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Monthly Archives: June 2014

Will the Fed Taper Sooner Than Expected?

“Adieu, Sweet QE, Adieu

The FOMC should (and might) accelerate the pace of QE reductions to $15 billion on Wednesday (June 18th).  Furthermore, at its meeting on July 30th, the FOMC could – and should -announce a similar-sized reduction for the subsequent two months.   Hence, the Fed would not have to wait until its September 17th meeting to announce the final leg. QE would then end two months earlier at the end of August rather than the end of October as markets currently expect.  Such a path would generally afford the FOMC more freedoms, particularly at the September17th press conference meeting.

There are of plenty of reasons to justify such a move:  global interest rates are near historical lows levels; equity markets are at record high levels; the FTSE All-World index closing at an all-time high yesterday; the decade-low in volatility indices; the 6.3% Unemployment Rate; employment gains averaging 250K over the last two months; GDP forecasts for the remaining three quarters of 2014 fluctuating around 3% following the ‘transitory’ Q1 weather-induced slow down; the current lull (or temporary decline) in Ukrainian and Geo-political tensions; and lastly, the ECB accepting the stimulus baton.

Remember, FOMC guidance last year prophesied that QE was expected to come to an end when the unemployment rate hit 7% and the first hike would occur when the rate hit 6.5%.  In regards to this measurement, even the most dovish members have surprised themselves.

The Fed has indicated that it is “not of a pre-set course”.   There are advantages of keeping investors on their toes and having them believe that the FOMC is nimble and flexible.  In addition, it is likely that the Fed does not want to make the same mistakes made from 2004-2006 when it had become too predictable….”

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America’s Middle Class in Terms of Wealth Ranks Low Among Industrialized Nations

“Rich Americans. That’s our global reputation.

The numbers seem to back it up. Americans’ average wealth tops $301,000 per adult, enough to rank us fourth on the latest Credit Suisse Global Wealth report.

But that figure doesn’t tell you how the middle class American is doing.

Americans’ median wealth is a mere $44,900 per adult — half have more, half have less. That’s only good enough for 19th place, below Japan, Canada, Australia and much of Western Europe.

“Americans tend to think of their middle class as being the richest in the world, but it turns out, in terms ofwealth, they rank fairly low among major industrialized countries,” said Edward Wolff, a New York University economics professor who studies net worth.

Why is there such a big difference between the two measures?

Super rich Americans skew average wealth upwards. The U.S. has 42% of the world’s millionaires, and 49% of those with more than $50 million in assets.

This schism secures us the top rank in one net worth measure — wealth inequality.

There’s one main reason why the average Spaniard or Italian has more to his name than the typical American: real estate.

Home ownership rates are higher in many European countries than in the U.S., giving Joe European more assets to his name than his American counterpart. Plus, it’s easier for Americans to borrow money, which eats away at their net worth, said Jim Davies, an economics professor at Western University in Ontario, Canada, and co-author of the Credit Suisse report…..”

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Have We Begun to Sell the Rope ?


“What if all the low-hanging fruit of outsourcing jobs and financialization have already been plucked by Corporate America?

The connection between soaring corporate profits and stagnant wages is both common sense and inflammatory: common sense because less for you, more for meand inflammatory because this harkens back to the core problem with the bad old capitalism Marx critiqued: that capital dominates labor and thus can extract profits even as the purchasing power of wages declines.

(What Marx missed because he was early in the cycle was capital’s dominance over the central state’s political machinery–a topic covered here in The Purchase of Our Republic.)

New good capitalism generates wealth for everyone via soaring profits which drives the valuations of stocks ever-higher, enriching workers’ pension funds and boosting spending, some of which trickles down to those who don’t own any stocks, either directly or indirectly.

Bad old capitalism trumps new good capitalism if the soaring profits are basically wages diverted to the few who own most of the financial capital. In Marx’s analysis, this gradual impoverishment of labor eventually erodes capital’s ability to sell products, undermining capital’s ability to reap profits.

The endgame of this is obvious: once capital can no longer make profits selling goods and services and wage-earners can no longer afford to buy goods and services, the system disintegrates.

The magic “solution” of the past 40 years is to enable labor’s continuing consumption with debt. And when labor is over-indebted and can no longer service more debt, then the central state (government) borrows and spends trillions of dollars to replace sagging private consumption….”

