Parabolic moves

I've noted in the past that parabolic moves are not sustainable. Not on the upside or on the downside. We are now seeing an extreme decline in the CRB. I doubt this move is sustainable. As a matter of fact you can see on the weekly chart that we may be at the beginning of a bounce.

On the daily chart we can see that the trend from the last month has now been broken. Any bounce in the CRB will probably correspond to a correction in the dollar. As I noted in a previous post the dollar is now in a parabolic rise that will need to be corrected also. I think the odds are good that the dollar correction and commodity bounce is starting.

A different ballgame

I'm starting to hear talk in the media that the recession is probably nearing an end. If this was a normal recession I might tend to agree as most recessions only last 9 months to a year. I know this is going to be used as the excuse for why the market is going to rally. I'm pretty sure the rally will have everything to do with relieving oversold conditions and nothing to do with an improving economy.

I also know a great many investors are now positioning for a 70's style stagflation or hyper inflation based on the incredible amounts of paper currency being printed by the central banks of the world. I suspect most of these investors are expecting a return to that kind of investing climate. I was expecting that myself until recently.

I don't think we are moving towards that kind of scenario anymore, at least not for a while. I think what we are seeing unfold is something none of us has ever seen before. A whole different ballgame. Consequently I doubt that very few investors are going to be prepared to survive what's coming much less make money.

I'll start off by saying that I don't think this is a "normal" recession. Definitely not a mild recession like Abbey Joseph Cohen and many in the media want us to believe. No this is something much more dangerous. What we are heading into is a massive purging of all the excess debt built up over many years.

For all practical purposes our economy for the last few years has been built on a foundation of debt instead of real productivity. What does it say to you that 70% of GDP is consumer spending? A good portion of that spending was coming from inflating housing prices or credit cards.

As this debt bubble implodes the powers that be, who also have never seen this before, are taking the exact wrong course of action to try and "fix" the problem. I've got news for them, there is no way to fix this. It certainly can't be fixed by continuing to add more debt. Unfortunately that's exactly what is happening. Every week we get another billion dollar bailout. All of these bailouts are only adding more and more debt that will need to be either repaid or defaulted on. I'm pretty confident the ultimate path for a big part will be default.

So the more the governments of the world try to use the remedy that worked for the last 30 years the bigger the problem actually gets. It's exactly because we did go down the debt expansion road for so many years that we are in the mess we're in.

This is why on average the world experiences a depression every 70 years. The new generation never experienced the ravages of an imploding debt bubble so we take the good times as a sign of never ending happiness. Believe me an expanding debt bubble can be very pleasurable. I can say that quite a few people have been living high on the hog for a long time based purely on nothing more than ever larger debt. Unfortunately I'm afraid that almost no one foresaw the ultimate outcome of this false prosperity.

That outcome isn't going to be pretty and it certainly doesn't lead to a "typical" or even mild recession. What it does lead to are hard times the like of which probably none of us have ever experienced.

So when I hear the talking heads on CNBC calling for a mild recession and the end of the bear market I have serious doubts. Very serious doubts!

Dollar topping

I've been noting for a while that the strength in the dollar has been putting pressure on the markets along with commodities. I've also pointed out in the past that parabolic move are prone to collapse. I think it's safe to say we've seen a parabolic move in the dollar.

We are also moving close to the timing band for the 19 week cycle low in the dollar. Now that we have a swing high in place I think the odds are good the dollar has topped and will be heading lower for the next 5-7 weeks into that cycle low.

I expect this will take the pressure off the markets giving us the counter trend rally we've been looking for that should separate the first and second phase of the bear market.

The next phase will probably be accompanied by a much more orderly rise in the dollar.

Here's where I've been the last several days. Hanging out in the dirt of Utah's Canyonlands. I'm the scruffy one in the middle holding the vicious killer dog.

12 month moving average

I think we are probably within days to at most a week to 10 days of putting in a bottom. Granted I don't think this will be the final bear market low. That won't come for at least another couple of years.

As of today we are now on day 36 of the current trading cycle. The average duration is between 29-43 days so this decline is getting long in the tooth. Especially since the last cycle ran long at 45 days. Usually a long cycle is followed by a short cycle.

Either way we should be close to a bottom. A test of the 02 lows would seem to be in the cards at the very least. However that's not what I'm interested in. No I'm interested in the bounce out of this bottom. I suspect the rally is going to be amazing to say the least. I fully expect the market to test the 12 month moving average. That could mean a rally back to the 1200 level in very short order.

I imagine almost everyone will take that as a sign that the worst is over. However I really doubt that will be the case. We aren't dealing with a "normal" bear market. What we are seeing is the credit cycle coming full circle since the last bottom in the 1932 depression. This is commonly known as Kondratieff winter. This is the period where excess debt gets purged from the system.

Since we just saw the largest credit bubble in history I don't expect that we will accomplish this purging in only a year. It took several years back in the 30's and that was a much smaller bubble. Once the coming rally runs it's course I fully expect the market to roll over into the second bear phase. This phase will last much longer and probably result in much more damage than what we've just seen.

Possible 1-2-3 reversal developing

The market is working on a 1-2-3 reversal. If it can close above Mondays high it will complete the trend change. At that point the odds would favor that the path of least resistance has changed to up.

Todays rally in the face of short term overbought levels is another sign that the bottom for the year may be in. I'll have more in tonights update.

New charts

New charts are now posted to the Public Chartlist.