This market seems intent on annoying the most people most of the time. It would do so again if it rebounded to the highest possible level. 13207 would be such a level even if it could go higher yet, as long as it stays below 13662. Time will tell.

The Dow did not even hesitate to go through the lower trend line, like a hot knife through butter. Total drop was 1068 points or 7.8%. Unfortunately I cannot get detailed tick charts but if you look carefully you can see that the drop can be counted as a completed 5 wave sequence, but by the same token it can also be viewed as a 1-2, 1-2, 3 and now 4 with 5 and 4-5 still to go. We simple do not know. In any event a bounce back to the trend line is possible; that is around 13000 to 13100 depending on how long it takes.

The so called fiscal cliff is now to blame. This is a red herring if ever there was one. The fiscal cliff is self imposed temporary torture as politicians play in their respective sand boxes. The actual outcome is already known. The US is spending 1 trillion a year too much (relative to a balanced budget), so either spending must come down or taxation must go up, either way the economy will be stimulated to a much lesser degree than it was the last 4 years. That is an inconvertible fact, cliff or no cliff. The only questions is how fast they will do it. 600 bln. seems to be the right number for the moment. That is a lot of stimulus gone and it differs from the Fed’s QEs in that the money is actually spent, not lent out to the banks.

Here is that wedge again. We now know that it did indeed peak out on or about Oct. 8th. From there it has now dropped about 900 points in about a month, a respectable amount. It is now trading below levels first reached in April of 2012.  At least 2 QEs wasted! As far as I can see there is no plausible alternative scenario that would stop this drop until we reach the base of the wedge, that is at 9750 and at this pace we could be there by March of 2013.  So far we have not had the usual bounce back to the lower trend line. If we do it would be the last opportunity to get out.

So we clearly broke out of the wedge to the downside. Actually today’s action was the worst in a year which just tells you how subdued this market has actually been. We now have 5 waves down, possible for an initial wave 1 down. Next should be a rebound, more or less to that same trend line after which the serious action should start in wave 3. This rebound the next day or so should be your last chance to get out . We will see.