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State of the Union: Welcome to McDonalds, May I Take Your Order?

“A plethora of recent studies show that when it comes to retirement, we definitely don’t have our financial house in order.

And it’s an issue near the top of many Americans’ minds. An April poll from Gallup http://www.moneynews.com/Personal-Finance/retire-savings-Gallup-debt/2014/04/23/id/567278/ indicated that 59 percent of adults are moderately or very worried about not having enough money for retirement.

For example, the National Retirement Risk Index from Boston College’s Center for Retirement Research shows that 53 percent of households risk falling at least 10 percent short of the retirement income needed to maintain their standard of living. 

In addition, the Employee Benefit Research Institute (EBRI) finds that more than 40 percent of retirees are at risk of running out of money for daily needs, out-of-pocket spending on healthcare or long-term care, according to The Fiscal Times.

The three areas that many of us expected to fund our retirement now appear at risk, The Times reports. That’s Social Security, personal savings and employer-sponsored pensions…..”

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Steve Forbes: Circumstances in Our Economy Will Necessitate an Au Standard

“Business mogul Steve Forbes says that not only is a return to the gold standard a realistic option, but “circumstances” in our economy will necessitate it.

“We were on the gold standard for 180 years in this country’s history — did very well with it,” Forbes told J.D. Hayworth, John Bachman and Miranda Khan on “America’s Forum” on Newsmax TV on Monday.

“If we’d been on a gold standard since 1971, when Richard Nixon took us off the gold standard, today our economy would be 50 percent larger if we’d just maintained historic growth rates we had for the first 180 years of our existence,” the chairman and editor-in-chief of Forbes Media explained.

The gold standard is a monetary system in which the value of currency is equal to a fixed amount of gold. The currency can also be converted into gold.

“Gold gives money . . . stability just like the ruler measures length, the clock measures time, a scale measures weight,” Forbes added. “A dollar measures value and when the value is stable, you get a lot more investment, a lot more growth, a lot more opportunity.”

Without the gold standard in place, the dollar has grown increasingly unstable, even though there have been “periods of strength,” Forbes says. ….”

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RealtyTrac: U.S. Forclosures Hit an 8 Year Low

“Foreclosure activity across the United States dropped toan eight-year low in May as banks reclaimed fewer homes and foreclosure startssaw their lowest levels in years, RealtyTrac said in a report on Tuesday.

RealtyTrac, which tracks and maintains housing market data, said 109,824 properties across the country were at some stage of the foreclosure process in May. That marked a 5 percent decline from April and left foreclosure activity—foreclosure notices, scheduled auctions and bank repossessions—26 percent below the year-ago level.

May was the 44th consecutive month foreclosure activity was down on an annual basis, a sign of the housing market’s steady progress toward recovery.

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“This is showing that foreclosures are fading further into the rear-view mirror …”

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Why the Economic Bust Is Inevitable According To the Austrian Business Cycle Theory

“The key of the ABCT is that economies operate in cycles, they go through ‘booms’ and ‘busts’, ‘expansions’ and ‘recessions.’ A ‘crisis’ should not come as a surprise. Austrian School economists argue that central banks don’t help in smoothing the amplitude of the cycles, but are actually the root cause of the business cycle. While some may view that the expansionary monetary policy can mitigate the adverse effects of a crisis, the Austrian School begs to differ.

The paper does an outstanding job in explaining the ABCT and applying it on the major business cycles of the modern US economy. It also answers the question whether we have seen the end of the current crisis (“bust”). Although Barack Obama believes that “we have cleared away the rubble from the financial crisis and begun to lay a new foundation for stronger, more durable economic growth”, this report will tell you otherwise.

