Deflation is the Green Shoot Sprouting

Obama is trying to read the tea leaves and sees "green shoots of recovery" poking up.  Today Neely sent out a bulletin to note that deflation is finally showing up in the stats.  Despite the huge attempt to reflate the currency by Bernanke, and the financial stimulus, the destruction of credit continues unabated.  More on this here and here.  And Prechter of course has been saying since 2000 that the Fed will not be able to stop deflation.  I will repeat what I have written previously, due to its seminal importance: 

I reread Conquer the Crash recently, and was blown away by Chapter 13, which lays out why the Fed cannot prevent deflation.  While Prechter has provided his thinking to his subscribers, I asked him for permission to distribute Chapter 13 to my readers, and he graciously agreed.  I would urge you to download and read Chapter 13, excerpted from his book, especially when you see in the news and columns drivel like "no one could have predicted this."  They could, and they did. 

What Prechter wrote in 2000 is pretty much what has been tried for the past 18 24 months, to no avail.  How can we expect bailouts and reflation of under $2T to forestall a credit debacle of $52T?  Global credit grew $24T over the Greenspan Indian Summer period on a paltry global GDP growth of $10T, so at least $14T will come crashing down; plus we already were highly over-leveraged across the global economy in 2000. 

Once we accept that the party is over, we can begin to get serious about how to reset the economy.  A lot of it is time and taking the pain.  And we should not forget the wisdom of FDR's Treasury Secretary Henry Morgenthau, who testified in May 1939:

"We are spending more money than we have ever spent before, and it does not work. ... I want to see this country prosperous. I want to see people get a job. I want to see people get enough to eat. We have never made good on our promises. ... I say after eight years of this administration we have just as much unemployment as when we started ... and an enormous debt, to boot."

I don't think he was any more a Keynesian. 

Comments

[DG]

Yelnick,

You assume that today's crop of charlatans has as much integrity as Morgenthau. I can bet you that as a condition of employment, Geithner was instructed to either obfuscate or to only spin "happy thoughts" about "green shoots". If he keeps a private journal, it was probably pre-written to avoid any future embarrasments by revealing the truth.

[Mamma Boom Boom]

DG,

If I may: Integrity is the missing root of our society. Geithner is only one fool. Everyone we elect (at least a very high percentage) has sold out to money. Both political parties are nothing more than organized crime gangs, selling insurance to the highest bidder. It has filtered down to the general populous. Even you and I are sold out pricks to money. 'Our society is doomed'.

As a people, we are being paid back for not doing our due diligence when casting our votes. The politicians know it's a beauty contest, that we are all fools. They have manipulated the system of buying votes until there is nothing left for our country. Look around, put a pencil to it, the patient has a deadly disease, is bleeding from the jugular, the bleeding can't be stopped, and the patient is going to have to fight off vultures.

I could go on for hours, but the subject is deflation. (I could go on and on about that, too)

Ned

[Forkoholic Serge]

Today we finally escaped out of the orange fork we were from Monday. As you can see orange provided considerable support and resistance points. I also included unconventional green fork only because it provided resistance in the morning as well as at the EOD. Still can't label this action as impulsive, although it sure looks like, even from fork prospective and here's my reasoning - if I label a/b as 1/4 - i get overlap, if I label it 1-2,1-2 the A point on EllOsc is the highest which implies wave 3 action. So only logical choice is to label it abAB. On the other hand action from B maybe impulsive - until/if 4 overlaps 1, but EllOsc seems righ for this one. Today-tomorrow is Puetz's TUCT{TAKT} CIT day and trend should remain til the next CIT date. Larry Pesavento yesterday suggested next Monday maybe a low, but it maybe a high as well. Looks like nobody wanted to be short at EOD coz of C earning reports. I saw some buying of May 800 $SPX puts and calls, around 8000+ contacts on both sides, probably expecting a move in either direction.
http://forkoholic.spaces.live.com

[Virginia Jim]

Speaking of gold as a 'barometer' of deflation on page 134:

"....if gold were to move above $400 per ounce, I would probably be convinced that a major low had passed."

That puzzled me at first. The deflationary spiral has ended OR his starting point was the high in about October 2007? I'd expect he'd write the same thing now, just the higher reference point. Thought's anyone?

