Thursday, January 10, 2013

Historical Extremes being tested once again.....and it's NOT going to end well

It would be reasonable to assume, that the 2007 top marked the end of the great bull market, that originally tried to top in 1999/2000, but, due to extreme leverage and debasement of the U.S. Dollar, markets carried to new highs in nominal terms in 2007, however NOT in real terms. This distinction is important, because the divergence between nominal values (in inflated U.S. Dollars) and real values (adjusted for inflation) signaled the end of the great bull market. However, once again, the powers that be are attempting to keep the great credit bubble inflated, through asset and debt purchases by the Federal Reserve. The markets are at a critical juncture, in that if the Dow Jones Industrial Average closes above the October 2012 closing high of 13,610.15, it will generate a Dow Theory Bullish primary trend change. Should this occur, it would suggest the 4-year cycle is stretching, just like it did in the 2006-2007 time frame, and the large expanding wedge I have illustrated before would be playing out, with a target above the 2007 all-time highs. However, we do have a potential ending diagonal playing out, with an extended minor wave 1 of Intermediate wave (1). This scenario would allow for one more new post-2009 intraday high in the DOW, before finally reversing. Ending diagonals are final moves, and the pattern completion is always follow by a hard reversal in the other direction, in this case down. Technically speaking, the Double Zig-Zag scenario from 2009 is still intact until the DOW takes out 13,661.87 intraday, but this is another possible scenario that could be at play here. The key for this scenario is not to close above DOW 13,610.15. As long as that level holds on a closing basis, this scenario would allow for a new intraday high, immediately followed by a swift intra-day reversal. Things have already been stretched beyond imagination, however if the DOW manages to close above 13,610.15, the 4-year cycle is stretching once again, and, just like 2007, it will end at some point, and the fallout will be much worse than 2008. Meanwhile, our focus is on this potential pattern and the DOW levels cited on a closing basis. As long as 13,610.15 holds on a closing basis, the Dow Theory Bearish Primary Trend Change from August 2011 is still intact, and this market will be set up for a swift move below the March 2009 lows as the inevitable deflationary forces take hold and drive the next leg down of this massive bear market into the 4-year cycle low.