The Austrian Business Cycle Theory

Mises and Hayek believed that business cycles are a direct cause of excessive credit flow into the market, which is facilitated by an intentionally low interest rate set by the government. The supply of credit gives the false impression that money originally saved for investment has increased. By doing so, banks mislead borrowers into believing that the pool of investible funds is bigger, and therefore they tend to do what entrepreneurs do: invest in larger production facilities or projects they originally could not afford to finance. These investments bear what economists describe as a “longer process of production”, or capital good industries that stimulate a shift of investment away from consumer goods. This shift is unsustainable, and eventually a correction ensues. The reason is that you have a market that is out of balance and falsely directed to a level of investments that is far from reality. In other words, the state has instigated unsustainable growth.

austrian business cycle theory economy

What happens when the central bank comes in and artificially lowers the interest rate? To explain we take a look at the chart below prepared by Roger Garrison. In this chart, which relies on the Hayekian triangle depicting the different stages of production, Garrison illustrates how a change in the economy’s money supply affects its structure of production. The curve of the Production Possibility Frontier (PPF) shows different combinations of consumption and investment for any given economy (chart on the top right). Any point on the PPF curve is a sustainable mix between consumption and investment (savings).

There are three main scenarios:

  1. In a pro-savings economy: Investments go up, encouraged by a drop in interest rates. This point on the PPF corresponding to this lower interest rate shows that the economy directs its investments to earlier stages of production. As a result, the triangle expands horizontally.
  2. In a pro-consumption economy: Savings and investments (discouraged by the rise in interest rates) decrease. As a result, the triangle becomes shorter from the horizontal axis as investments go to lower order consumer goods.
  3. In the case of a policy-induced credit expansion: This scenario is depicted in the graph as Saug. Here we have two opposing factors at play as a result of the drop in interest rate. As it appears in the graph, the new interest rate encourages both an increase in investment as well as discouraging savings. The low interest rate intersects with both S (the real supply of money by savers given that low interest rate) and Saug (the supply induced by the central bank). These are basically the “mixed signals” we were talking about earlier. Both points are located on the PPF, but meet outside the curve, implying this level is neither efficient nor sustainable.

Hayekian triangle  economy

Who is behind the boom and hence responsible for the bust?

According to the ABCT and the Austrians, it all starts with the primary engineer of the cycle: the government. Any form of state intervention is an attempt to influence markets to prolong the process of needed adjustment and reallocation of resources to more productive uses. Therefore, by manipulating interest rates, governments negatively impact the economy as creators of the growth bubble– which in essence is artificial, distorted and imbalanced.

The illusion behind the boom

The illusion lies in the misallocation of investments or ‘malinvestment’, using Mises’ terminology. This mismanagement involves two concepts: “time preference” and “forced savings”. We recommend readers to go through the explanation of these concepts in the paper (embedded at the bottom). But for now, we highlight the following: It is a play on consumer behavior: Present consumption carries more value to individuals than future consumption. When interest rates are intentionally lowered, consumers are misled to thinking more money is available, and ready to be spent – when in fact their purchasing power, as per forced saving, has weakened. In this inflationary environment, everything is an illusion. Everything has become more expensive, whether wages, commodities, services, even assets and real estate.

SP500 QE 2014 economy

From boom to bust….”

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Russian Companies Seek Renminbi to Avoid Sanction Turmoil

“As we have been reporting (and forecasting for the past several years), the Eurasian anti-US Dollar axis is rapidly taking shape, with recent events catalyzed and certainly accelerated by US foreign policy in Ukraine, which has merely succeeded in pushing Russia that much closer, and faster, to China. The latest proof of this came overnight when the FT reported that Russian companies are preparing to switch contracts to renminbi and other Asian currencies amid fears that western sanctions may freeze them out of the US dollar market, according to two top bankers.

According to Pavel Teplukhin, head of Deutsche Bank in Russia, cited by the Financial Times, “Over the last few weeks there has been a significant interest in the market from large Russian corporations to start using various products in renminbi and other Asian currencies and to set up accounts in Asian locations.”

Andrei Kostin, chief executive of state bank VTB, said that expanding the use of non-dollar currencies was one of the bank’s “main tasks”. “Given the extent of our bilateral trade with China, developing the use of settlements in roubles and yuan [renminbi] is a priority on the agenda, and so we are working on it now,” he told Russia’s President Vladimir Putin during a briefing. “Since May, we have been carrying out this work.”

“There is nothing wrong with Russia trying to reduce its dependency on the dollar, actually it is an entirely reasonable thing to do,” …..”

