A Greek Default Blow-Off ~ The Risk Averse Alert

Monday, February 06, 2012

A Greek Default Blow-Off

As I was saying Friday, when the garbage stinks, it's time to take it out...


The only thing "natural" in today's sinking of the NYSE new 52-week high-low differential is its harmony with a strictly technical trade underlying the market's advance. In other words, if stocks were being accumulated, the leaders would not be so widely brought to heal on a day like today, particularly given the market's recovery into the close.

Confirmation of a strictly technical trade being a well-beaten horse, the risk of a "blow off" top nevertheless remains undiminished in spite of it. Weak hands might be weak hands, yet even these apparently possess enough control to manage their course on a journey to doom. Included among weak hands, of course, are lenders of last resort. Plainly, these are embarked on a multi-decade trend toward becoming ever-weaker. I would argue, too, there's ill-intent behind this, largely foreign-directed, exploiting homegrown dupes whose credentials provide cover of "respectability" masking actions otherwise demonstrating a criminal insanity, judging by growing dissent anyway.

That said, if there's anything worth waging war over, whatever it will take to reverse this trend qualifies. Glass-Steagall presents a mighty weapon, no doubt. Likewise, the more this trend toward weakening lenders of last resort exerts itself, the more I am convinced the May 6, 2010 "flash crash" was precipitated for the very reason I initially thought: introduction in the U.S. Senate of a Glass-Steagall amendment to the Dodd-Frank financial regulation bill, a Ponzi finance killer.

Yet sticking with the script of crisis begets hyperinflationary fix, let's consider how a "blow off" top might develop here at the precipice of (shhhhh!) a banking system convulsion following a hard Greek default...


A [modestly] new, prospective Elliott wave count from March '09 bottom for your consideration. This has five waves up (whose "channeling" is well-defined on an arithmetically-scaled graph; above is logarithmically-scaled) forming wave (a) of B. A pair of "c" waves are slated to follow. First, wave c of (b) of B taking the market down and wave (c) of B back up.

It is this latter "c" wave that might transpire in a "blow off" top. How this might look in the grand scheme of a corrective wave targeting index levels last seen in the 1987-1994 period follows...

$INDU monthly

Probably the most significant matter on display here is fading relative strength indicating increasing, underlying long-term weakness coinciding with the market's levitation over the past decade, plus. Confirmation of this increasing weakness at March '09 bottom likewise found no positive divergence technically justifying the market's subsequent advance, unlike March 2003. So, suspect, then, is this advance.

Yet the market's present position maintaining positive, long-term relative strength also might be setting up a blow off top, this forming wave (c) of B upcoming. A reasonable speculation per the impetus underlying this prospective, "last gasp" in a technical trade centers on the likely massive hyperinflationary response lenders of last resort deliver in reaction to Greek sovereign default sometime following conclusion of the loooooooong weekend they and the troika are presently enjoying. (Have I just solved the Greek crisis? Shorten the "weekends" and more hours will be worked! Brilliant!)

Of course, it's uncertain whether this prospective "blow off" is, in fact, likely. Yet it appears the declining long-term relative strength trend in all likelihood would remain intact notwithstanding a new all-time record Dow Jones Industrials high. Lord knows weak hands continue having their way, and this notwithstanding those many revelations of their increasing prominence in the face of the market's persistent levitation. So, contemporary demonstration of this persistence at least demands some regard for the possibility a blow off top might precede the market's collapse.

Fitting, though, is a market at the doorstep of calamity producing a sense of possibility for further upside in its mixed signals. Back in early-September 2008 there were mixed signals just the same. Then, too, it seemed most socially acceptable to suggest a final bout of strength might win the day. Of course, though, that's not how things worked out and the market's subsequent collapse was worse than even those bearish expected (like myself). With Greek default looming, then, forewarned is forearmed.

Fast Money
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