to try and fix the problem - we might not be in this mess.

Actually I suspect we would anyway. Why you ask? Because human nature never changes. I can tell you that pretty much every human being on the planet who sees how well two aspirins work is going to automatically assume that four aspirins will work twice as well. That my friends is the exact mentality that got us into this fiasco. Greenspan saw how well printing and cutting rates worked in '87 and decided that since it worked then it would also work in 90, 94, 98 and 2000. Then Bernanke came along and when things started to crumble in 06 he decided that if 2 aspirin had worked in the past then 100 aspirin should work marvelously now. Unfortunately 100 aspirin will only kill the patient just like the Fed’s credit bubble has now killed the global financial system with the global economy following close behind.

Despite all that I think, until conditions get truly desperate people will continue to delude themselves that this is just a recession like many others. As such we should be approaching the end soon, right? Well if this is a run of the mill recession then I would agree and expect the market to bottom soon and start discounting better times ahead. However, as I’ve pointed out many times in the past, the extreme left translation of the current 4 year cycle is saying that this is anything but a run of the mill recession. We’ve never seen a 4 year cycle roll over this fast. Not even in the 30’s. What the market is trying to tell us, in my opinion, is that we are now facing Kondratieff winter .

Historically, Kondratieff winter (a depression) happens about once every 70 years. It takes about that long for the market to forget what caused the last bust. Of course what caused it was rampant credit growth. As credit starts to expand exponentially it eventually leads to a deflationary bust as the market cleanses debt from the system through massive defaults and bankruptcies.

That my friends, is exactly what we are experiencing right now. So it doesn’t matter what tactics Bernanke, Paulson, Obama or anyone else use, we’ve already made the mistakes that allowed the credit bubble to form. Once that happened there was, and is, nothing that’s going to fix or stop the collapse of that bubble.

Back to my earlier thought that people are probably expecting the recession to end soon. I think we will need to see that kind of mentality in order for any rally to take hold. Granted it will start simply because selling pressure will eventually exhaust itself, it may already have. Once the rally gets started in earnest, investors will convince themselves that the market is discounting the end of the recession....more in last nights update.

Dollar key

Yesterday I pointed out the 1-2-3 reversal in progress in the S&P. We also have the same pattern forming in the dollar.

With today's move down the dollar has put in another swing high. It's now set up to complete the pattern if it can close below the Nov. low.

I've marked the timing band for the weekly cycle low with the light blue box. If the dollar is completing a T1 pattern (explained in the weekend report) then we should see the buck move back down to test the consolidation zone between 76 & 80.

I suspect this move into the weekly cycle low will correspond to an intermediate term rally in stocks and commodities.

Another 1-2-3 reversal???

On Friday of last week the S&P just did break above the down trend line. With today's move lower we are now set up for another attempt at a 1-2-3 reversal.

As of today the trading cycle is on day 35. The average cycle runs between 28 and 43 days. We could see another move back down to and possibly even another attempt at a 2b reversal before the final bottom of this intermediate decline is in.

I will be watching the buying into weakness data as a sign the smart money is ready to step in and buy any pullback. Insiders are already buying at levels never seen since 74.

We should be days away from a final bottom if we haven't already put it in.

4 day rule

With today's positive close the S&P has signaled a Sperandeo 4 day rule possible trend change.

The rule says that after a long intermediate decline or advance 4 days in a row in the opposite direction is often confirmation of a trend change.

I have a feeling that if we see the market close above the Nov. highs we are going to start seeing that performance anxiety that I've been warning about.

Buying panic?

In the last several posts I've gone over my take on human nature. The one constant is that it never changes. The other dependable is that we always go to extremes.

Well we just got the negative extreme. We may now be ready for the positive extreme. I pointed out in last nights update that all the short term indicators I watch are at extreme overbought levels. Usually this is the recipe for a pullback. In bear legs it's the recipe for another move down. On top of that we saw huge selling into strength yesterday (explanation in last nights update). I was expecting this, as selling into any rally has been very profitable the last 3 months.

However the futures are up strong this morning. A market that just rolls right over short term over bought levels is a strong sign of a bottom . Once the market becomes convinced the bottom is in we could see a buying panic on par with the selling panic we just saw, as money managers chase the market trying to improve their year end numbers.

I suggested in the weekend report that market participants would probably come in at the beginning of the week looking to sell the rally. I also thought they could get burned on the short side if this market had in fact bottomed. Yesterday they did get burned and burned bad. Not only that they missed a 400 point rally. All those that sold heavily at yesterday's close looking for the market to fall today are now in the red at the open. If a buying panic does start they will take more losses and miss another chunk of the rally. We have the ingredients in place for a runaway bear market rally. Will it happen? I don't know, we'll have to wait and see. I do know that I'm not willing to lose any of my long positions right now.