[EN]

But Obama said that he will save the economy and I believe him because he looks happy and has a new dog. The dog looks healthy, is that not a sign that he will save the day?

[vipul garg]

gold is moving too slow .. a new high looks on the cards.. all major analysts have connected gold with inflation-deflation scenarios and increasingly off late.. wonder why gold is hell bent on proving them wrong !!

[Account Deleted]

vipul,
I concur with your point on gold.It does get really complicated sometimes.BTW do you work in Delhi or G'bad.

[Mamma Boom Boom]

Alert! Alert! Alert! Alert!EEEEEEEEEEEEEEEEEEEEEEeeeeeeeeeeeeeeeeeeeeeeeeeeeeeeeeeeeeoooooooowwwwwwwwww! Sirens are wailing.

--Market Update-- http://www.bushongbusiness.com/opinion.html

Ned

[saahilcap]

My Neely subscription is getting a bit frustrating. He keeps raising his bullish targets, but then doesn't go long!. After initially saying that this rally would be capped around SPX 850 at a maximum, and getting out of longs at 800, he keeps getting more bulish.

And that is fine, but then why won't he go long? We have already left 75 points on the table by getting out too early, and by his own forecast, we may be about to leave another 100 or more! Maybe I don't get his style, but it is frustrating to watch the market going up day after day and not participating in the action (or worse yet, being short).

[mark]

Thank you Sahil.I respect your honesty wrt Neely.
My only suggestion to you. Find a method and trade it rather than depending on others. Thank you.

[saahilcap]

No, I should be thanking YOU for your "suggestion". Why would you need to thank me?

I am not "depending" on anyone, I have multiple sources as well as my own analysis. However, this is a site that seems to have a focus on Neely's style and outlook, and since I have been subscribing, I wanted to throw this issue out for discussion to better my own understanding of how to get the most out of his views. Perhaps I should change my prior post to read "HE has left 75 points on the table" as opposed to "WE".

[DG]

Saahil,

My suggestion would be to learn the methods yourself, start charting a market you want to trade and make the trades you think fit the methods. Neely's simply not going to trade the middle of an ongoing correction because he doesn't like the risk/reward. There have been times when he doesn't make a trade for over a month. To mark's point about methods, I think NeoWave is the right method, but you do need to learn it for yourself as well, especially if your own desire to trade a market doesn't match how frequently Neely wants to trade it.

I got NeoWave pattern buy signals at 82.95 on the SPY and again at 84.89, but the only reason I got them was because I was charting along with the market action and had built my own short-term wave count to fit into Neely's longer-term count. Short and long being relative terms.

This last phase of the advance has been the least robust of any since the beginning of April, so it's getting tired, unless you think that this last move up since Wednesday's bottom is an X-wave in a running correction, which is possible, but seems unlikely at this juncture of the corrective rally.

We broke Neely's line in the sand by .36 points yesterday at the high and immediately reversed and Friday's late-day dump actually broke a trendline that had formed starting from Thursday's low. It'll be interesting to see what he says on Monday. If we take out Friday's high on Monday and you want a trade, I would take a long trade with a stop at the 61.8% retrace of the move from Wednesday to Friday's high. On the SPY that would be 85.31, so find the equivalent on whatever you're trading. That said, back when I got my first buy signal, I calculated an SPY target of 87.88 for an abc wave C of the contracting triangle with reverse alternation. Friday's SPY high was 87.65, which is quite close. For that trade scenario I just gave, you might want to watch 87.88 first to see how the market handles it. If we blow right through it, Neely's final rocket launch scenario is probably in play. If we hit it or close to it and reverse, I'd actually look to get short with a stop 1 tick above wherever we reverse, e.g., 87.95 or whatever.

Once you get the hang of NeoWave, you'll be able to trade without Neely, trust me. It's just going to take a while, but at that point, you'll be making enough money that the cost of subscribing will be a non-issue and you'll subscribe just to get the longer-term counts and do the shorter-term trading on your own.

I read an interview with Neely once where he said he has only made a few intraday trades in his life, during the final run-up in 1999-2000. He just doesn't like it.

