A December Test of the Lows?
Breadth Summation index remains Bearish
Last month I suggested that we should test the 2002 lows before the market could form a good low and we breached them briefly on November 21st. This month we have a number of cycles suggesting a test of the lows or worse in December and or January to match the post Election 2000 pattern we have been watching. The market managed to get short term overbought as we reach the first resistance level near 900, and suggesting a deep pull back in December before we rally into the New Moon of December 27th. The Breadth Summation index (BSI) is slowly improving but must climb out of the bearish zone decisively to mark a good low and we are not there yet.
The Weekly BSI is made up of a dozen Breadth and Momentum indicators and is a good measure of oversold and overbought conditions. It makes a very good swing trading system that can avoid all negative periods while keeping much of the gains in the positive phases. It is interpreted as Bullish when turning up from low levels, and Bearish when turning down from high levels.
The post Election 2000 pattern for a mid December low is not invalidated yet, but a move above SPX 900 would take us out of the 70 to 80 point range and signal we are probably taking a different path. Last week we were in a range near the highs much like the week of December 4-8, 2000 just before a Monday high and a 4 day plunge to the bottom of the range and then to new lows the following week which would mean a low near December 18, 2008.
A bigger look at the 2000-2008 Fractal/Analog
The year 2000 is the best guide for this decline since its timing matches the late August top in 2000 and it is part of an alternating Election cycle every 8 years. The first decline into October was a good match in time and price with a 33% decline, but the following correction into each Election was different because we made a lower low in 2008, but each went up about the same since 13% is in the middle of the 9-18% range in 2008. The next decline into late November was a bit weaker at 26%, and the rally so far at 17% is a bit stronger, but they are similar enough especially in time. If the pattern continues to work, we should start to decline to SPX 800 early this week and continue to the 700 level by December 18th, before a choppy rally develops into the Inauguration date of January 20th.
Holiday week-ends often mark a change of mood
Holiday week-ends have marked turns this year within a week or so and the Thanksgiving cycle turn can be interpreted as an early low in blue or a cycle high from the previous Columbus Day cycle low in yellow. Since we did not exceed the Thanksgiving New Moon high last week and the StochRSI is more overbought than oversold for the last month, I suspect the yellow path is correct and we should get a more serious pull back this week if we are to make new lows in mid December like the 2000 pattern above.
Full Moon of December 12th and New Moon of December 27th
The Moons are very good at marking turns within a few days when the markets get very emotional and volatile like now. Full Moons are statistically lows but this one is a special case since it will be part of a rare grand cross with Saturn and Uranus that can only occur every 40 years or so and this one is the most powerful in over a hundred years. The previous Saturn - Uranus opposition was in November 1966 after a similar 40% drop from the Wave 3 all-time high back then and the market also made an October 10th low in 1966 just like we saw in 2008. Other previous occurrence of this opposition were in June 1920 a year that was down 40% and in December 1875 also down from a major top that led to the 1877 panic. The late 1966 Full Moons are the closest to now and were both local highs after a decline suggesting weakness early this week that rebounds into the Full Moon and further weakness into mid December like the Election 2000 pattern suggests. However, since this Full Moon is a lot more intense Astrologically than in 1966 I remain extremely cautious that unexpected events could make this Moon very volatile and unpredictable. Since New Moons are normally highs I expect the December 27th New Moon to be a high with the positive seasonality helping.
SPX hourly indicators turn bearish from overbought
Except for the red VIX line which remains oversold, the white Tick and blue Put/Call lines turned bearish from their overbought zone and could support a longer and deeper decline before they reach oversold again. The 4 week cycle suggests a low near December 22nd, which would be similar to the December 21, 2000 low in the post Election pattern discussed above. A similar picture with cycles suggesting weakness can be seen in the Nasdaq hourly chart here
SPX daily indicators not were most lows were made
The white Tick and red VIX lines are barely turning bullish but the blue Put/Call line is already close to its blue down trend line and getting overbought and this is not how all previous lows were made. Also troubling is the fact that less puts were bought to protect equity holdings at each much deeper low, suggesting they are seen as temporary and an opportunity to buy calls and profit from an expected rebound and that is a warning sign we may see lower lows to get the fear where it should be. The 9 month cycle low is due near December 15th, but it is not always precise and a decisive break higher of the StochRSI on both the SPX and Nasdaq would be a sign we have seen the lows of the year and the 9 month cycle low was early. The Nasdaq indicators are better positioned for a low except for the white Tick line which is too high as seen in the Nasdaq daily chart here
The 22 week cycle low and Inauguration
The 22 week cycle is prominent in the market and some of the dates 22 weeks apart are listed on the chart below. There is also a high-low-high series that suggests a low near Inauguration which would be a logical place for a change of mood as Obama takes power.
