The Problem With Breaking the June 11 High

There is a lot of commentary on the prior few posts about Neely having to change his count if the Jun11 high is exceeded.  Here is what he had to say about it this morning (emphasis added):

It’s amazing the number of emails I’ve received lately trying to talk me out of my bearish scenario or asking what it means if June’s high is exceeded (which means they think I’m wrong). That alone favors my preferred scenario, but a move above June’s high is not a good thing, it’s a horrible thing. It means the bear market will last for years and economic conditions will get much worse than originally thought. 

This would put him in more alignment with Prechter's view, of a bottom in 2014 (+/- a year or so, with 2012 at the earliest); or if the government continues to intervene like FDR did in the '30s, this might stretch even longer, to 2017 - 2020.  Currently Neely expects a rapid drop to the long term bottom, maybe as early as Jan 2010 (six months!). 

As an historical note, the last three deflationary depressions that followed a credit bubble all ended their first phase down in around 3 - 4 years: 1837-1841, 1873-1875, 1929-1932.  Hence 2007- 2010/11 would have been consistent.  This reflects the rapidity which a market can adapt to changing realities.  A lot of ink has been spilled over why the 1930s lasted so long; but it was clear that by the time FDR took over in 1933 a recovery was in progress, and a quite strong one (given how far we had fallen).  The policy question is why we went back down. 

• Keynesians such as Krugman continue to argue that we did not stimulate enough, and that while FDR caused the recovery due to deficits, an attempt to go back to normal in 1937 (due to the apparent recovery) by lowering the deficit sent us back down.  This argument is relatively easy to disprove, since the last two Hoover budgets (FY32 and 33) got us to around a 5% deficit per year, and FDR's first three budgets continued at around that level.  In what respect were Hoover's stimulus insufficient and FDR's heroic?  And even in 1937 spending continued to go up, albeit at a lower pace.  More likely something else was going on, and a recent UCLA study found it in the ill-guided attempts by both Hoover and FDR to keep wages and prices high in the face of deflation.  This prevented the market from clearing; high wages kept unemployment high, and high prices kept capacity underutilized.  In any event, the record of massive stimulus is that it does not work and may deepen the problem if done poorly; just look at Japan twenty years after their credit collapse in 1989. 
• Monetarists such as Bernanke continue to argue that the Fed failed to provided sufficient liquidity.   This comes out of Milton Friedman's trenchant work that blamed the prolonged and deep fall in the '30s on failures of the Fed.  Yet in the heart of the recent crisis, Friedman's co-author criticized the policy reaction as fighting the wrong war: the problem back then may have been liquidity, but the problem today is bank insolvency.  Liquidity helps avoid bank runs; but does not repair insolvency, which is due to overleverage and bad loans.  At 30:1 leverage, a mere 3.3% of bad loans means you go insolvent.  In this case, as asset values collapsed (real estate in particular), banks found they had insufficient collateral for their loans.  The problem is much worse in Europe than here: while our bank assets (loans) are around 2:1 of GDP, according to John Mauldin it is 4:1 in the Eurozone, 5:1 in the UK and an incredible 7:1 in Switzerland.  We clucked at the "zombie banks" in Japan after their 1989 collapse, and yet have left our money center banks in the land of the living dead. 

Yves popped over some thoughts which he might prepare in a guestblog later this week.  He notes that markets outside the US are not confirming this rally, nor are currency or bond markets. 

Regardless, if we break the SP956 pivot point, look for an enthusiastic piling on and a sharp rally.  We almost hit it today.  Potential turn dates for a summer peak center around the second week of August, after the coming lunar eclipse in the first week of August that follows an Asian solar eclipse this week.   That eclipse cuts across a huge swath of people - around half the world population - and may cause superstitious panic across India and China. A prediction of doom by an astrologer in Myamar (Burmese) may compound the normal skittishness that comes with such an unusual and rare event.  This will be a fairly long total eclipse that starts at sunrise in India, runs across Shanghai and southern Japan, and continues out into the Pacific. 

I do not expect bank failures or if you like the second wave of the crisis that quickly, but as the next wave of real estate problems begin hitting - option ARMs repricing, HELOCs and other second mortgages coming due, commercial real estate collapsing - we should see an eclipse of banks beginning in Europe and moving around the world.  Ironically it might start in Austria, which is over-invested in Eastern Europe, where bank problem first began in earnest in April 1931.  Austria as a country defaulted, which was hugely embarrassing to the former head of a major empire.  Others followed, including England going off gold in September, also hugely disruptive since they had managed the reserve currency for the world for over 100 years.  Germany repudiated their war reparations, and the dominoes fell rapidly after that.  The US to its credit (literally) held out the longest before FDR devalued 40% when he repriced gold from $20 to $35/oz.