[saahilcap]

DG, Thanks for your concise outlook on the markets. I have been greatly impressed with Neely's predictions, but his trading style needs some acclimation, Especially for "hourly" traders, which should be very short-term focused, it wouldn't seem too risky to try a counter-trend long occasionally. I have not actually studied any of his methods, but simply subscribed to get his view. It has been well worth it, so far. My personal view, somewhat simplistic, is that 877.35 SPX is the exact 61.8 retrace of the November high (1007.51) and the March low (666.79). That, combined with the Armstrong turn date (April 19th) happening this weekend, convinced me to try a short at 875 near the close. If we blow above this level next week, I'll probably capitulate and stand aside until a better opportunity presents itself.

[Tom]

I read somewhere that the 31% advance off the March lows was the largest and fastet move of any bear market rally except for the 33% rally in 1931. If we were to hit 1000 in the next few weeks as Neely's alternate scenario describes, it would be a 50% rally in just a couple months. I know he predicted this would be one of the biggest bull traps in history, but I find that hitting those levels, then reversing in a waterfall drop, hard to swallow in the context of historical precedents.

[saahilcap]

The 1930's are not the ony historical precedent to these types of rallies. Much more recently, the NASDAQ had a very similar oversold rally: From a low on Sept 21, 2001 of 1387.06, it rallied (almost straight up and in a structure very similar to what we are seeing in SPX right now) to a crest of 2065.69 by December 6, 2001.

That was a gain of 49% in less than two months!

Interestingly, it made a slighly higher high a few days later, and then collapsed to new lows. That was probably small consolation for those traders who went short too early, for most were wiped out by the time the market made new lows.

In studying past downtrends, I have found numerous examples of these types of powerful rallies. They kill both bears and bulls.

[DG]

Tom,

You might appreciate this nugget from Mastering Elliott Wave:

"The Theory indicates that man, and his markets, continually charts new territory and types of behavior. It stipulates that at no point in history is a market's action or psychological environment identical to any other period. Similarities are allowed, but not exact duplication. This can be a problem for traders, especially "system" developers, who endeavor to formulate strategies based on historic price action and behavior. Unlike most systems and forms of analysis, the Wave Theory warns the analyst to look for change and warns him when and where a market will not behave as in the past."

[Rich S]

As DG mentioned, the SPX did take out 875 on Friday, which marked a complete retracement of the second X wave of Neely's running triple three. That count is all but dead, and I'm nearly certain that on Monday Neely's alternate count will become the preferred. In addition to that count (large expanding triangle for wave (X)), some of the other scenarios discussed recently are still in force. We might be in wave (D) of either a neutral or expanding triangle, with the latter resulting in a new bear market low by the time wave (E) completes the formation.

[Tom]

Gaining 50% in two months for the S&P is certainly possible, but I would hesitate to place a bet there. I think the odds are against it happening especially when the wave count for his primary scenario has been fulfilled and there a host of other technical indicators unrelated to wave structure (e.g. sentiment, volume, wedging price action) that argue against it. Maybe that's why Neely hasn't issued a trade to go long. He's just not that confident right now it has the strength to continue going much past 875.

[DG]

Rich S,

The irony of retracing the entire prior X-wave is that everyone noticed it, which might mean it's the perfect place for a reversal and the playing out of Neely's original running triple three. The rules for contracting triangles require that wave C be smaller than wave A, which is still the case. So, I think the action to-date still fits under the rules of a contracting triangle with reverse alternation, despite retracing the entire X-wave.

That said, if we don't reverse here, I'm going to go long and strap in for a potential rocket ride. Stops are close enough for a good risk/reward ratio.

[DG]

Incidentally, to preserve typical Fib relationships between legs of a triangle, even accounting for reverse alternation, this move would have to stop at ~90 SPY.

[vipul garg]

manish.. i work in delhi.. u?
i am a complete believer and follower of wave theory ( actually neo wave theory)

mr neely is absolutely not comfortable with the count and that is why in his own admission a rare alternate count coz as DG said , for a typical C to A leg relationship a move to 900 odd is required, which on extrapolation will mean that market will try and test the next higher resistances on 950 odd ..and hence mr. neely's alternate count.