A Troublesome Pulse ~ The Risk Averse Alert

Wednesday, November 27, 2013

A Troublesome Pulse

Not to put too much stock in possibility a tremor to remember could hit before year end, we might give equal, if not greater consideration to a viewpoint respecting dynamism we see persisting in the face of an otherwise weak and deteriorated technical backdrop. This perspective would serve to delay (possibly for some months) the moment of truth when the banking system's insolvency in fact moves center stage to become an unmistakable primary catalyst in transition to a state of permanent crisis inspiring a central bank leap off the Wiemar deep end. ("Unmistakable," as opposed to today's game of make believe pretending the banking system is made solvent by no less a hyperinflationary central bank response.)

Being as we were friendly to possibility an Elliott "rising wedge" might have been forming in 2010 following the May 5th "flash crash" and developing into May 1, 2011 peak—at the time this was seen marking formation of wave (c) completing the market's counter-trend rally off March 2009 bottom, but now is seen more likely marking wave 5 of (a) into February 2011 peak—we might return to this viewpoint because the manner in which this "special" Elliott wave form "fits" circumstance developing off March 2009 bottom remains no less relevant now than was the case back in 2010. To wit, an Elliott "rising wedge" typically forms following a move that has traveled "too far, too fast." This, of course, remains a noteworthy characterization of developments off March 2009 bottom, thus raising likelihood this special Elliott wave form could be marking wave (c) whose beginning is at early-October 2011 bottom. Likewise considering extraordinary fundamental circumstance accompanying the market's recovery off March 2009 bottom we find only added rationale for arguing why a "rising wedge" reasonably should mark completion of the counter-trend rally since.

Current similarity we see to technical circumstance coinciding with the market's 2011 peak aside, and notwithstanding notably suspect volume accompanying the market's advance since early-October bottom, shrinking even more so than relatively muted volume accompanying the market's advance into 2011's peak, we nevertheless could be in store for still more manipulation of a broken price discovery mechanism prior to completion of wave 3 of (c) going into year end, this according to the Elliott wave count applied above to a prospective "rising wedge" marking wave (c) higher from March 2009 bottom. We might likewise see the Elliott Wave Principle's "alternation guideline" coming into play here, as wave 3 of (c) completes. To wit, we should rather expect wave 3 of (c) technical characteristics to "alternate" from those registered during formation of wave 1 of (c). Look for confirmation of this via RSI (top panel) and MACD (bottom).

Extraordinary central bank intervention following 2008's collapse of Adam Smith's Leveraged Ponzi Scheme—running through a shadow banking system which at the time was enjoying an infinite multiplier and, rather critically, an implicit lender of last resort backstop—became a market move running "too far, too fast" once March 2009 bottom had been established. Tenuous, fundamental circumstance that subsequently has been exposed as lender of last resort exit from its now explicit backstop is proving with the passage of time positively impossible, indeed, seems a suitable psychological backdrop accompanying formation of an Elliott rising wedge. "Exhaustion" it represents finds fundamental circumstance agreeable, albeit well greased. Fading volume is a most troublesome pulse.

Duly note, though, this rising wedge is easily envisioned extending its formation to late-summer 2014 before it completes. Not until then should we expect the bottom to fall out, then. In the interim will we likely see volume contract still further? Silencing animal spirits so revealed presents circumstance capable of catastrophically buckling the Confetti floor under the market to be sure.

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