We are approaching an important juncture in the stock market and economy, namely the next business cycle high point that is on course to be reached around June 24, 2012. The short term trend in the stock market is still up. However, the top alternate count as suggested from an earlier blog entry has emerged as the preferred count, which would put the orthodox high of the Primary-degree advance from the March 2009 low in February 2011.
Here is an updated chart of the DJIA, starting from the orthodox high on February 2011:
In the second phase of "The Great Deflation", the corresponding structure -- Cycle wave x -- started in March 2009 and is unfolding as a complex structure with Primary wave [W] complete in February 2011 and Primary wave [X] down in progress with Primary wave [Y] starting in June 2016 and continuing until 2021. Primary wave [X], as per the preferred count, would itself be a complex structure. The expanded flat structure that unfolded from February 2011 to October 2011 would be Minor wave A of a larger expanded flat, Intermediate wave (W), in which Minor wave B of the structure is in progress and is unfolding as a triple zigzag.
Within Intermediate wave (W) in the DJIA, Minor wave B is on course to reach 1.618 times the length of Minor wave A, which would give an upside target of 13625. In the S&P 500, a more likely relationship is Minor wave B = 1.382 times the length of Minor wave A, which gives an upside target of 1452. Both of the upside targets should be reached around June 24, 2012.
After the business cycle high point is reached, markets will head lower with Minor wave C of Intermediate wave (W) unfolding as a five wave structure that will take around a year to complete with a downside target of around 8500 in the DJIA and 850 in the S&P 500, both to be reached around June 2013.
Here is a longer term chart of the S&P 500 showing how Primary wave [X] is likely to unfold with the structure reaching completion in June 2016:
Look for the Federal Reserve to step in with a third round of quantitative easing once the DJIA falls below 10000. QE3 is likely to be launched later this year, but after the November 2012 general election takes place. The market action in Intermediate wave (X) will create the appearance that QE3 is succeeding in propping up the stock market. The markets will put in a lower high around June 2014 before a long hard fall, Intermediate wave (Y) follows, unfolding as a zigzag and taking the markets down to the lower trend line shown in the chart, which connects the October 2002 and March 2009 low points. The markets should find support at the lower trend line shown in the chart at the next business cycle low point in June 2016.
When the business cycle high point is reached later this year, the economy is expected to decline in nominal terms as well as real terms. Last week's reading on the nominal GDP of the US economy came in at 2.2% for the first quarter of 2012. Considering that the Bureau of Economic Analysis (BEA) has used a GDP deflator of just 1.2% in the last 6 months, it's no surprise that the economy continues to decline in real terms. Considering that the actual inflation rate is around 7% (as per Shadow Government Statistics), production of goods and services in the United States is essentially at the same level it was in 1982, with the bear market erasing 18 years of economic growth as of today. In many nations of the Western World, there is already a resumption of economic decline in nominal terms with many nations in Europe reporting that their nominal GDPs are declining.
The US Dollar Index is also supporting the idea of a business cycle high point around June 24, 2012 as the dollar has already completed a Minor degree leading diagonal with a retracement in progress. Here is an updated chart of the US Dollar Index:
As pert the main wave count, Minor wave 2 down is in progress, unfolding as a complex structure (expanded flat - expanded flat - zigzag) and should be done in late June 2012. The start of Minor wave 3 up in the US Dollar Index corresponds very well with the start of the five wave decline in the stock market (Minor wave C in the DJIA and the S&P 500). The US Dollar Index continues to paint a picture of a deflationary collapse in the economy as most of the debt in the world is denominated in dollars, and the deflating of the credit bubble would make the dollar more valuable as there would be fewer dollars in the global economy.