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Saturday, October 19, 2013

Saturday, 10/19/13 update

Let's recap the last couple of weeks.

First, the Obama administration announced the selection of Janet Yellen as the replacement for Ben Bernanke as the chair of the Federal Reserve.  She is a Keynesian and is known as a monetary dove.  Really, all you need to know about her and what her program for the Fed is likely to look like can be inferred from this excerpt from an article about her that appeared in the NY Times:
"As the central bank’s vice chair since 2010, she has pressed for stronger measures to reduce unemployment, battling the doubts of other Fed officials about the value of continuing to expand the Fed’s enormous stimulus campaign."

Second, after a lot of flying feathers and consternation from Congress and the President, our government has the green light to borrow (and thus spend) another TRILLION dollars.  And that's a trillion dollars beyond the 3 trillion dollars or so that it already collects in taxes.  That's Trillion with a T!!

So naturally the Wall Street reaction is a strong rally.  You see, the American stock market is a perpetual motion money machine that will NEVER AGAIN fail.  If I seem cynical, it's because I am.  You see, I have this (apparently) bad habit of thinking through the situation and seeking to understand what it's eventual consequences are likely to be.  And I believe that those consequences are likely to be quite negative.  But what needs to be recognized is that those consequences might take some time to develop.  So for right now the strength in equities makes a certain amount of sense, especially if your time frame is short term.

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There are still two possibilities in the short term following the highs established at the Sep 19 top. Those are whether that high represents the top of Minor W1 of Inter W5 (Alternate #1 below) or the top of Inter W5 itself (Alternate #2).  If it's the top of Minor W1 then Minor W2, W3, W4 and W5 need to occur.  If it's the top of Inter W5 that would also mark the top of Major W3 and some serious bear market activity should start to develop.

The pattern from the Sep 19 high into the Oct 9 low can be counted as a 3 wave move into that 1640.00 low.  Depending on which alternate is in play, that low is either the bottom of Minor W2 with Minor W3 of Intermediate W5 now in progress, OR it is the low for Intermediate Wave "a" of Major W4 with Inter Wave "b" now in progress.  At this point the odds favor the possibility that Inter W5 is still in progress based on the strong and clearly impulsive action off the 1640.00 low of Oct 9.  That action looks much more like what would be expected of a 3rd wave in an impulsive series rather than a part of a "b" wave in a correction.  In addition, the rally since the Oct 9 low has now carried above the highs of Sep 19, so if a Major W4 is in progress it has to be an irregular flat.  In that context a practical limit for the rally that's under way would be the point where the rally travels a distance that is 1.236 times the travel of the "a" leg of Major W4.  That point is at ES 1747.25 - beyond that point and it's almost certain that Alternate #2 can be ruled out.

Alternate #1


Alternate #2

  

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