If we ponder the US response to the crisis, it is not that compelling.  Banks remain zombies.  Various attempts to deal with bad loans have foundered: the initial mortgage relief in the summer of 2008 has had no apparent impact; the original TARP was changed quickly as it failed to buy out any toxic assets; the recent PPIP proposal is a null set so far. The major initiatives of Obama - healthcare, global warming and education - are orthogonal to the financial crisis and should make it much worse due to incurring massive new debt and new taxes.  The Fed seems to have hit the wall in new initiatives.  And overall we seem to be in a high level of denial over the problems, seeing green shoots where none exist and jawboning to increase consumer confidence.  We have even spent for billboards to attempt to argue that the recession is soon to be over, as if touting the fantasy will make it a reality!  Shades of President Ford's hapless Whip Inflation Now! buttons of 1975. 

At the moment we see upside surprise in earnings, which may fuel the sharp summer rally.  This appears to be due to rapid cost reduction not improving business conditions; or in the case of Intel, due to the China bubble echo driving more chip sales. TI reported a 56% slump, although painted a rosy outlook for Q3.  And so it goes this week with more reports tumbling in and showing optimism amidst severe results. 

We night even see a blip in GDP to positive in Q4 or Q1, especially if stimulus spending gets released.  (Other than tax credits to poor folk, it has been largely held up or entangled in red tape.) 

Neither of these positive indicators are suggestive of a trend change.  Instead, they will be the calm before the second wave of the storm.

Comments

[in the red]

Everyone talks about this collapse like it is right here...wait for it...wait for it...oooooo look at this data, it surely means we are going down now.

When are we going to realize that it is just pure guessing at this point and that counts will be changing for some time after the high is broken.

You can't predict the market I'm afraid.

[Mamma Boom Boom]

in the red, your a fine piece of work.

[in the pink]

Agreed. When everyone thinks something is going to happen, it ain't... the top will never be The Top.

[Sherman McCoy]

I love the Armageddon scenario, I just can't trade based on it. Prechter/Neely sell a service, but it's like the coming Ruff Times - it never comes to pass. I'd like to see them run money and beat an index. Last time I checked, Bob's still looking for $100 Gold, and Neely was looking for 100,000 DJIA. Both are silly forecasts in the extreme. If I want to bet a long shot, I'll go to the track.

The LT trend is bullish until it's not. and predicting otherwise is a fools errand. I look at Gold and see higher prices because as they say, "it's a bull market". Who's to say stocks aren't in a (nominal price)new bull market?

[George Soroes]

2000 - 2003 = A
2003 - 2007 = B
2007 - 2009 = C

[Dog Whisperer]

2009 - 2010 = -1

[mttoolkit]

I have a Neely River Trading blog

contact [email protected]

It is for former students of NRT ONLY!

[DG]

The LT trend is bullish until it's not.

You mean LT like since March of this year? How many long-term trendlines has the decline from October 2007 broken? Is there a single one that isn't broken? How can you talk about a LT uptrend in that context?

[DG]

Agreed. When everyone thinks something is going to happen, it ain't... the top will never be The Top.

Wait, is there anyone left who doesn't think, after we came within 5 points of a new high, that we won't make a new high? Doesn't that mean, by your definition, that it won't happen? So I should go extra short right now, right, since my risk is only about 5 points?

I love how the market pseudo-sages come out of the woodwork at times of maximum confusion and try to pretend that they are above the fray.

[Sherman McCoy]

A 200 day M.A. I would consider LT. We're above it. The 50 day has been above it for the last 20 trading days. I don't do trendlines - they're for fools, I do Regression lines. Furthermore, I'm not selling anything, just pointing out a fact. $SPX tracked the 200 day from May 2003 to Jan 2008 and then broke. In that time Elliott was consistently looking for an apocalypse rather than making money.

This is about making money, right?

[Lasse]

One thing that never stops amazing me is how easy it is to not see the forest for all the trees.
If one takes a step back and looks at the larger picture, perhaps at a quarterly or yearly chart of the Dow or the S&P, a few things become clear.

