Once upon a time, in a land far, far away from Europe, there lived a very generous Central Banker named Kindly Old Uncle Ben. One day, Kindly Old Uncle Ben was happily cleaning his printing press, while humming the theme song from The Apprentice, when suddenly a powerful sorcerer appeared before him. The sorcerer’s name was Evil Lord Keynes.
Evil Lord Keynes wanted to gain control of Uncle Ben’s vast financial resources, but Uncle Ben staunchly refused. Upon hearing this refusal, Evil Lord Keynes became very angry, and decided to place a curse on Kindly Old Uncle Ben. Lord Keynes took three steps back from Uncle Ben and shouted his magic words: “Caveat Emptor!” As his green cape billowed and coursed with the Infinite Powers of Fiat Currency, Evil Lord Keynes waved his magic wand (made of gold-plated plastic) and with a flick of his wrist, forever cursed Kindly Old Uncle Ben. This wicked curse forced Uncle Ben to lend money, print money, and just generally throw money around at random in an almost compulsive fashion.
Which is pretty much where we find ourselves today. (It all makes sense now, doesn’t it?)
Needless to say, by now everyone who doesn’t live in a geodesic dome somewhere in the Montana wilderness knows that yesterday, the Federal Reserve led an effort to coordinate six Central Banks in order to make it easier for everybody to borrow more US dollars. Well, everybody except you, of course. Especially if you’re a middle-class American.
No, this American money isn’t really for Americans. It’s for foreign entities who — if you can believe this — have even less fiscal discipline than we do. Basically, the Federal Reserve has reaffirmed its willingness to operate as the World’s Largest Payday Loan Company. The big difference between them and a real payday loan company is that the Fed’s interest rates are way better. Also, in order for you to borrow money from the Fed, it’s not required that you actually have a paycheck coming at some point in the future.
Anyway, the market was quite excited by this news, and the Dow rallied approximately 20,000 points in the first five minutes. That’s how I remember it, anyway. I think it sold off a bit later, though, and only closed up 400-something. Maybe I should look at a chart.
The challenge with any type of analysis is that it’s based on probabilities. Technical analysis and Elliott Wave are ways to increase your probability of being on the correct side of the market. However, no form of analysis is a crystal ball, due to the complexity of the system being analyzed, and the fact that not all circumstances can be foreseen.
I’m happy that at least my charts from Monday and Tuesday were pointing to further upside, so hopefully not too many readers got caught wrong-footed. But even I didn’t see a move this strong coming. Needless to say, the market blew through my projections, and all lines of resistance, as if they didn’t exist.
The long-shot bullish alternate count I’ve been mentioning each day has suddenly become less of a long-shot. There are a few things holding the old preferred count together, but in order for it to remain viable, the market needs to slow its advance and reverse very soon.
The preferred count didn’t have any key levels violated on Wednesday — however, its odds have to be adjusted to reflect the strength of the rally. There are a couple other things that, in my mind, allow it to remain on the table for the time being, as follows.
One is the possibility that Wednesday was an exhaustion move, similar to October 27. If you study the charts, you will see several similarities between the two moves. In an exhaustion bar, the majority of the buyers get sucked in all at once, and the fuel gets spent so quickly that the market falls down shortly thereafter (sometimes after another day or two of sideways/up movement).
Another is the fact that, despite the joyful news from Kindly Old Uncle Ben, the TED spread remains at its highest level in more than two years, which is an indicator of continued systemic financial stress. And a third is the fact that the “bottom” wasn’t formed with too many of the usual factors that make bottoms.
That said, this count could be eliminated quite quickly if the market doesn’t oblige (see chart below):
The bullish alternate count has of course, roared into the spotlight, and could in the end prove to be the correct count. I have illustrated on this chart one potential way for this count to unfold. Please note that this illustration is largely speculative at this point, based on similar situations in the past (chart below).
I feel I have to increase the odds of this (short-term) bullish alternate to 35%.
At this point, despite the massive three-day rally, there are still a few unanswered questions. I remain medium and long term bearish, while the short term picture has become a bit clouded. Things should clarify over the next few sessions, as the market gives us more information. Trade safe.