Two Months of Remission

The European debt crisis has gone into remission. A deal was reached yesterday in which banks took a 50% haircut in order to make Greece's debt sustainable. I had predicted the possibility of a remission in early October 2011 in the blog entry on October 7, 2011.

We may even see the European debt crisis go into remission for a short time.

We are also starting to see a lot of optimism as economists are calling for a new period of economic growth on Greece, which would lower the debt to GDP ratio and ultimately allow the country to get out from under the debt burden by 2021. Much of the optimism is characteristic of the expected personality of Minor wave 2, that is, optimism returns and people become convinced that better days are ahead.

There was also a deal reached on the expansion of the EFSF (the bailout fund) and a second bailout package to avert a Greek default. 

Stock futures in Europe and the United States were rising rapidly as I write this, possibly marking the end of the first part of Minor wave 2 up. A large retracement of the rally is expected to unfold through most of November 2011, then a year-end rally in December 2011 with a target of 11930 for the DJIA and 1260 for the S&P 500 in early January 2012. The targets may turn out to be the orthodox peak of Minor wave 2. The most likely scenario for Minor wave 2 up is a flat or a double zigzag as the rally from the October 4, 2011 low will have unfolded in 3 waves.

In a flat scenario, Minute wave [b] retraces 90% (or more) of Minute wave [a], ideally dropping the DJIA to 10550 and the S&P 500 to 1085, then Minute wave [c] rallies but does not reach the peak of Minute wave [a]. In a flat, wave c does not have to reach the peak of wave a.

In a double zigzag scenario, Minute wave [x] retraces a large chunk of Minute wave [w] during November 2011, then a second zigzag, Minute wave [y], unfolds during December 2011 and early January 2012 to complete Minor wave 2, but Minute wave [y] does not reach the peak of Minute wave [w].

The European debt crisis is in remission. The remission will last around 2 months. The debt crisis is expected to return, worse than before, with the advent of Minor wave 3 down in January 2012. The bailout fund is expected to be overrun with impunity as the economic fault lines in Europe go critical. Italy and Spain are too big to bail out, and will go under after the UK defaults on its debt (possibly around March / April 2012), setting a chain reaction of defaults in motion. Even now, people in Greece have started to turn to bartering as "The Great Deflation" unfolds in full force in that country.