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El-Erian: Jobs Market Hasn’t Hit the Wall

“Friday’s highly anticipated U.S. jobs report sheds light on a crucial question for the economy: How much more can the Federal Reserve do to stimulate growth and push down unemployment before it runs into undesirable inflationary consequences?

Economists have long been engaged in a discussion about the nature of unemployment in the U.S.: Is it more short-term and cyclical, or is it more structural and long-term? In the former case, accelerating growth can bring the unemployment rate back down to where it was before the crisis. In the latter case, the “natural rate” of unemployment would be higher, impairing the economy’s ability to create jobs and grow without stoking inflation beyond the asset markets.

Until recently, the debate was largely academic: Given the depth of the economic downturn, everybody recognized that there were lots of jobs to recover before unemployment fell anywhere near its natural rate. Moreover, with political polarization on Capitol Hill undermining a comprehensive policy response, there wasn’t much interest in figuring out how the natural rate itself could be improved.

Now, though, the question is gaining urgency. The widely followed U-3 unemployment rate has fallen to 6.3 percent, down from a 2009 peak of 10 percent and approaching — albeit frustratingly slowly — the pre-crisis low of 4.4 percent. Yet economists have yet to agree on a threshold beyond which inflation (outside the asset markets) might become a problem. Nor have they converged on a narrative about an important determinant of job creation — the level and composition of economic growth.

One group is quick to point to…”

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Bearish Shortsellers Reload Again Despite Five Years of Pain

“For five years it’s been the fate of American short sellers to be wrong, as the biggest rally since the Internet bubble steamrolled defensive trades.

They’re loading up again, sending bearish wagers in the SPDR exchange-traded fund tracking the Standard & Poor’s 500 Index (VIX) to almost 11 percent of its shares, the highest proportion since 2012, according to data compiled by Bloomberg and Markit Securities Ltd. Bets against atechnology ETF are 67 percent above the 12-month average.

One of the best things you could do in the stock market over the last three years has been to buy shares from short sellers, who borrow stock with the aim of replacing it once the price falls. After bearishness peaked in 2011 and 2012, theS&P 500 rallied more than 14 percent within six months. With U.S.valuations approaching levels not seen since 2007 and the Federal Reserve scaling back stimulus, the bears are back again.

“That, from a trader’s standpoint, is a bullish sign, because you don’t have too much optimism in the market,” Walter “Bucky” Hellwig, who helps manage $17 billion at BB&T Wealth Management in Birmingham,Alabama, said by phone. “That there isn’t unbridled optimism shows that there could be more upside.”

Bearish Bets

Frontier Communications Corp. (FTR), a voice and data services company in Stamford,Connecticut, and Boise, Idaho-based chipmaker Micron Technology Inc. are among companies with the highest bearish bets. Their shares have soared more than 22 percent this year. A Goldman Sachs Group Inc. measure of the hedge fund’s biggest short holdings has risen 7.8 percent this year, compared with a 5.5 percent gain for the S&P 500.

More than $1.6 trillion has been added to American share values since the end of January amid accelerating economic growth and actions by central banks to stimulate the expansion. The S&P 500 advanced 1.3 percent to a record 1,949.44 last week as the European Central Bank cutinterest rates and U.S. unemployment stayed near a six-year low.

While the S&P 500 has rallied for 10 of the last 12 days and advanced each of the last four months, investors have been withdrawing money from the market. About $4 billion was pulled last month from the S&P 500 ETF, the world’s biggest with $164 billion in assets, data compiled by Bloomberg show. Funds that buy domestic shares have received $4.8 billion this year, compared with deposits of $25 billion in bonds.

Market Hiccup….”

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Your Tax Dollars at Work

“In South Florida, one of the nation’s top privately-run Medicare insurance plans faces a federal investigation into allegations that it overbilled the government by exaggerating how sick some of its patients were.

In the Las Vegas area, private health care plans for seniors ran up more than $100 million in added Medicare charges after asserting patients they signed up also were much sicker than normal — a claim many experts have challenged.

In Rochester, New York, a Medicare plan was paid $41 million to treat people with serious diseases — even though the plan couldn’t prove the patients in fact had those diseases.

These health plans and hundreds of others are part of Medicare Advantage, a program created by Congress in 2003 to help stabilize health care spending on the elderly. But the plans have sharply driven up costs in many parts of the United States — larding on tens of billions of dollars in overcharges and other suspect billings based in part on inflated assessments of how sick patients are, an investigation by the Center for Public Integrity has found.

