This is the time of year to exhale, take a step back and contemplate the next move. Let’s look at these ingredients in order. Since we have a world wide readership, with apologies to my friends in the southern hemisphere, we almost made it through another summer. Or let’s say I made it, because in the blast furnace of Arizona, we had the hottest July on record.
In terms of financial markets, this one has also been hot and it hasn’t been boring. There were a few unexpected twists where markets continued higher without pause. So instead of a low or a break to the upside, we are now on watch for some real corrective activity.
That’s what I mean by taking a step back. I don’t think many people would have thought we’d be still peaking in August back in June and that’s probably why it’s turning out this way. So I’m not here to pour cold water on anything, especially since the country needed this and by the looks of the biotech sector some of you have been having real speculative fun. But I would have preferred to see something like 2004 where we broke out in August and never looked back. Instead, I hope we are not looking at something like 2000 or 2008.
I’ve categorized this for you almost every week since I was in Pasadena at the Expo in June. The real story was the bounce in the Dollar I had pegged in June turned into a 4th wave triangle. Well, if that was a 4th wave triangle, we might have a completed 5 wave pattern now. It’s rare that I agree with much of anything in the Elliott community anymore but we do have what looks like a 5 wave pattern from the March high.
That’s where we agree and I’ve given you the calculations and reasons why the Dollar should be turning here. It still has to survive the overhead resistance condition but for the moment let’s say that it does. The word out of the Elliott community is the Dollar is now poised to rally for one to two years. My problem with that is we’ve had an exceptionally steep correction. This move down is almost a 78% retracement. If we go strictly by historical probabilities, once you get beyond 61% the future longevity of the pattern has to be put into question. Actually, once a pattern gets beyond 61% odds do favor a retest of the old pivot which in this case is the bottom. Once we get past 61% and DON’T GO TO THE BOTTOM, odds favor an elongated period of sideways action. In this case it could mean a monumental sideways pattern or even much larger degree triangle. If we are going to have a 1-2 year leg up from here, the question you have to ask yourself is do you think the pattern that started in 2001 and ended last year is a completed bear market?
I don’t think it is. On the other hand I do think the pattern that started last year can go on for a couple of years, it’s already gone on for a year. I just think it has more of a chance to go sideways as opposed to up. This is not only my rooting interest; this bounce has already failed 2x at the 38% retracement. Our best chance for economic recovery is for inflation and deflation to be kept at bay. My take this summer has been if we take out the 2008 low we are run the risk of a hyperinflationary depression and if we take out the 38% high we’ll have to deal with a deflationary depression. As you can see, neither has happened. Last year we had a whiff of serious inflation on the oil front and recently a whiff of deflation when oil was down in the 30s and you can go into a Cole Haan store and buy a $400 pair of shoes for $189.
All of which brings us to the stock market. If we are sitting here and contemplating a Dollar that will go east or north, which means the stock market may be heading south. This is the week I’ve pointing to. We are in the rolling 160-62 calendar day window to the March lows. My concern has been the potential for an important pivot this month since we’ve had them in the past. We also know that September and October are traditionally the toughest months of the year for the markets. But when we’ve crapped out in September it’s because the pattern set itself up for it in August. Many of my readings are calling for highs. Most noteworthy is an NDX that is up 50% off the low. Just because we are up 50% does it mean we are toast? But we could be. One of my favorite comparisons is the bear market rally of 1938-39. That period was also known as Great Depression II. There were a lot of reasons for it which we won’t get into today but the bottom line is the Dow came up 50% off the bottom, backed off and had a 12% correction before peaking at 61%. It then had a multimonth pullback before hitting a double top at 61% two weeks after Hitler invaded Poland. That was the end of the rally and it didn’t stop going down until 1942. The relevance here is that 50% is already a long way. We can’t expect much more and now conditions are ripe for a turn. The way I’d look at this week is to view every high as potentially the one and it’s possible we may have already seen the high.
The next consideration is to realize this is the last two weeks of August. Even if we do get a turn, many of the big players will not be at their desks until the beginning of September. I don’t think there’s a rush to get into anything here. Whatever is developing may not get the follow through for a couple of weeks. It’s the dog days of summer. Relax, enjoy yourself and hopefully you won’t end up in the path of some tropical storm. I am also going to have a little down time and will have a brief column next week and our full column will resume in two weeks.
The long awaited new format for our newsletters is now a reality. We’ve combined the text with the charts. So if you went away because you didn’t like the old format, now is the time to take a second look. It’s a click away at www.lucaswaveinternational.com.
