Business Cycle High Point Ahead

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.

US Dollar Index Hits 11 Month High

The US Dollar Index reached an 11 month high, breaking through the 80 barrier yesterday and staying above that level today. The bulls are in firm control over the dollar even as "The Great Deflation" inexorably regains the upper hand in gold, oil, stocks, and housing after a 2 year bear market rally from March 2009 to May 2011.

Here is an updated chart of the US Dollar Index starting from the low of Primary wave [2] down (2008 - 2011) and the rally so far from the low:

The primary count is that the dollar is approaching the center of Intermediate wave (1) of Primary wave [3] up, which could explain the break-out advance that has started to unfold over the last month. This scenario is hinting that we are close to reaching an Intermediate degree point of recognition in which analysts and economists will start to realize that the dollar is trending upwards.

Here is a chart of the US Dollar Index since the low in 2008, which shows part of a Cycle degree advance in progress:

The upside target of Intermediate wave (1) of Primary wave [3] in the US Dollar Index is around 93, to be reached in September 2012. The upside target takes the dollar beyond the peak of Primary wave [1] up.

Here is a chart of the US Dollar Index, showing the projected wave path of the dollar through the rest of "The Great Deflation". The advance from the low in 2008 is Cycle wave I up, projected to end in 2021 with an upside target of around 185.

The US Dollar Index is an important part of "The Great Deflation" picture. While the US Dollar Index is in a bullish uptend, stocks, commodities, the economy, and job market are declining during the same time interval. Here is how the dollar fits into the overall picture:

1 -- The Cycle degree advance in the dollar from 2008 to 2021 lasts a fibonacci 13 years. The advance was preceded by a 32 year bearish ending diagonal. The 13 year duration for Cycle wave I up in the dollar also fulfills the guideline that ending diagonals are retraced in the opposite direction in one-third to one-half of the time. This strongly argues for "The Great Deflation" ending in 2021. Cycle wave I up in the US Dollar Index strongly corresponds to Cycle wave c down in the DJIA, S&P 500 and the Wilshire 5000.

2 -- Most of the global debt is denominated in US dollars. During the massive credit bubble that unfolded during Cycle wave V up (1974 - 2000), the dollar was relentlessly devalued relative to other currencies on the planet as the credit bubble expanded. At the height of the credit bubble, there was an estimated 1 quadrillion (that is 10^15) dollars in debt throughout the globe. Now that the credit bubble is imploding, the US dollar is rising in value again as phantom money (which is mostly dollars) disappears into thin air.

As "The Great Deflation" starts unfolding in full force, the US Dollar Index will accelerate upwards. Primary wave [3] up in the US Dollar Index strongly corresponds to Primary wave [3] down in the DJIA, S&P 500, and the Wilshire 5000. As we are approaching the center of Intermediate wave (1) of Primary wave [3] up in the dollar, the overall sentiment on the dollar in the mainstream media is something to keep an eye on in the coming weeks.

Bulls in Control of the Dollar

Last week was a game changer for the dollar. The recent breakout in the US Dollar Index is a very strong indication that a bull market in the dollar is in progress. This post is an update to the blog entry back in late April 2011 when the mainstream media was pronouncing the "death of the dollar" and economists and analysts were writing obituaries on the demise of the dollar as the world's reserve currency.

The US Dollar Index rallied initially in May 2011, then was stuck in a "sideways trend" for over 3 months. The early May 2011 low was never taken out. Here is the short term chart of the US Dollar Index.

The May 2011 low marked the end of Primary wave [2] down in the US Dollar Index. From the early May 2011 low, we got an initial kickoff rally, Minute wave [1] up, that unfolded for most of the month. The retracement that followed the rally lasted almost three months as Minute wave [ii] down unfolded as a double zigzag with Minuette wave (x) of Minute wave [ii] taking out the previous high by a small margin.

Now that the breakout happened, we can be confident that the advance in the dollar is just getting started.

Here is a chart showing the intermediate term outlook of the US Dollar Index.

Primary wave [2] down in the US Dollar Index unfolded as a (W)-(X)-(Y) combination correction where Intermediate wave (W) unfolded as an expanded flat, and Intermediate waves (X) and (Y) unfolded as zigzags. The first subwave of Primary wave [3] up in the US Dollar Index, Intermediate wave (1) up, is seen advancing the index above the high of Primary wave [1], since the Primary degree third wave is very likely an extended third wave. The upside target for Intermediate wave (1) of Primary wave [3] up in the US Dollar Index is 93, to be reached in September 2012.