Dominated by private insurers, Medicare Advantage now covers nearly 16 million Americans at a cost expected to top $150 billion this year. Many seniors choose the managed-care Medicare Advantage option instead of the traditional government-run Medicare program because it fills gaps in coverage, can cost less in out-of-pocket expenses and offers extra benefits, such as dental and eye care.

But billions of tax dollars are misspent every year through billing errors linked to a payment tool called a “risk score,” which is supposed to pay Medicare Advantage plans higher rates for sicker patients and less for those in good health.

Government officials have struggled for years to halt health plans from running up patient risk scores and, in many cases, wresting higher Medicare payments than they deserve, records show.

The Center’s findings are based on an analysis of Medicare Advantage enrollment data from 2007 through 2011, as well as thousands of pages of government audits, research papers and other documents.

Federal officials who run the Medicare program repeatedly refused to be interviewed or answer written questions.

Among the findings….”

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Documantary: United States of Secrets

Cheers on your weekend!

[youtube://http://watch?v=WUe6qyEXoJQ#t=10 450 300]



[youtube://http://www.youtube.com/watch?v=9QzDHPcNfrw 450 300]

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NFP Shows Improved Labor Stance on Headline Number, Looking Into the Report We Find Something Different

There was good news in today’s NFP report: at 138,463K jobs reported by the establishment survey, the US economy has finally not only recovered the prior cyclical high of 138,365K, but surpassed it by 98K. Congratulations.

And now the bad news. As the next chart shows…”

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A Closer look into the report

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Inventory Drawdown in Q1 GDP Revisions is Going to Continue


An interesting paradigm shift is happening here.

I monitor lead times and vendor fill requirements on a fairly regular basis, including from some big e-Commerce folks.

In the last couple of months I’ve noted a rather dramatic shortening of inventory lead times from them — that is, expectation that if you are a vendor you will be able to ship product to them much faster than before.

Some of these shortenings are really dramatic — 50% or more.  Amazon, in particular, is getting extremely aggressive in this regard.

This implies that the inventory drawdown we saw in 1Q GDP revisions is going to continue.

That’s the macro-level impact.

But at the more-granular level, why becomes the question.  Inventory that is rapidly sold through is not much of a cost, other than the physical space to hold it.  That is a big deal, of course, but the trade-off is that if you have inventory in stock you are then able to fulfill customer demand more-quickly.  That’s the good part and what customers expect.

So what is leading to these rather-significant reductions?

We don’t know as of yet, but I can speculate…”

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Daring to Go Off Script

[youtube://http://www.youtube.com/watch?v=f3vwsTui0ZM#t=37 450 300]

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State of the Union: You are Fucked!

“If you make more than $27,520 a year at your job, you are doing better than half the country is.  But you don’t have to take my word for it, you can check out the latest wage statistics from the Social Security administration right here.  But of course $27,520 a year will not allow you to live “the American Dream” in this day and age.  After taxes, that breaks down to a good bit less than $2,000 a month.  You can’t realistically pay a mortgage, make a car payment, afford health insurance and provide food, clothing and everything else your family needs for that much money.  That is one of the reasons why both parents are working in most families today.  In fact, sometimes both parents are working multiple jobs in a desperate attempt to make ends meet.  Over the years, the cost of living has risen steadily but our paychecks have not.  This has resulted in a steady erosion of the middle class.  Once upon a time, most American families could afford a nice home, a couple of cars and a nice vacation every year.  When I was growing up, it seemed like almost everyone was middle class.  But now “the American Dream” is out of reach for more Americans than ever, and the middle class is dying right in front of our eyes.

One of the things that was great about America in the post-World War II era was that we developed a large, thriving middle class.  Until recent times, it always seemed like there were plenty of good jobs for people that were willing to be responsible and work hard.  That was one of the big reasons why people wanted to come here from all over the world.  They wanted to have a chance to live “the American Dream” too.

But now the American Dream is becoming a mirage for most people.  No matter how hard they try, they just can’t seem to achieve it.