I would be very nervous about shorting at this point.

What a leg!

If we put in the final bottom for this leg down on Friday then this was the second largest percentage decline in history at 43.5% in 3 months and 7 days. Only the initial crash in 1929 exceeded this with a decline of 45% in 2 months and 6 days.

Does anyone remember Newtons third law. For every action there is a reaction. The same holds true for the stock market. The more extreme the decline the more extreme the counter trend rally. Action/reaction. In 1930 that 45% initial decline produced a counter trend rally of 50% in a matter of months.

Do I think we are going to see something similar? Yep I certainly do. I've stressed over and over how human nature never changes and I guarantee it still hasn't. We have the mother of all counter trend rallies coming. It's going to make everyone believe that we've seen the ultimate lows for this bear market. I guarantee it. I really doubt 741 is going to ultimately prove to be the final low but I think it has a good chance of marking the intermediate low.

I think anyone short the market is now taking a big risk of getting caught in an explosive move up. Everyone has to decide for themselves if they are willing to risk going long in a bear market. That being said counter trend rallies can be extremely profitable in bear markets. The catch is that intermediate bottoms are hard to spot in real time.

At this point though even if one doesn't catch the exact bottom the expected violent rally should be so powerful that any timing mistakes will be trivial. That is if you are willing to take long positions. Bears that just can't bring themselves to play both sides of the market might just consider going to cash until we have signs that any rally is running out of gas.

I would caution against trying to sell to quickly as I expect this rally will go much higher in percentage terms than anyone can imagine at this point.

Was breaking the 02 lows significant?

As expected the break of the 02 lows is bringing out all the technical traders now calling for a total collapse of the market. Maybe and then again maybe not.

Major tops and bottoms are often accomplished by the markets breaking major support levels. The dumb money investors jump heavily into a trade that they think is risk free. At the same time the smart money takes the opposite side of their trade.

We saw this exact pattern play out at the 02 bottom and the 07 top. Could we be seeing it in action now? Maybe!

We know the 22 week cycle is due to bottom anytime now. Yesterdays total panic into bonds suggests we saw completely irrational capitulation. Public short interest is at record highs. Cash sitting in money markets is at levels not even seen at the 02 lows and insiders are currently buying stock at levels last seen during the two weeks after the 87 crash.

All that being said, should one jump in right now? I'm going to suggest that a close above the 10 day moving average might be a safer entry and provide a margin of safety that we have in fact seen the weekly cycle bottom.

Reaching levels only seen once in history

At yesterdays close the S&P was 36% below the 200 DMA. There has only been one other time in history where the market has stretched further on the downside. That was at the bear market lows in 1932. The upside is that every time the market got anywhere near this stretched below the mean it was quickly followed by an extremely violent rally.

That being said I think we are very close to the bottom time wise. The daily trading cycle and weekly cycle are now in the timing band for that low. Smart money is starting to buy on sell offs. Dumb money is panicking. We have the ingredients in place for the mother of all counter trend rallies.

All that being said we probably need to put in at least two more down days before this is over.

Details in last nights update.

New 52 week lows are not confirming the recent decline

On Oct. 10th 92% of all stocks on the NYSE made new lows. So far that has been the internal bottom for this market. On each successive decline fewer and fewer stocks have been moving lower. Most of the stocks on the NYSE are not confirming the new lows. Not what you want to see happening if you are heavily short.

As of today the current trading cycle is on day 27 (the average length is between 28-43 days) The odds are very high that this trading cycle low will also mark the 22 week cycle low. The odds are also good that we will see a powerful counter trend rally out of this low.

Thursday's 2b reversal may have marked that low. At this point it remains to be seen. Either way we are getting very late in the cycle to be short. Sure we very well could see another move down but I dare say at this point it seems like that is what everyone is expecting. It seems like many bears are now anticipating a move to 500 quickly. I'm not so sure this bear market is going to make it that easy on the bears though. Remember the market will do what ever it takes to fleece the most participants. As of today the dumb money confidence was back down at levels that have marked intermediate lows in the past.

This late in the cycle I would rather be long or in cash than risk getting caught on the short side hoping for a few more days of declines. If the weekly cycle bottoms the ensuing rally could be deadly for bears caught on the wrong side.

Take a look at gold on Sept. 17th if you want to see what can happen as a weekly cycle bottoms in a bear market.

Where to now?

I'm going to take a guess and say investors at this point don't know where to turn? I suspect blog traffic is high everywhere as shell shocked investors frantically look for the market guru that can tell them what's going to happen and what they should do with their investments.

I'll make a few observations for what it's worth.