IF we are indeed in a wave 2 of a much larger wave down, it is in my book sensible to remember that a wave 2, more often than not retraces at least 50% of the previous move.
The S&P index has at current levels retraced approximately 32% of the whole move from the top of October 2007 to the bottom of March this year.
From a time perspective, wave 1 took 74 weeks to complete and, so far, this move up has only been on its way for 19 weeks, i.e. 25% of the previous move.

With that in mind one would think that, assuming a current wave 2, the current move has some way to go

IF the larger correction instead ended in March and we currently are in a wave 1 of a move that will take us beyond S&P 1576 one would, for the same reason, expect a sharp correction and re-test of lower levels before long.

It appears that S&P index at 956 is the present pain barrier for a lot of shorts.

An example of wave 1 and wave 2 behaviour is the long term change of direction of the Dow starting in 1932, or more recently on a smaller scale in EUR/$US starting in 2000.

[DG]

In that time Elliott was consistently looking for an apocalypse rather than making money.

I would amend this to "EWI was consistently looking for an apocalypse". The techniques are bigger than Prechter, although he and his crew have the largest "mindshare" with Elliott.

[barood]

There is this scenario I am thinking of now because now seems so many expecting 1000 to sell their positions. If Wednesday is down I will give up on 990. Wednesday is a key pivot in my positioning.

I think tomorrow they close the market at a new high and Wednesday the market will start rolling down again to new lows if this scenario to play. Why? After looking around for consensus sentiment, 4 categories of participants at the moment.

1. real longs are looking to sell close to a 1000 which Mr Market will attempt not to give this opportunity

2.EWI did not get there 7600 Dow target and hence did not enjoy this rally. The market will not give them their Wave C target in this summer.

3. Neely will be proven wrong for his highly advertised high of June 11 all over the Internet boards.

4. Any left Bears will close positions little after new high in anticipation of re shorting at higher price.

I don't know the weight of each of the above market participant sentiments. But if we take normalized distribution of these forces, I am expecting the market will resolve it by a close at new high and reversing. Again Wednesday is a key day if the market is determined to kiss 990-1000. Gold stocks will enjoy a quick rally even if the market rallied and they will reverse when the volatility hits high on the general market. I could be wrong though on both scenarios. Market is here to humble us all.

Barood.

[anon_aka_TERA BAAP]

it is INCREDIBLE..how much the Sentiment has CHanged..

i DO NOT enjoy being on same TRADE as NEELY...because he has been LOSER calling for CRASH while MISSING so much of UPSIDE

but now TERA BAAP is convinced that we will BREAK the march low

too many BULLS on this TRAIN... and i want to ride alone

DG please tell your BOY-FREIND mr NEELY to go LONG, therefore i would have 100% COnfidence in my SHORT positions

I SOLD my BULK GS shares bought in high 60's for 95 pts profit..now i am shorting GS XOM , gold and oil futures as well as SPX

HINT..look at SPX chart from 9/24/01 to 7/24/02 .. that is what CAPITULATION looks like..

TERA BAAP

[GG]

barood & anon_aka_TERA BAAP

go back to sleep.

[Forkoholic Serge]

Larry Pesavento puts his finastro career on the line ;-)
http://tfnn.s3.amazonaws.com/LarryPesavento072009.mp3

[DG]

i DO NOT enjoy being on same TRADE as NEELY...because he has been LOSER calling for CRASH while MISSING so much of UPSIDE

Whatever.

[[email protected]]

the trading mindset that every missed opportunity to make $ is a loss is the wrong one.

focus should be kept on safety and NOT losing money first. its a game of survival.

if you can avoid the bad trades, your money will compound faster than a volatile portfolio. leveraged ETFs are a good example of how a volatile portfolio can inhibit compounding gains

[DG]

its a game of survival.

When you're trading with your own real money it is. When you're fake trading over the internet, it's whatever you want it to be. That's why I can't take anon seriously because there's no way anyone with serious money would act the fool like he does. Unless he inherited it from his daddy.

[vipul garg]

anon, looked at the charts.what is it about that time which makes it similar to now in terms of charts

[Sherman McCoy]

Lasse, In a forest for the trees argument, you have to look at the obvious expanding triangle in the SPX, which is a wave 4 formation. You also have to ponder the vertical move from 1200 to 1000 as well as open gaps on major sector ETF's. This isn't NASDAQ, and those gaps should get filled.

As far as Prechter goes, he's a broken clock. He has some flunkie writing algorithms to spot waves and long ago gave up on being an innovator. Being consistently wrong from 1987 to 2000 will do that to a prognosticator.I wouldn't be surprised if some hedge fund paid him to spread disinformation. I make more out of DeMark's approach than I ever made from Bob.

