Little thoughts on Swine Flu

Somehow, my brain cells was in hibernation mode this afternoon. So to prevent it from going into full hibernating mode, I did some readings on H1N1 Swine Flu. Partly because I was going to US soon and more importantly, there was a warning from health authorities that the swine flu epidemic may run its peak in the fall season and will affect 30% of the US population. That's a awful lot.

So here it is again. I am skeptical of almost everything even though on the surface, I may appear to agree. Including the wild conspiracy theories of the New World Order etc etc. But sometimes, I do read a bit to gain an insight to both sides of the equation. Truth comes from skeptical questioning and real understanding.

I was particularly concerned when I saw Baxter had patented the H1N1 vaccine in 2007. That was 2 years before this virus infected the human population. The media reported that the source of virus came from pigs. And so, how in the world can this vaccine be created and patented then ? Unless, it was either deliberate or by mistake, that the virus was already experimented and created in the laboratories and somehow got to the outside world. And worse still, this vaccine may be contaminated with the deadly H5N1 avian flu virus. Inject with caution is the word. Gosh, sometimes I really hate myself for being too inquiring.

Animals. When can we ever learn to love them with respect and care. They are always the scapegoat for human errors because they cannot fend and fight for themselves.

An abstract from "The Liberty Voice".

"Baxter has been chosen by the WHO to head up efforts to produce a vaccine for the Mexican swine flu that is spreading throughout the U.S. and Europe.

The decision was made despite further revelations last month that vaccines contaminated with deadly live H5N1 avian flu virus were recently distributed to 18 countries by a lab at an Austrian branch of Baxter.

Initially, the company attempted to stonewall questions by invoking “trade secrets” and refused to reveal how the vaccines were contaminated with H5N1. After increased pressure they then claimed that pure H5N1 batches were sent by accident.

However, the probability of mixing a live virus biological weapon with vaccine material by accident is virtually impossible."

Read on. Copied from Case about bird flu

Off to the final race

Last night, SPX busted through 1018 easily, the activity surely resembles a wave 3. From my last post, I mentioned SPX need to exceed 1013 quickly else the momentum will be to the downside. It surely fulfilled this yesterday. So now with the structure clearer, we can narrow our probabilities. The H&S formation of SPX has been cancelled, but the triangle of Gold/Silver remains. Short term target is US$1085 for Gold if it breaks to the upside. However, it will best to stay neutral at the moment and not second guess the direction. Remember, a breakout from a symmetrical triangle can go either way.

SPX is now in the final upleg. There are 2 possibilities here.

1. Its in major wave 3 of C of C. We should expect a weak corrective wave 4 and a final rally to SPX 1041 to complete the entire rally from March lows. Major resistance remains at 1044. The great bear should resume thereafter.

2. Its in minute 3 of major 1 of C of C. This paints a more bullish target of Dow 10k and SPX1121, a 50% retracement before the bear resumes.

We will know by then if the market has topped. The reversal will be strong and violent, befitting of the status called "Great Bear".

Watch for negative divergences on the RSI/MACD of weekly charts as prices make a new high.

As prices makes new highs while volume is decreasing, distribution is also going on silently as institutions and big boys unload their holdings to retail investors. Be careful not to be the one to carry the last bag.

Deflation or Inflation

My last post talked about Pretcher's call for US$650 Gold bottom. He supports a deflationary view.

I do agree so far with his call on the equities market. Been pondering over and over again and I got to say I am still skeptical about his precious metal direction. For the past few days, both Gold and Silver had been consolidating in a diagonal triangle. The break, after ABCDE is completed, is either to the upside or downside in a big, fast way. On the other way, equities seemed to paint a Head & Shoulder picture and if 1013 is not surpassed quickly, the momentum should be to the downside. Price was up last night on SPX, but volume down. This is bearish.

At this juncture, most are on the consensus that the trend of both equities and commodities are in the same direction. USD is opposite. Hence, most expect them to be down at the same time, drawing similarities to the crash of 08, where fund managers and institutions liquidate their commodities holdings to raise cash.

What IF, and a big if, this time is different.

Looking at the long term chart of USD, its clear it has been in a secular bear market. Within a secular cycle, there will be cyclical bull markets. But overall, the long term trend is down. Focusing on the weekly charts, I saw a double top in USD. And there is a clear 5 wave impulsive structure down after the double top formed. If, USD has bottomed for wave 1, and is now retracing in a typical 50% or 61.8% of wave 1 to form wave 2, we would expect USD to crash in a nasty wave 3 after wave 2 is completed.