First off you might as well quit searching. No one knows what's going to happen tomorrow or the next day. We are already making history on a daily basis. The only other time in history even close to approaching what we are seeing now occurred in the 30's. Even then many of the extremes were far less than today. So expecting someone, anyone to have any realistic insight at this point is probably wishful thinking.

At times like this (granted there hasn't been any "times like this" before) I always try to remember one important fact. A fact that never changes no matter what the fundamental environment or technical basis of the market is. Human nature never changes. We are currently experiencing a level of pessimism never seen before in the last 100 years. If there's one thing I do know about human nature it's that we go to extremes. The other thing I realize is that these extremes can't be maintained for extended periods of time. (Extreme pessimism is harder to maintain than optimism. It's one of the reasons tops usually take longer to form than bottoms.)

Remember back in the summer when it appeared that oil would never stop going higher? The current bleak outlook will eventually burn itself out just like the excessive optimism in the oil market burned out. So unless human nature has changed the current negativity will be followed by extreme optimism.

So what do we do right now you ask? Common sense would suggest that human nature being what it is, extremes should be faded.

At the moment I have no idea if the market will continue lower or not. I do know that I don't want to short this extreme pessimism. It's usually much more profitable to short the other extreme...euphoria. I do think we will get the opportunity to do just that at some point as I think this bear will not be done until at least 2010.

At this point though I'm pretty sure the risk reward is better on the long side. However as I noted in my previous post I don't think we are going to spot the bottom with any of the tried methods. At this point I'm thinking more in terms of time than any technical or oversold levels. I'm pretty sure that if one is patient human nature will run it's course and eventually the tide will turn in the other direction.

I suspect that while we wait for that tide to turn most traders trying to pick the bottom are just going to take many losses and only manage to whittle down their account. At times like this it's probably better to just take your stand and do something else besides watch the market all day. Perhaps now is a better time to think like an investor than a trader.

Those pesky patterns

I noted some time ago that Trading patterns was becoming too popular. I'm becoming even more convinced that it is going to get harder to succeed in the markets by TA alone. By that I not only mean pattern recognition but levels of support and resistance are not going to mean much during this bear market.

I suspect this bear is going to take away almost every tool that investors use to try and get an edge in the market before it's over. And yes that may mean the COT reports go out the window also.

I've included a recent example of what I'm talking about.

In the first chart we see a nice triangle consolidation forming. Often these are continuation patterns. Since the market had been falling apart it seemed reasonable to assume that it was going to continue to fall apart. The pattern breakdown suggested this was likely the case.

However moving on to the second chart we see the market quickly negating the triangle breakdown. A negation of the triangle should have been a very positive sign. A V shaped rally at this point would not be unexpected.

Umm not so fast with the rally. The triangle negation got negated. Whew is anyone else getting dizzy?

Granted this is just one example. But I think this kind of TA will only get worse as this bear market continues. I also expect levels of support and resistance to regularly fail only to quickly reverse course as this bear wears on.

One example that I think will be tested at some point is the 1200 level on the S&P. If we get the large rally that I think will separate the 1st and 2nd phase of the bear market it seems logical to expect the 1200 level to be tested. That was a major breakdown point. I'm guessing there will be many a bear that will go heavily short at that level.

I also suspect the market will likely push right through that level and take all the bears to the cleaners before reversing at a higher level and dealing out the same beating to all the bulls who will view a move above 1200 as proof the bear is dead.

I'm afraid this is going to be one tricky market to negotiate in the next couple of years. The extreme left translation of the current 4 year cycle suggests that the ultimate bottom when it does arrive is going to be much lower than anyone thinks or can even imagine at this point. However the road to that end is going to be anything but straight.

I'll elaborate in more detail in the weekend report.

I'm back

I'm back and working on the weekend update.

Out of town for the weekend

I will be leaving Friday morning to, you guessed it, go climbing for the weekend. I won't have the weekend report out till late Sunday evening. I also won't be around to respond to new subscribers. It wouldn't hurt to wait till Sunday if you wish to initiate a new subscription as I won't be able to respond till then anyway.

BTW we got a 2b reversal today. Old timers here know what I'm talking about. If you don't, just enter 2b reversal in the search bar.

Dollar Cycle

The rising dollar continues to pressure all asset markets. At times like these it seems like conditions will never change. I guarantee they will though :)

Over the last year investor emotions have been swinging to extremes. Why should now be any different. Last summer oil rallied to heights that convinced everyone that it was different this time. We were never going to see $100 again. However as we know that wasn't quite true.

Right now it seems like the market will never rally again and that the end of the world is near. At some point sentiment will turn and if the last year is any indication it will move just as violently in the opposite direction.

