The structures in the Dow, S&P and even CAT are all similar but still they differ in the details. The S&P is relatively speaking the most straightforward index. It has this big A-B-C pattern that as a minimum promises a correction that should still go lower, and , of course, it can become a full blown bear market ultimately. Alternatively, in pink, there is an A-B-C going the other way as a wave 2. We would give that less weight as it would take a lot more time and violate proportionality.

Within the green scenario it is furthermore not perfectly clear where we are in this second major leg down. We could presently be in a 4th wave triangle of wave one down, or wave one could already be complete.

All of this appears to be driven by trade policies of the president. That that is in fact so, is hard to determine but, for the sake of argument, assuming it is then the “problem” continues to exist. As of today we have Navarro, a rabid mercantilist from the middle ages, and Kudlow a TV commentator taking conflicting economic views. In between we have this charming Mnuchin who owes his fortune to his predecessor at Treasury, H Paulson. Three alumni from GS in a row! Next Bolton is coming on board at a timely moment. This guy still thinks problems can be solved militarily and is chomping at the bit to prove the point. Wilbur Ross, a bankruptcy artist who once saved Trump’s bacon, needs no mention as no one listens to him anymore. And if that was not enough we have to keep guessing if this ignorant president is serious or just doing another “art of the deal” piece of theater.

Note: It is conceivable that rather than a simple A-B-C structure as shown in pink, this index will trace out a much more extended triangle A-B-C-D-E which would the constitute a large B wave. This would limit the ultimate bearishness that we expect and would take far too long.

The Dow is a little confusing, it is so erratic, so lets have a look at Walmart. Walmart gave birth to at least 4 billionaires and it just happens to be the largest civilian employer in the U.S. Also the stock has done well over the past forty years. So three of Trump’s favourite things.

It is also a marvel of EW, adhering to most of the rules religiously. Particularly the 5th wave is clear as a bell. It is a diagonal, read wedge, only rather than terminating into a point it does the opposite and widens out. These structures always occur just before the end, that is the peak. Then they virtually always retrace in their entirety. In this case that calls for a drop to , at least, $47 or so which, coincidentally, happens to be close to a Fibo 62%. So far the stock dropped from $110 to $85, or 22%, in just over two months. Worldwide the company employs 2.3 mln. people, in the U.S 1.5 mln.

No more Chinese imports, no more jobs, no more stock market gains.

ITB is a rather obscure U.S. Home construction iShare or ETF.  The analogy with the Dow is a bit tortured but nevertheless it illustrates the point.

Here we have an initial drop of about 20% into early March followed by a fairly clear a-b-c  corrective counter-trend correction, a wave 2. That may or may not be over and may continue to $42 or so. Then a wave 3 has to start as 5-waves never stand alone!.

The Dow is slightly different but in essence doing the same thing. It could break to the upside beyond yesterday’s high of 24,622 to complete the c leg. With the new trade war with China getting a bit ridiculous this does not seem likely but some modification of this pattern may result.

For those that do not have the benefit of a formal training in economics, I would like to point out that a trade surplus or deficit between an open economy and the rest of the World, of necessity always equals the governments surplus or deficit. This is an inescapable truism. It follows then that a trade deficit is the direct result of a profligate government spending habit. Trump has added immeasurable to this problem. Also, if your currency is THE world currency, it remains to be seen who in the end actually pays. Kudlow, who is not an economist, will have his work cut out for him.

Note; the national accounts formula is:      Y =  C + I + G + ( X – M )

where Y represents national income or GDP, C is consumption, I is investment, G is government spending and X–M stands for net exports. This represents GDP because all the production in an economy (the left hand side of the equation) is used as consumption (C), investment (I), government spending (G), and goods that are exported in excess of imports (NX).

Forget economics, who is going to win this one?