Saturday, June 11, 2011

The Next Leg Down

We now have confirmation that the next leg down, Primary wave [3] down, has begun. This means that the bear market rally that had been unfolding for the last 2 years has ended, and we are seeing a resumption of the larger downtrend.

Back in early April 2011, I had predicted how Primary wave [3] down would unfold once the bear market rally ended. The posts can be found here: Part 1, Part 2, Part 3.

First is a chart of the last 2 1/2 years, showing the bear market rally:

Notice the trend line break in early June 2011. Trend channels are an integral part of technical analysis, and they generally define a region where an advance or decline takes place. In the case of a 3 wave advance, the lower trend channel starts at the beginning of the advance (which would be the March 2009 low in this case) and continues through the low point of either wave B or wave X within a larger advance. Notice that the lower trend channel associated with Primary wave [2] up acted as support with the trend line touched in Sept 2010, Mar 2011, and May 2011, before finally breaking down in early June 2011.

The significance of the trend line breach is enormous. It is indicative of a trend change from up to down at Primary degree in the stock market, and within a short time, in the economy and job market as well.

Here is a chart of the DJIA, showing a close-up of the decline from the peak.

Notice that the initial decline from the top started with a leading diagonal for Minute wave [i]. This was followed by a 50% retracement of the initial decline in Minute wave [ii]. After the upward move, downward movement resumed, going through the lower trend channel associated with Primary wave [2] in the process. The most likely scenario in the short term is Minute wave [iii] unfolding as an extended third wave.

The decline from the peak that has unfolded so far point to a 5 year duration for Primary wave [3] down, with the low point around May 2016.

The hard times that unfolded during the period that people identify as the "Great Recession" is a teaser-trailer preview of the hard times that will come during Primary wave [3] down. The last decline, Primary wave [1] down, which people identify as the "Great Recession" was a moderate strength downward impulse. The next leg down, Primary wave [3], down, which will last 5 years, will be a very strong downward impulse.

I'll summarize some of the expectations for Primary wave [3] down:

Stock market, economy, and job market

1 -- The DJIA will fall to around 2200 by the end of the period. The S&P 500 will fall to around 220 by the end of the period.
2 -- October 2013 will be a Cycle degree "point of recognition", which is the center of Primary wave [3] down. This will be characterized by "The Great Panic of 2013" which will be a magnitude larger than the "Panic of 2008".
3 -- The center of Primary wave [3] down will be characterized by large scale bank runs. The Obama Administration will respond be declaring a "bank holiday".
4 -- Upon reaching the center of Primary wave [3] down, economists and analysts will realize that a major depression is in progress.
5 -- The economy will wipe out 36 million jobs in the United States, pushing the unemployment rate (U6) to 40% by the end of the period.
6 -- Deflation will unfold in full force.
7 -- The last of the family wage jobs will be purged by 2015.
8 -- Nominal GDP will fall faster than gold.
9 -- Rising interest rates will cause a massive cascade of debt defaults, causing businesses and corporations to fold. This will result in rapidly rising unemployment.
10 -- Health insurance premiums and college tuition will go parabolic.
11 -- A bull market in the US Dollar will unfold.


1 -- The GOP will continue to accelerate farther to the right.
2 -- Government shutdowns with a multi-month duration will unfold in the political arena starting in 2012.
3 -- The trend towards increasing authoritarianism will accelerate at the state level, especially in states controlled by the GOP.
4 -- Obama's approval rating will decline, reaching a low of 4% by 2016.
5 -- The Tea Party will increase in size and influence. Sarah Palin's political influence will increase as magical thinking becomes more widespread.
6 -- Obama will win the 2012 election by a narrow margin. Republicans retake the Senate and increase their majority in the House. (Alternate scenario -- Obama wins by a landslide and the Democratic Party has a large majority in the House and Senate. This could happen if Medicare is the top voter issue).
7 -- The United States defaults on its debt in 2014 due to rising interest rates making the existing debt too heavy of a burden to bear.
8 -- Extended unemployment benefits will not continue beyond the end of 2011.

Social Trends

1 -- The movie industry will continue to decline. Opening weekends for event movies will fall to $25 million (domestic) by the end of the period. This trend will be driven by wage deflation and rising unemployment.
2 -- Horror movies will over-perform relative to other genres with increasing frequency.
3 -- Hard rock music, such as music that dominated the charts in the early 1970s, will become more popular.
4 -- Bright colors will increasingly go out of style.
5 -- Racial and religious tensions will become more explosive over time.
6 -- By the end of 2011, the majority of Christians will embrace the "2012 Nibiru the world is coming to an end" meme.
7 -- Protests such as those that took place in Wisconsin in March 2011, will increase in size and extent as attacks against collective bargaining rights, abortion rights, unionization, Medicare, Social Security, and unemployment benefits escalate.

The next leg down is upon us. As Primary wave [3] down unfolds in the coming months and years, we will be faced with hard times and come under severe testing. "The Great Deflation" is now starting to unfold in full force.

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