Finally, here is a longer term chart showing the outlook of the US Dollar Index out to 2016.

The target for Primary wave [3] up in the US Dollar Index is 153, to be reached in March 2016. Five years is a reasonable duration for a Primary degree advance in a bull market. The end of Primary wave [3] up in the US Dollar Index should correspond with end of Primary wave [3] down in the stock market.

The US Dollar Index is a very important part of the larger picture, namely, "The Great Deflation" unfolding with increasing momentum over time. The end of "The Great Deflation", identified as Supercycle wave (a) of Grand Supercycle wave [IV], should correspond with Cycle wave I up in the US Dollar Index, which should occur around November 2021.

Our Current and Future Path

Here is an update on our current position within the larger Elliott wave sequence. The larger picture still remains the same. With the blow-off top possibly in its final days, it's time to assess where we are and where we are going.

The long term trends have not changed, as shown by our current position at the largest degrees of trend:

Ultra Millennium wave ((III))    1400 - 11000+  Modern and Future Civilization

Super Millennium wave ([1])    1400 - 4400+    Modern and Future Civilization

Millennium wave ((1))              1400 - 2233      Modern Civilization

The Millennium degree trend is still up.

Within Millennium wave ((1)), it is clear that the first three Grand Supercycle waves have already completed. We are in a Grand Supercycle degree bear market, which started in 2000.

Here's a chart of the DJIA from 1915 to 2055, showing the projected wave path of the DJIA in the years and decades ahead.

Given that Grand Supercycle wave [IV] must stay within the trend channels associated with Millennium wave ((1)) with perhaps a throw-under at the end of the correction, I lean heavily towards a flat. The bear market is just getting started and we are yet to enter the heart of the abyss. The bear market should end in 2055, which would also correspond with a Kondratiev cycle low point.

Within Grand Supercycle wave [IV], we are still in the initial leg down, which is Supercycle wave (a). It is clear that Supercycle wave (a) is unfolding as an expanded flat, with Cycle wave a and Cycle wave b completed and Cycle wave c in progress. Since an expanded flat is a 3-3-5 pattern, we should expect Cycle wave c to unfold as a five wave impulse. Within Cycle wave c, only Primary wave [1] is completed and we are very close to completing Primary wave [2].

Here is a chart of the DJIA from 1998 to 2021, showing the projected wave path of Supercycle wave (a).

The projected wave path of Supercycle wave (a), of course, paints a picture of deflation unfolding with increasing momentum over time. It is for that reason that I call the period "The Great Deflation". So far, "The Great Deflation" has been unfolding in a punctuated fashion. This will change with the start of Primary wave [3] down, when deflation will unfold in full force.

Here is a chart of the DJIA from 2007 to 2015, showing the portion of Cycle wave c that has unfolded so far, plus a projection for a portion of Primary wave [3] down. Expect Primary wave [3] to last 55 - 60 months. The bear market is projected to continue sliding down the "Slope of Hope" until Oct 2013, when the center of Primary wave [3] is reached.

The point of recognition is arrowed on the chart. That's when economists and market analysts start to realize that a major depression is in progress. Until the center of Primary wave [3] is reached, there will be numerous calls for a bottom and reassurances of recovery by economists, market analysts, and politicians. In the early part of Primary wave [3] down, economists will likely say that "it's just a double dip recession".

Another aspect of "The Great Deflation" is a great bull market in the US Dollar that started in 2008.

Here's a chart of the US Dollar Index from 1998 to 2021, showing the projected wave path of the rest of Cycle wave I.

As shown in the chart, the down trend in the dollar, which started in the 1700s, ended in 2008. The 300 year bear market in the dollar is clearly too big to be a Grand Supercycle degree correction, it is most likely Millennium wave ((2)). The projected wave path of the US Dollar Index also paints a picture of deflation unfolding with increasing momentum over time.