The 11 month cycle low
The 11 month cycle is also important as shown by the dates 11 months apart in the chart below. The cycle lows are often late by a month and suggesting the possibility of lower lows in December and/or January for this 11 month cycle low.
The 13 month PI cycle
Martin Armstrong discovered the PI cycle and its smaller and larger octaves. Below I show some of the important dates this 1/8th octave has produced within a few weeks of its occurence. Since December 15th is also an expected cycle low we are on the look out for a low and the ones back in October and November are a bit far to apply and it is probably still ahead of us.
12/5/08 - Bonds near their 60 year cycle high
Bonds are probably headed for an early 2009 high
Bonds are confirming that the 30 year bull is still alive and that the final high will probably be seen between the 13 month cycle high of February and 6 year cycle high of April 09. This move up to record highs was probably Wave 3 of 5 and we should pull back for a Wave 4 correction to 128 or 122 before a final Wave 5 of 5 rally in 2009.
The end of a 30 year Bull market
Rates are making the lows of a generation as Bonds complete their secular 30 year Bull market that caused this credit crisis just like the last debt boom in 1929. Kondratieff wrote about the importance of this 60 year cycle to the economy since the contraction in debt invariably causes a corresponding downturn in the economy. The next 20 to 30 years will see the gradual collapse of the US Bond market as holders of Treasuries convert them into better assets and cause interest rates to rise for decades further choking the economy.
The path is clear when Debt gets out of control
Once the debt bubble is broken, and the sub prime crisis leaves no doubt that it has, the result is debt deflation which destroys much of the wealth that was artificially created, there is no free lunch. We will probably not slide into a Great Depression as quickly as in the 1930's because the world is different and much more connected, but we may get there eventually if we do not return to a Gold standard that forces fiscal responsibility on the financial system.
Fed cut confirms the 6 year cycle high in Rates
The 6 year cycle high in Rates started with a pause in August 2006 and was confirmed by the aggressive Rate cut from Bernanke in August 07 and January 08. The spread of the credit problems will leave the Fed no choice but to keep short rates low into the next 4 year business cycle low into 2010. We can see that the move down in this last 6 year cycle low of 2010, which is the 1/10th octave of the 60 year cycle is much stronger and suggesting it is the last move down before rates gradually start to head higher for 20-30 years.
12/5/08 - The US Dollar 4.3 year PI cycle low
The US Dollar at last resistance before 2005 high
The rally in the USD is reaching a zone of resistance near 88 that should gives us another pull back to the 80 area in December but the final high is likely to be near the Inauguration and PI cycle date of January 20th and the 2005 high of 0.92 is likely.
The US Dollar acting like 1991
The US Dollar has rallied sharply much like it did in 1991 and there were banking and real estate problems during Savings and Loan crisis but that rally failed and the USD made new lows the following year, and I expect a similar outcome once the Dollar turns down in early 2009.
The US Dollar is declining due to Debt inflation of 8%
Since the 1970's the amount of US Debt backed by the dollar has increased at a rate of 8% per year, while the dollar has declined at a rate of 3.5% per annum. Half of this debt is owned by the Fed and US itself for its pension liabilities, the remaining half is owned about equally by Americans and Foreigners. There are now over 4 trillion in global USD reserves and more than two thirds are in Asia. When these reserves start to flow into other assets like resources, they will cause price increases where they go, and downward pressure on the USD and its debt. The Currencies of countries with a major surplus like China, Japan, Germany and Russia will appreciate over time, especially the ones with large USD reserves like Asia and Russia.
Japan's rates can't go any lower and the Yen may be turning up for a while
The Bank of Japan raised Rates once for the first time in 6 years and may have signaled the end of the Yen's weakness. Each wave down in 1998, 2002 and 2005 has been on lower momentum while the waves up to 100 have been stronger possibly forming a bullish ascending triangle targeting the highs near 120 or higher.
12/5/08 - Commodities near end of correction
Commodities continue to collapse
After losing the 20 year support near 240 to 350, the CRB collapsed even further to the round number support of 200 and the last support left is the 2001 lows near 180.
Oil collapses into 5 year cycle low in November
Oil fell hard to the 1990 and 2000 highs near 40 for the 5 year cycle low in November and has raised doubts on how high the next rally can get for the 5 year cycle high of 2010.
Gold has probably seen the lows of the year
Gold has probably ended the third decline of the correction from the March 08 high and it should continue higher towards the next cycle high of March 25th 09. The COT's are also showing a configuration seen near previous lows.