Just a quick update on the wedge concept as it is progressing in the DOW. It looks like the structure is complete but these diagonals have an annoying habit to go further than one expects. Each led comes in threes and consequently it would be possible that we have only completed waves 1, 2 and 3 and are presently in wave 4 with 5 still to go. However, the proportions of the legs to each other and the whole looks to be near perfect. A break now of the lower boundary would increase the confidence that it is game over for this index.  The question then is what can possible cause, trigger or provide the tipping point for such a change to occur. We have no idea and do not really care. Nevertheless it is hard not to notice that in 9 days from now, or perhaps a little earlier, it might become clear who the next president of the US might become. Obama would be good as he would keep Bernanke in office so you can count on QEs forever, Romney would be good because he favours super free capitalism that should increase profits, that at least is the conception. Perhaps it will soon be clear that concept and reality are miles apart, regardless who wins.

If it pans out is a different matter altogether , but theoretically if Dow Chemical is following the script of a large “flat”, this is what one might expect. In the real world stock prices never go below zero simple because no one would be interested in selling, however conceptually a value below zero is perfectly acceptable in a capital intensive industry such as this. Lets just say that it will reach a value below $5 and above $0.

Late yesterday the company reported a drop in earnings of 39% (nice Fibo # by the way). It was trading at a p/e of about 18. To keep that going the stock would obviously have to shed some $12 or so and even then it won’t be cheap. Betting on this can be a little tricky initially as the market, applying “modern” economics, just loves companies that rid themselves of their workforce, or at least a good part of it. Don’t forget, bad is good!

This market is thoroughly beginning to irritate me a lot. So I am contemplating a silent period for a few weeks. However, before doing that I just would like to present the bear case , in my view the realistic case, once again using the DOW. I single out the DOW as it seems to be the only major exchange that is so close to its previous peak(s), perhaps because it is easily manipulated by a constant barrage of talking up, interventions by plunge protections teams and what not. Here are the charts once again, arithmetic and semi–log;

These charts are from MSN and include the Great Depression. They can be enlarged by simple clicking on them. The counts shown differs a bit from the one the Gainesville boys swear by. They have the top in 2000 whereas, chart wise at least, 2007 seems to make more sense. It is all a little academic but take a good look at the semi-log chart. Equal distances are proportionally equal so if the great recession we are supposedly in is going to resemble the great depression you would expect a drop of about 3 blocks, so far we have barely done a single one. Notice also that in both waves 2 and 4 the DOW travels from one side of the channel to the other (irrespective of the absolute size of the loss). This time the DOW barely made it to the middle and is once again hugging the upper channel line from below. Given all the supposed excesses the economy has to purge itself of, it would seem reasonable to expect a visit to the other side of the channel before all is said and done.

The 2007 high is interesting for other reasons as well. Waves 1 and 3 combined took exactly as long as wave 5 alone AND travelled a (proportionate) equal distance. They are therefore precisely vector equal and I do mean precisely!

Concerning the need for Keynesian stimulus one has to keep in mind that his theories are unproven, certainly in settings other than the one he had in mind concocting this stuff. But even if his thoughts are taken as gospel it is worth remembering that;

a. Taxes in the US have never been lowered/extended as much as they have been over the past, say, 10 years.

b. The US has run a deficit of about 6 trillion during that same time period.

c. It was involved in at least one war if not two for most of that time.

d. The Fed’s balance sheet has exploded by an additional 2+ trillion dollars.

e.The US is undoubtedly the greatest beneficiary of seigniorage ever and also benefits from credit extended to it by the likes of Japan and China.

f.Apart from bailouts the unemployment insurance benefits were extended to 2 years and now more people are filing for disability that are finding work.

g. For businesses there is the 100% first year depreciation.

h.Interest rates have been near zero for almost 15 years

These are just some of the most obvious ones. There are many others and they are coming from all sides, China, Britain , Europe and so on. What more Keynes do we need???? To make a long story short I am convinced that the bear scenario is much more realistic than the bull scenario.

Using the same Bloomberg chart here is the DOW (industrial Average);

So far it is the only one that is making a new high. Why it is in this unique position is not entirely clear. Perhaps they have taken the strongest measures to pump up their stock market, using both transparent and not so transparent means. We do know that the US Fed. is actually targeting the stock market, at least that is implied if the level of the market is used as a measure of the “success” of the Fed’s interventions. From an EW standpoint this should not have happened, or, alternatively the count is wrong. A double zig-zag could explain away the inconsistency (see alt a-b-c X a-b-c) but it is not very convincing. In any event as long as the Dow stays below the 2008 highs it remains likely that it too will fall in line with the rest of the markets.