While Primary wave [3] down unfolds in the stock market, economy, and job market, Primary wave [3] up will unfold in the US Dollar Index. The end of "The Great Deflation" will correspond with the peak of Cycle wave I in the US Dollar Index. 13 years is definitely a reasonable duration for a Cycle degree advance within a larger bull market, and in addition, retrace the 32 year ending diagonal (1976 - 2008) within the guideline range of 10 - 15 years.

We did not have a "Great Recession" that recently ended. The current bear market is not in the same league as the Great Depression, so we are not in the "Second Great Depression" either. We are in a major depression. I think that the Crisis of the Roman Republic is a better comparison to the magnitude of the bear market that is unfolding and the hard times that are coming. I propose to call the current period, Grand Supercycle wave [IV], the "Crisis of the Western World".

US Dollar Approaching Critical Juncture

The US dollar is approaching a critical juncture. Bearish sentiment on the dollar is very strong, and many are already pronouncing the dollar's demise. The decline of the dollar has been in the news for several weeks.

Generally, when there is extreme bearishness or extreme bullishness in play, a major trend change is around the corner. In the last two low points, one in 2008 and another in late 2009, there was extreme bearishness on the dollar. In both cases, the dollar rallied. There is every reason to believe that the dollar is going to rally this time around as well.

Now for some charts on the US Dollar Index. Here is a chart of 2008 - 2011:

 

 

The low point in 2008 is off the chart. Since the low point, a quick rally lasting 8 months unfolded, followed by a flat that has taken 2 years to unfold so far. The 8 month advance is best characterized as a Primary degree advance when considered in the context of the larger picture. The large flat that is still unfolding can reasonably be characterized as a Primary degree correction.

1 -- The advance from March 2008 to Nov 2008 would be Primary wave [1]. 8 months is quite brief for a Primary degree advance within a bull market. A Primary degree bull market advance would generally last around 6 years (as a guideline). Within the larger picture, this labeling works best.

2 -- The large flat that has been unfolding would be Primary wave [2]. 2 years is a reasonable amount of time for a Primary degree correction. Within the flat, Intermediate wave (A) unfolded as an expanded flat, Intermediate wave (B) unfolded as a zigzag, and Intermediate wave (C) is unfolding as an ending diagonal.

Here's a chart showing Minor wave 5 of Intermediate wave (C) in detail.

First of all, the chart shows how close the US Dollar is to a critical juncture. Within Minor wave 5 down, three waves have already unfolded with Minute wave [iii] just now completed. The final low of Primary wave [2] is indicated by the target box on the chart, with a downside target of 72.0 to 72.75 sometime in May 2011.

It's more than a coincidence that the US Dollar is approaching a critical juncture at the same time that the stock market is. The commodity markets are also approaching a critical juncture next month as well. The common denominator of all the markets reaching a critical juncture at virtually the same time is "The Great Deflation" which will no doubt kick into high gear upon the next leg down in the markets. One of the consequences of "The Great Deflation" is a bull market in the US dollar.

Projecting the future wave path of the US Dollar Index is fairly straightforward. Since Primary wave [2] is a deep retrace of Primary wave [1], we should expect Primary wave [3] to be 2.618 times the length of Primary wave [1]. This puts the target at around 120. Continuing with the "all the same market" theme, Primary wave [3] up in the dollar will unfold at the same time that Primary wave [3] down is unfolding in the stock market. This helps build the case that Primary wave [3] down in the stock market will last 55 - 60 months with the low point around April 2016.

Primary wave [4] down in the US Dollar Index should last around a year and is very likely to unfold as a zigzag. Primary wave [5] would start in 2017 and continue through 2021, lasting 55 months. The upside target for the end of Cycle wave I is 180. 13 years is definitely a reasonable amount of time for a Cycle degree advance. This helps build the case for "The Great Deflation" ending in 2021.

Here's the chart showing the projected wave path of the US Dollar Index.

The projected wave path of the US Dollar Index paints a picture of "The Great Deflation" unfolding with increasing momentum over time.

From the 1700s, the dollar went into a downtrend that continued until 2008. This decline is best labeled as Millennium wave ((2)). The decline unfolded as a triple zigzag with an ending diagonal unfolding from 1976 to 2008. The projected wave path of Cycle wave I would accomplish another guideline, namely, the ending diagonal would ideally be retraced in 10 - 15 years.

There is every reason to be bullish on the US dollar.