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.