I wanted to try to make a wave count to make some sense of the structure of the DJIA. I wanted to use Elliot Wave theory as a basis for at least giving me some ideas about where we are in the overall wave count. If you look at the 2007/8 top and follow the breakout from the triangle at the top, then you can come up with a count that put us at the lows of 6500, completing a 5 wave cycle. I think that it's safe to assume that the sell-off that ended in March of 2009 capped that 5 wave cycle.
Where Are We Now ?
The next question that arises is where are we now ? A five wave cycle usually corrects in 3 waves (ABC). "A" being the first move off the V bottom, "B" being the pullback and "C" correcting back to Wave 4. After hitting point "C", the market started to meander, uncertainty about the move up or down from that triangle. The Breakout took place beginning right around September of 2010 and completing Wave 1 right around 5/2011. The market got weak as it usually does after May and pulled back to the apex of the triangle correcting Wave 1. Wave 2 completed right around October 2011. Wave 3 has begun and has recently pushed higher, just recently breaking out above Wave 1 point.
A Pullback Negates The Count
What's unique about this count is that if Wave 3 were to terminate now and pullback below point 1, it would negate the wave count. One of Elliot's rules is that Wave 4 never enters the price territory of Wave 1. It would appear that Wave 3 will need to continue higher, so that when it terminates and pulls back to Wave 1 it will not violate it.
13,136.69 and 12,715.02, Two Important Numbers
The retracement of the original breakout in 2008 terminated at 13,136.69 on 5/19/08. It was the second attempt to push back into the triangle. The first attempt was on 5/2/08 and failed at 13,132.46. That attempt failed and price pulled back to 12,715.02. It bounced off that level reaching the 13,136.69 and the failure was epic from that point.
Today the DJIA is at 12,982.95. It's right in between 13136 and 12715; It's trying to push higher. If it can gather the energy to push above 13136, then there will be significant confidence that the market will be moving higher.
Failure Here Is Epic
If we fail at this level and price moves lower, then one could make the argument that the entire move from 6500 to 13000 represented Wave 2 of a major down market. This would be disastrous for markets everywhere as the expectation would be that Wave 3 moving lower would take out the 6500 bottom. The fear and panic that would be created would be severe. It would destroy people's confidence in markets.
The Case For Further Gains Driven By QE3,4,5...
The correlations recently with the US dollar, have been a weaker dollar, drives our equity markets higher. Recently, some of my analysis indicates that the US dollar may be starting to turn. If we experience any weakness in the US Equity markets, that would suggest price is going to be moving lower, validating the Wave 3 scenario, then I firmly believe that the US will enter the markets with QE3,QE4....QE.. etc. as they cannot risk the hit to confidence that would ensue from markets taking out the 6500 lows.
Can We Draw Parallels With or Compare the 1929 Crash ?
When you look at the 1929 Crash - it becomes evident that the key point occurred in the 1950's. Price was able to push back above where it had come off the top in 1929. If we compare that point in the 1950's when price pushed above the breakdown area to today's levels - the glaring difference is that passage of time. It took 20years to regain enough confidence in markets to push price higher. Today it has been about three years since we bottomed in 2008. Not enough time has passed. This might lead one to question whether we are in fact, still just in a reactive bounce off the lows of 6500 - or if confidence has indeed been regained and we're entering a new bull market.
Why Is There Confusion In Financial Markets Today ?
I definitely believe that the uncertainties created by the large fiscal pumping of money into the system by governments has resulted in confusion for investors. While the money machine has resulted in higher asset prices, thereby supporting markets, it has at the same time created doubt amongst market participants. Investors are confused. Investors know that the huge monetary stimulus provided by all world governments has resulted in higher stock prices; however the fear is that we all know at some point the day of reckoning will come and the government will either be forced to stop providing stimulus due to higher bond rates resulting from an ever increasing cost of funds.
Leverage Has Not Been Reduced
Leverage is what created the financial crisis. Banks taking excessive risks destabilized the system. Banks have been provided with liquidity today by the central banks, but that liquidity has come at the future expense of government citizens. The liquidity has not reduced overall leverage. It has just moved it out of view. That high degree of leverage still exists within the financial system; however, it now is an obligation of each world government - held on the balance sheet of each central bank, shared by all its' citizens, in lieu of a financial obligation shared by only the shareholders/bondholders of a particular bank. Governments, by providing liquidity for banks, have enacted a "cost" or "burden" upon societies everywhere. Citizens around the world will be forced to pay down the debts that have been created by central banks. This will be a drag on future economic growth. Market participants know this, and for this reason may yield to caution when deciding to push more money into equity markets.
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