Part of the key is the dollar. We are now moving into the window for the weekly cycle low. The daily cycle is now on day 9. The average duration of the daily cycle is 18 days so we should be getting close to the top. I'm looking for the next swing high as the potential top of this run. At that point the dollar should start to work it's way down into the weekly cycle bottom. Once this process starts I expect it will spark a counter trend rally in all asset markets.

Forced selling

As subscribers know I'm not only bullish on the general market right now but I'm especially bullish on two sectors. One of them is mining stocks.

The last time the XAU traded as low as it did in Oct. Gold was around $325 an oz.. With Gold now priced more than 2X higher than that I doubt the mining industry is in any danger of bankruptcy, unlike the financial sector. If miners aren't going bankrupt then the only reason I can see for such ridiculously low prices is simply forced selling. Other wise know as emotions run amok.

When the market does something stupid I want to take advantage of it. No matter how I look at this it still looks stupid. Miners should be a big beneficiary if the market rallys.

McClellan Oscillator

One of the signs that the market is trying to put in an intermediate bottom is a quick flip in breadth. One of the things I watch for is a move above the zero line by the McClellan oscillator. Usually once this occurs the oscillator tends to hold above zero for a month or more.

We just got that move into positive territory. Consider that this move pushed the oscillator to levels not seen in 10 years and that it came from the most depressed level in 10 years. Just another sign that the market is likely setting up for a very powerful 4th quarter rally.

If and when the 1-2-3 reversal completes and signals a trend change I'm guessing we are going to start seeing performance anxiety from many fund managers as they try to improve their yearly numbers. That should add fuel to the fire.

I still think the market will likely trade up to and maybe even past the 200 DMA before this rally exhausts itself and the market rolls over into the second phase of the bear market.

Shall we try again?

It looks like the market is trying to form another 1-2-3 reversal. The last attempt failed. I think this one will likely succeed.

1-2-3 reversals

We now have several complete 1-2-3 reversals. I'm focusing on oil and gold. Specifically I want to take note of oil. The reason is that as oil collapsed it never really tested the 200 DMA. Seldom does an asset, especially one that's been in as powerful a bull market as oil, just slice through the 200 DMA and never look back.

You can see on the gold chart that recently gold shot back up to and above the 200 DMA. I think the odds are good that oil is also going to pop back up to the 200 DMA before rolling over again later this year or early next.

I've also included a long term chart of the CRB. Commodities are now bouncing off long term support. This looks like a logical level to launch a powerful counter trend rally.

Finally the dollar is also on the verge of completing a 1-2-3 reversal. I noted in a previous post that the dollar was likely topping and the weekly cycle bottom was due sometime between Nov. 7th and the beginning of Jan. As the dollar works into that bottom it should take a lot of pressure off all asset classes.

Capitulation or no capitulation?

There seems to be some debate about whether we saw enough of a decline to represent capitulation at the Oct. lows. I've seen everything from "the decline was too orderly" to "they didn't sell them hard enough" used as an excuse for why the bottom isn't in yet and this rally is going to quickly fail. Let me point out that we are always going to hear that at bottoms. I heard it at the 02 bottom.

Now take a look at the charts and you tell me if we went far enough to represent capitulation. Volume spiked higher than any other time in history. New lows pushed higher than any other time in history. As a matter of fact new lows almost doubled any other low in the last 28 years.

The Vix spiked to almost 100, again dwarfing any period in the last couple of decades except maybe Oct. 87.

So what do you think? Does historic extremes never before seen in the history of the stock market represent a selling climax or not? Some times I have to wonder how these people can come up with these off the wall ideas. Actually I know exactly how they come up with it. They went short as we were making new lows and now they are on the wrong side of the trade. They are trying to rationalize why they should continue to hold on to a losing trade.

As we've witnessed many times, investors want to be right more than they want to make money. I mentioned some time back that when I turned negative on energy a portion of my subscribers who were energy bulls left. I can't tell you how many e-mails I received trying to convert me back to bullish. Fundamentals this fundamentals that. Fundamentals be damned it was a parabolic spike for heavens sake. That has nothing to do with fundamentals and everything to do with emotions.

I'm getting the same thing happening now with many of the bears who some how aren't satisfied with a historic decline. They think the market should somehow go straight to zero. I'm not even sure that would satisfy some of the perma bears. Now that I don't confirm their position they need to find someone else who does. Again it's more important to be right than to make money. I suspect that when the rally runs out of steam and I turn bearish again many will be back but likely with a smaller portfolio because they couldn't take the small loss when they had the chance and they couldn't change their mindset.

Now let me say that anything is possible. The market could roll over again quickly and break to new lows. However the odds are against it. If you bet against the odds you will eventually lose. That doesn't mean that you will always win by betting with the odds either, just that your chances of making money are greater. I've got news for you. Since none of us can see the future the best we can do is to keep the odds on our side.