And here are some hard numbers to back that assertion up.  The following are 15 more signs that the middle class is dying…

#1 According to a brand new CNN poll, 59 percent of Americans believe that it has become impossible for most people to achieve the American Dream…”

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DOW Candle Stick Analysis for Chart Chompers

“It’s not timing the market but time in the market”. Yep, we’ve all heard this refrain from market commentators on TV disguised as experts. Some go even further saying it’s impossible to time the market. Well, what a load of codswallop! Anyone that says this to you is a happily oblivious member of the Flat Earth Society (FES). Sure, FES members can still function well and be successful in their one dimensional world. Ignorant bliss can be extremely satisfying. However, in the analysis I’ve undertaken of the Dow, there is clear evidence presented that the market can, despite the naysayers, indeed be timed.

Let’s leave the timing aspect aside for the moment and using my top-down analysis approach begin with the yearly chart.


That massive upmove in 2013 absolutely slaughtered the bears, possibly close to the point of extinction. Claws holding white flags of surrender were raised. Just the sign required that a significant top is close at hand. A big, positive candle such as the 2013 candle should normally see a little follow through action which we are experiencing right now. The 2013 high was 16588 while currently the 2014 high is north of 16700. Years of looking at charts has shown me that big candles like that generally need to be consolidated which may involve just a simple correction, which we have already seen, but can often be a reversal of trend. In a moment we’ll move on in a bid to determine which scenario is more likely going forward.

Before that I wanted to do some more long term work. I have added Fibonacci retracement levels of the whole upleg from the 1974 low of 570 to the current top. Now I don’t think we’ve seen the final top but I expect it to be only marginally higher so using the current top won’t have any significant effect on this analysis.

Firstly, we can see the 2009 low is close to the 61.8% level bottoming just under that level. (Using Fibonacci in this forward looking manner is a way to predict future tops and lows). This adds significance to that low and is an argument against the megabears predictions that the 2009 low will be taken out. My personal opinion is to look for a low around the 50% retracement level which is currently just above 8650. The 50% level is also one of Gann’s key levels. Another of Gann’s discoveries was that lows are often 50% of the high price. Currently, 50% of the high price is a bit above 8350. Of course, as the Dow rises higher so too will these Fibonacci and Gann levels.

My personal opinion is that the coming plunge will see most, if not all, of 2013’s gains wiped out before a rally into the end of the year. Then an even more bearish 2015 before final low in 2016 close to the levels I just outlined. Now this, of course, is purely speculation on my own part.

But we’re getting ahead of ourselves here. Let’s slow it down and move onto the monthly chart and see what that tells us.


This chart is very revealing. Firstly, I have drawn trendlines from consecutive lows starting from the March 2009 low, then the October 2011 low, the November 2012 low and finally the February 2014 low. It can be seen that each new trendline is getting steeper and steeper. We are now onto the fourth consecutive steeper trendline. That folks, is undeniable evidence that the bull market is in its last throes.

Secondly, I have added a Relative Strength Indicator (RSI) whereby a downtrend line can be seen. This shows that the recent Dow tops are declining in strength. A bearish divergence. Generally after the third bearish divergence a significant down move can be expected. (There’s the magic number three again.) We are now just awaiting the next Dow high to coincide with a weaker RSI reading than its previous two tops. Now keep in mind we are dealing with the monthly chart and the longer the timeframe the stronger the indication.

You will also notice I have drawn horizontal lines on the chart which refers to the levels of the 1998 high, 2000 high and 2002 low. Assuming the bull market since 2009 is just about finished, I wanted to look at potential correction ending levels. As Gann noted, old tops often become support in the future. So that brings into the frame the 2000 high of 11750 and the 1998 high of 9367. Now going back to the yearly analysis, the 2000 high appears too high. Sure there may be a short term reaction off that level but I still favour a lower level for the final correctional low. That brings us to the 1998 level. Corrections generally push into the old high levels giving them a decent test so we could assume a little below this level. That would also conveniently be close to the Fibonacci/Gann 50% level and Gann’s 50% of high price level as mentioned in the yearly analysis. Now if the 2002 low were to be taken out then the probabilities of breaking the 2009 low would increase dramatically. While not out of the question, it is a scenario I just don’t favour at all to be quite frank.

Let’s move on and view the weekly chart……”

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