Are Stocks Staring Into The Abyss?

Europe’s financial woes are serious. We believe the financial crisis will hit the fan starting in 2012 which will eventually lead to a political union of several major European nations, perhaps even a broader political union of western nations including Great Britain, the United States and Canada. It may be what results from developing global economic chaos. This is Grand Supercycle degree wave {IV} down underway from May 2nd, 2011, a dangerous Bear Market wave of long-term duration. Life will change by the time it finishes.

Germany’s benchmark bond offering failed Wednesday, which is an alarming development for Europe and for contagion risk to the rest of the globe, as up until now Germany has been seen as the rock that fortifies and protects a complete European meltdown, with a quarter of the continent’s GDP. Now we all know Germany has problems as well. Germany’s Central Bank had to buy 39 percent of the 6 billion euros offering ($10.0 billion equivalency). In other words, Germany just printed $3.9 billion equivalency dollars out of thin air to pay its bills. Weimer Republic anyone? Not good.

So what is happening? We are entering Grand Supercycle degree wave {IV} down, the mother of all Bear Markets. In the past, we have seen Bear markets affect the solvency of corporations and individuals. Now we see a new Bear Market affecting the solvency of sovereign nations and continents. This Bear market is on a Grand scale the likes of which we have not seen in centuries. Here is a chart showing the big picture and how past Bear markets fit in with the scale of this developing one:

Above is a Big Picture Historical Elliott Wave Labeling for the Dow Industrials. It now appears that Grand Supercycle wave {III} up completed May 2nd, 2011 with a Megaphone Top Jaws of Death pattern. This is a major Bearish topping pattern. We cannot be completely sure that this Cycle Degree wave V up finished its Megaphone pattern because if the fifth wave (E) up finished on May 2nd, 2011, it means it truncated or failed to rise to the upper boundary. This leaves open the possibility that wave (E) up may have one more strong rally left in it to reach the upper boundary. There are no hard and fast rules. If the top is in on May 2nd, 2011, then the mother of all declines, Grand Supercycle degree wave {IV} down, has started, which will be so bad, it could be a coming Tribulation period of political and economic upheaval, war, pestilence, and natural disasters. Then a golden era, Grand Supercycle degree wave {V} up will follow. The Great Depression was of Supercycle degree, wave (IV) down, and was not of Grand Supercycle degree, like the coming Bear Market will be, which means this developing Bear Market, which is in its infancy, will be worse.

Prechter:

November 9, 2011

INTERIM REPORT

There is a good chance that the orgasmic upside lunges that have peppered the stock market since August 9—exactly three months ago—are over. According to reports, the consensus among fund managers is that the market is primed to rally until year-end. The big gains of October convinced them that the worst had passed. But in my judgment the setup is very much like that of 1973.

In late December 2010, I said on television that the situation looked much as it did just before the start of 1973. The market had been in a two-year bear market rally, per our interpretation of the Elliott wave model; and a broad bullish consensus had developed on the outlook for stocks, recalling January 1973’s “Not a Bear Among Them” headline from Barron’s. (See the March 2011 issue of EWT for a list of indicators of extreme optimism among every class of market participants.)

In 1973, the stock market topped in January and was weak into August; then it rallied hard right through September and October, statistically the two most bearish months of the year. It was a convincing rally, and optimism returned. That rally ended on October 31, leaving the “bear months” in the dust. But instead of continuing higher, the market turned down from there and in just a month plunged below the August low. November is usually a benign month, but that year it wasn’t.

Here in 2011, several key market sectors topped in February, the broad market topped in April, and it was weak into early August, when the NASDAQ made its low. The market spent September basing and then had a huge rally in October, just as in 1973. It made a closing high on October 28, one trading day before month’s end. It fell so hard over the next two trading days that on November 1 the Trading Index (TRIN) reached 11.30 intraday, enough to indicate a short term low. The ensuing rally, which took place over the past week, brought the market nearly back to its October high. In doing so, it got through the seasonally strong days, which ended at yesterday’s close, filled the gap from October 31 in the NASDAQ, ended a diagonal triangle (see text, p.37) in the Dow Jones Transports, and reached the upper end of the upside resistance zone of 1270-1277 basis the S&P cash index that Steve Hochberg cited in Monday’s Short Term Update. Today it is falling hard from that point.

None of this proves anything. All market analysis is probabilistic. Today’s huge intraday TICK and TRIN numbers so far (-1600 and 7.45, respectively), in fact, would normally be associated with a near term bottom, so there is plenty of room for uncertainty. But the main exception to that tendency occurs at kickoffs of major declines, and that’s how the waves seem to be positioned. We will soon know which event is occurring. Overall, recent market behavior has been conforming to our analysis and seems to be in line with our bearish position.

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