With a wave 2 rally in USD ongoing, equities should be on a decline at the moment. Commodities as well. Although the structure of correction defers. Equities forming a H&S (bearish) and commodities consolidating in a triangle (can be bullish or bearish depending on the direction of breakout). Which brings us to the next scenario. Most seem to think USD has truly bottomed at least for the next couple of years. What if this time, it turns out differently. Markets have a tendency to leave 80% of the people behind and wrong. So when most people agree on the same direction, its perhaps beneficial to try and step back and look at the other side.

Could both USD and equities crash at the same time ? Why not...

If the very existence of Fed itself and the monetary system comes into question, all hell will break loose. This might be the next catalyst for a crash. The world which we lived in now operates on a fiat currency system. There is no backing on Gold or any other precious metal. President Nixon removed the Gold Standard since 70s/80s. Hence, the value of our currency lies in our confidence of it. In the crash of 08, capital flew to treasuries and greenback as a flight to safety took hold. If Fed comes under scrutiny by the public and the nature of its existence is being questioned, I don't think people will still consider USD as the safehaven then. Where else will these capital flow to ?

Not in equities, not in USD nor any fiat currencies, so what else left ? Gold & Silver ?

Even if we are in a deflationary environment, it doesn't mean Gold and Silver should fall as well. If Fed manage to control inflationary pressures, gold and silver should continue to perform well if the cause of the next downfall lies in the confidence of our monetary system.

Here is Congressman Ron Paul's campaign on the auditing of Fed, HR 1207.

"I have been very pleased with the progress of my legislation, HR 1207, which calls for a complete audit of the Federal Reserve and removes many significant barriers towards transparency of our monetary system. This bill now has nearly 170 cosponsors, with support from both Republicans and Democrats. Senator Bernie Sanders has introduced a companion bill in the Senate S 604, which will hopefully begin to gain momentum as well. I am very encouraged to see so many of my colleagues in Congress stand with me for greater transparency in government.

Some have begun to push back against this bill, and I am very happy to address their concerns.

The main argument seems to be that Congressional oversight over the Fed is government interference in the free market. This argument shows a misunderstanding of what a free market really is. Fundamentally, you cannot defend the Federal Reserve and the free market at the same time. The Fed negates the very foundation of a free market by artificially manipulating the price and supply of money – the lifeblood of the economy. In a free market, interest rates, like the price of any other consumer good, are decentralized and set by the market. The only legitimate, Constitutional role of government in monetary policy is to protect the integrity of the monetary unit and defend against counterfeiters."

China Bubble Drop Updated

In my previous article on SSEC falling 5% signalling the change in trend, we may get the sell signal soon. They made the high on 4 Aug and have dropped 12.2% since then. Its now sitting above the 200ma, but below 50ma. Once 200ma breaks, the odds are high that the bear market rally Wave B is over and it will be the first to roll over.

Thereafter, the rest of the markets should start to roll over one by one.

Robert Pretcher issued a bulletin end of February advising his clients to close short positions as the market was in extreme bearish mode (3% bulls) and was tightly compressed. Shorts will be slaughtered if they are not out of the way of the ferocious bear rallies. Bear market rallies had been known to be fierce and fast. This had happened.

Pretcher once again, just released his latest bulletin, abeit a week earlier in order to prepare his clients for what lies ahead. He advised the unwinding of long positions as we await for the nasty Wave C/Wave 3. In his 10 page report, he mentioned the likely disintegration of GE during the next wave down. Besides GE, hundreds more who had remained resilient during Wave A/Wave 1 will be impacted and weakened this time round.

He mentioned precious metals as well, forecasting a US$650 bottom for Gold. USD should start to rally for the next 3 years. Gold/Silver will take a hit as USD rallies. But they will be the buy of a century after the bear market bottomed (2012-2016).

The USD bottom

The USD seems to have completed their correction and bottomed last Thursday/Friday. The rally off Friday's low looks strong. Will it continue and signify a change in trend ? Lets watch it closely over the next few weeks.

Both SPX and USD moved up on friday. For the past few months, both indexes had moved opposite of each other. So, which one is a headfake ? I tend to support a down-move in SPX for the next coming weeks/months. However, though I still believe we are peaking soon, I need to avoid the major pitfalls of a trader. That is, letting your emotions rule.

To be a successful trader, one must cast aside his bias on a specific direction. He must learn to look at both sides rationally and choose the path with the best probabilities till it is proven otherwise. Stops must be in place to prevent excessive losses if a trade goes against you. Failing to adhere to these, a trader will find himself losing control and letting his emotions rule over his head.