[anon_aka_TERA BAAP]

VIPUL

i dont have much time to go into detail right now.. but look at Angle of Ascent off of the bottom on 9/21/01..the first sharp correction was on 10/18/01 and took similar form to 3/30/09 pullback..2nd correction 12/06/01 high very much like 5/08/09 high..then a final topping action on 1/04/02 BUT THEN A FINAL, SHARP RETEST RALLY HIGH between 3/11 and 3/19/02..after which the market went straight down and took out its old lows into the 7/24/02 bottom..4 months of straight down

THE entire structure to date from the march bottom matches almost EXACTLY the 2002 structure into the 3/11-3/19 topping..if the analogy continues then we should have a long drawn out topping action here (1-2) weeks and then a rounding, slow decline which accelerates later

[Sherman McCoy]

TERA-

I traded the 12/01 high and was short for the entire 5 wave decline. This market is nothing like that. IMHO, markets rhyme they don't repeat. What we have today is:

A 3rd of a 3rd wave GAP at 88.50 on SPY that NEEDS to be filled.
EEM looking to break above its w-1 low(as emerging mkts outperform in general)
5 clear waves down in POT and MOS(former mkt leaders)
A wave 4 triangle in GLD

As sure as this is still God's green earth, the market will rally.

[Sherman McCoy]

excuse me, 110.34 on SPY. Maybe you can live through 15 handles of pain, i sure can't

[Mista B]

Hey anon_aka_TERA BAAP,

Fwiw, your predictions have been more accurate than most regarding this rally. My guess is that those who've responded negatively to your posts do so more as a reaction to your tone than to your market direction calls. I for one am curious with regard to your ongoing thoughts, thus I look forward to your future posts.

[Sherman McCoy]

I predict MONsanto is going to open higher. 5 crystal clear waves intra-day. I'm booking my profit. Does that help?

[Ron]

No.

[DG]

Mista B,

While I think the tone is uncalled for, what actually bothered me more was the lack of specificity about the analysis. I understand some people consider their methods proprietary and I respect that, but give me some clue about how you are deciding market direction. anon was screaming about Obama/Geithner/Bernanke not letting the market drop. That's not a serious analysis. No politician in history has ever wanted a market to drop, with the possible exception of Lenin.

[elskid]

I SOLD my BULK GS shares bought in high 60's for 95 pts profit..now i am shorting GS XOM , gold and oil futures as well as SPX

HINT..look at SPX chart from 9/24/01 to 7/24/02 .. that is what CAPITULATION looks like..

TERA BAAP

But didn't you post that you were NEVER going to sell - something like no price was not too low.

[Carol]

june 11 intraday high 956.23 breached

today's high 956.53

this is great news for the anti-bad-news-bunch but now that everybody can see it the pretend sages will probably say to fade the reverse-push-rally (buy the tops on each big drop)

[Jose C]

"Regardless, if we break the SP956 pivot point, look for an enthusiastic piling on and a sharp rally"

--Yelnick

WHAT HAPPENED, DUDE??!! I TOOK THAT TRADE AND GOT HAMMERED! WTF???

[Jose C]

I guess sharp rally will pick up steam tomorrow morning. I feel like an idiot. Sorry, Yelnick. My bad.

Jose

[?er]

Why will the rally pick up steam tomorrow?

[WTF]

Does everyone remember this embarrassing call?

Aliso Viejo, CA (PRWEB) June 16, 2009 -- Glenn Neely, founder of NEoWave Institute and prominent Elliott Wave analyst, today announces a startling prediction: The S&P 500 is forming a major top in June, which will be followed by a large decline, eventually pushing the stock market to record lows for the decade.

[DG]

WTF,

No, we've only been discussing it since the day it hit the wires. I'm sure Neely wishes he hadn't made that forecast, but as I've said more than once, despite that call, his trading has been profitable since that day and he's out of the market right now completely.

[DG]

In fact, just to reiterate that there is a blog set up for Neely subscribers to discuss his counts and trading recommendations, if you are a Neely subscriber and want to join the discussion, e-mail me at neowavetrader (at) gmail.com, with a snippet from a recent Neely subscriber file. Yelnick does a great job of laying out the scenario in broad strokes to keep from disclosing too much information, but we can discuss freely at the blog, since it is subscribers-only.

[custom dissertation]

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