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Saturday, December 13, 2014

Saturday, 12/13/14 update

There are a number of possibilities for the ES/SPX at this juncture.  But before looking at those it's helpful to look at the long term picture.

Equities have been in a steady bull market since the Oct, 2011 lows.  There is a very well defined channel outlining the move.  The upper trendline of that channel has turned back the market at multiple points over the period and has thus provided strong resistance.  The recent highs have bounced off of that trendline.  If this count is correct, then the rally from the mid-October lows is the 5th wave of the bull market and thus is the last move up.

Zooming in, there are a number of possible alternates.  The three most likely are as follows:

1st, Major W5 and thus Primary WIII complete at the Dec 5 highs, Intermediate Term bear market in its initial stages:

2nd, ES/SPX tracing out Inter W4 of Major W5, Inter W5 to follow into Major W5 top:

3rd, recent highs only marked the top of Inter W1 of Major W5, Inter W2 in progress with Inter W3, 4 & 5 yet to unfold:

All 3 alternates are possible, but the odds slightly favor the 1st one with a top of higher degree in place and the initial stages of an IT bear market occurring in the last week.  An argument against the 2nd alternate is the lack of proportionality - if the recent selling is Inter W4 of the rally up from the mid-Oct lows then it is cutting much deeper than any of the other corrective sequences that have occurred during the move.  It also cannot be fitted into any reasonable type of channel.  The 3rd possibility would imply a lot more price appreciation yet to occur for the bull market, which would probably mean rocketing up past the upper trendline of the channel that delineates the last 3 years of the market.  A trendline which has provided solid resistance over that period, as previously noted.

An Intermediate term change in trend from bull to bear would imply some type of major paradigm shift in the fundamentals.  A case can be made for that.  First, and most obvious, the Fed Reserve money pump that has been pumping liquidity into the financial markets has been turned off in the last 60 days. 
Second, the Chinese economy has slowed drastically from it's torrid pace of recent years.  It has to be recognized how interdependent the world economy has become, and one can no longer judge the prospects for U.S. financial markets without acknowledging that interdependence and how it may affect our economy.  The Chinese economy now equates to that of the U.S., and the two combined outweigh the rest of the world by many magnitudes.  So if the Chinese economy slows down it is bound to affect our economy to some extent, not to mention the rest of the world.
Finally, commodity prices worldwide have been in a bear market for some months now.  That can be seen in the following chart of the CRB (Commodity Research Bureau) spot index:

The collapse in crude oil prices is part of this picture.  This is negative for the worldwide economy and especially countries that rely on commodities for income.  Yes, the U.S. economy is more service based and commodities are not a major economic driver, but there is no doubt they are weak and are a drag on our GDP, especially in the oil sector.  And given world economic interdependence, if other parts of the world are tipping into a deflationary economic turmoil that could bode ill for us.
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