Back to the markets, the SPX has retraced 38% of the entire decline from 1576-666, stopping at 1018 last friday. While SPX and Dow both hit new highs, NASDAQ did not follow suit. A case of intermarket bearish divergence. In Asia, SSEC/HSI had retraced at least 50% or more. The minimum retracements for a B counter rally had been met. Will the markets continue higher into fall season ?

A grand supercycle backtest

The Wave IV Grand Supercycle ? I hope not. Wave 4s are corrective waves. It typically retraces 38.2% of the previous Wave 3. Though not a large percentage, the degree of correction does matter. I had my count in a supercycle degree correction, however if things are really that bad and we are indeed in a grand supercycle correction where year 2000 is the peak of grand supercycle wave 3, we are in serious trouble. A grand supercycle lasts 100-200 years. Even if a mere 38% correction in price and time, we'll not going to finish this bear until 2020s. I am familar with this time frame due to the sign of Pluto in Capricon. However, the indicative bottom value of DOW is giving me the goosebumps. I knew Pretcher had already set the targets to the end of this bear at DOW 400. Yes, 400. However, I've always found him to be a extreme bear. So I've always tried not to take him too seriously, especially with global central banks taking a pro-active approach to induce credit into the markets and trying to prevent deflation.

Greenspan kept interest rates too low for too long, creating the dotcom bubble. After the cycle correction of 200-2002, capital flowed into the housing markets. Another credit induced bubble appeared, this time the housing bubble. Bernanke tried to prevent deflation and pumped liquidity into the markets. He tried to keep inflation in check as well. But will he succeed ? Watch the CPI.

Deflation is sometimes neccessary to wash away the excesses so that a new and better system can evolve. Preventing deflation is postponing the inevitable, not solving the crux of the problem. No one wants to be remembered as the one who caused the misery of the world. But if "morphine" is injected to a sick patient trying to keep him afloat, there will come a time when I do not even dare to think about.

Courtesy of Daneric's Elliot Waves :

I've been showing a lot of long term charts lately because I think we are nearing an important juncture: the resumption of the Great Bear market and on the precipice of a very scary move downward. So I'd like to revisit the Supercycle wave V theme yet again.

As most of my readers are everyday traders, you will know what I mean when I say a backtest may be occurring. Simply put, I am proposing that this Primary wave 2 rally is nothing but a massive "backtest" of a very long-winded Grand Supercycle upper channel line that resides very near where the market is today. Allow me to explain.

Elliott Wave theory, as laid out by Robert Prechter, proposes that the 2000 market top was a Grand Supercycle wave III top (in orange on chart) that stretched some 220+ year. It virtually aligns with the birth and rise of the United States. Within that Grand Supercycle wave III, there exists 5 subwaves of Supercycle degree (in purple on the charts). 1929 was the top of Supercycle Wave (III). After the Supercycle wave (IV) price low in 1932, a final Supercycle wave (V) impulsed upward in 5 subwaves of Cycle degree (blue). We cannot see all the activity prior to 1900 on this chart engine as I am unfortunately limited in what I can effectively show. So I make some assumptions based on sound EW theory. Allow me to explain some more.

A basic tenet of EW theory is the concept of channeling. Basically the price peaks of wave's 1,3, and 5 connect on a trendline and the peaks of 2 and 4 connect on a trendline. These trendlines typically form parallel trendlines, or whats known as a "channel". Again, channeling is a key concept of EW theory and gives us some of our basis for how we interpret very long term charts.

Every 5 wave structure from the submicro, to the Grand Supercycle, adheres to the concept of channeling. Just because a wave is very large (220 years long) does not mean it is more complicated. On the contrary, the larger the wave, the more closely Fibonacci expansion ratio targets are met and the more channeling adheres to basic concepts of connecting wave peaks 1,3,5 and 2 and 4. However there is something known as "Overthrow" on very powerful waves no matter what the size. That is where my charts come into play.

Again looking at the chart, Supercycle wave V (purple) lasted from the 1932 low to 2000 top. This 70+ year wave consists of 5 "Cycle" subwaves, labeled in blue. In theory, the blue Cycle subwave I, III, and V peak should have connected on a channel line (blue) just as subwaves II and IV connect. But something happened at where the Cycle wave V peak was "supposed" to end at about the red shaded dot area.....it extended above the channel line.

So looking at the charts, Supecycle wave (I) (not shown as it peaked in about 1837) , (III) and (V) should have also connected on a channel line (proposed purple). But purple Supercycle (V) also overthrows the purple channel line.

So based on this we can assume Cycle wave V should have ended at the touch of the upper blue channel line in about 1996 at DOW 5500. This is the red dot shaded area on my charts. You can see it struggled here yet it finally plowed on through and this is when the market got really extended and things got crazy. It kept on going until the 2000 orthodox price peak occurred. This 2000 top is the green shaded dot.

The advance above the purple upper Supercycle channel line was the result of a hyper-extended cycle wave V at the top of a Supercycle wave (V) in turn at the top of the most bullish Grand Supercycle wave III in history. It experienced "overthrow" of the channel and ran wild for a few years. This overthrow was largely the result of the expansion of credit which allowed people to borrow their way to a way of life that nature would normally keep in check. This is what Prechter could not possibly foresee nor predict.

Social mood was, in effect, "borrowing" from nature's laws. It did this through the Great Asset Mania, the greatest in the history of mankind. People were in a good mood and it reflected in both social and economic activity, asset valuations, and speculative fever. Laws were loosened at the very time when they should have tightened. Such is what happens at the top of a 220 year Grand Supercycle wave III. No one can see the top and no one can see the subsequent drop.

Then the Great Bear market began. A retrace Cycle wave "a" back to about 7250 occurred in 2002 and the DOW eventually met back up with the Supercycle purple upper channel trendline. This is the blue dot area in 2002 I show on the charts. It bounced off this trendline (blue dot area on the charts) and credit expanded yet again in another bubble of asset mania. Except this was a "b" Cycle wave and was actually a false rally built on a house of cards. The DOW was forming a corrective "expanded flat" in which the b wave price high (black dot area) goes higher than where the previous wave 5 price high occurred in 2000. We suspect this is a b wave because "real" valuations stopped long before the actual 2007 price peak. In other words when you were buying Valero (not a DOW member but just an example I thought of) at $75/share in 2007, when they are/were loaded with debt, you were buying a fantasy b wave cycle top. You can be sure that corporate debt fueled this expansive b wave valuations on the DOW 30 stocks. Prices were pumped way up on credit and the subsequent drop from 2007 - 2009 was harsh.

Regardless the market managed to stay above the Supercycle wave upper channel (purple) line after bouncing off in 2002. But in 2007 the party was waning and b wave was waning. The nasty Cycle c wave would begin. So the DOW actually topped in 2000, had an expansive Cycle (in blue) "b" wave rally that carried prices above the 2000 top in yet another credit -expanded bubble in an expanded flat. An "expanded flat" b wave occurs when the preceding wave was of such power that the main trend continues to "carry through" on the subsequent corrective wave. So the 2007 DOW top was a b "corrective" Cycle-sized wave and a false rally wave at that. The extreme sharp drop after the top confirmed it in my book.

So the Cycle c wave of that expanded flat is playing out now. Since an expanded flat is a 3-3-5 pattern, the current proposition is that Cycle wave c will consist of 5 Primary waves down that will eventually try and reach the lower purple channel line of Supercycle degree. Hence the less-than-1000-DOW target in a few years I show on these charts.

But Dan, the DOW seemingly traced 5 waves down from 2007 peak already! What gives? So aren't we done with the bear market for now??? Doesn't those 5 waves down form the Cycle C wave of your proposed 3-3-5 Expanded flat? The theory is no, we are not! Why? Because we had likely only 5 Intermediate-sized waves down which only formed Primary wave 1 at the March 2003 low. Toggle these charts to unlog scale and you can see it doesn't look at all so wrong.

And hence the "Primary Wave 2" (P2) rally we are in now. And after P2, comes a nasty P3 in which prices seek out the lower purple Supercycle channel line I show on the charts.

Which brings us to my main point: P2 is merely a massive "backtest" wave testing the upper purple Supercycle channel line (the purple shaded dot on my charts). And as traders, you all know that when a backtest fails, it heads to the lower channel line. And since there was significant "overthrow" of the upper channel line, the theory holds that there may well be underthrow on the way back down.

In addition, allow me also to state why Prechter theorizes that the DOW will head back to the DOW 400 (yes four hundred) area: Because if we are in a Grand Supercycle wave IV then according to wave patterns this correction should take us back to the previous subwave (IV) price range. That is a basic tenet of EW theory and you can see me often point that out on squiggle charts....so yes they should apply to Grand Supercycle wave charts too!

And the previous subwave "4" of Grand Supercycle wave IV is Supercycle wave IV which was...DOW 400 or less from 1929 to the Supercycle price low of 1932. So the theory holds prices should retrace to this area. Yes it seems unbelievable that the DOW could again be less than 500 but it was only 1975 when it was 570. So go figure.

P2: A Massive Supercycle channel backtest that should fail. Nothing more, nothing less.

And Cycle C wave should consist of 5 primary waves down forming the back end of an expanded flat on the DOW or something to that effect.