“The perfect dictatorship would have the appearance of a democracy, but would basically be a prison without walls in which the prisoners would not even dream of escaping. It would essentially be a system of slavery where, through consumption and entertainment, the slaves would lover their servitudes.” Aldous Huxley, 1931
Why do you think our society pays movie stars and professional athletes so well?
Wednesday the market gave up the ghost. Despite a litany of questions as to the light at the end of the tunnel, Powell painted the picture of a train.
See a daily IWM with a trend channel from June 2022.
IWM left a large range outside down day on Wednesday below a 3 point trend line triggering a Rule of 4 Sell signal.
It was followed by two Break Away Gaps.
Now the question is: will a 3rd such gap today define an Exhaustion Gap?
The pattern is reminiscent of the downside momentum the few days prior to Black Monday, October 19th, 1987.
It’s reminiscent of the 5-year cycle from 1924 to 1929 when the Fed perpetuated high-octane speculation.
Throughout the first 7 months of 1929 they warned of excess speculation.
When investors didn’t listen the Fed tightened.
When the market buckled, the last thing on their mind was backing off for fear it would create another bubble.
The last thing the Fed wants now is a bubble in the market to bleed into demand in the economy.
Of course then there are the conspiracy theorists who believe that the crash of 1929 was orchestrated by those in the loop because stocks were too high. So chop ‘em down.
And things just got out of hand…so to speak.
Why did the Free Money Train continue so long on the QE track?
Remember The Bernake’s comments that the Fed made a mistake after 1929 (by staying tight).
He apologized for the mistake to Milton Friedman saying “we won’t do that again.”
Hence the a decade of QE. That’s not Queen Elizabeth.
While the Fed is content to see the market lower, they may not want a bonafide crash.
But then, the best laid plans of mice and men…
It must be said that when have they ever been able to engineer a soft landing.
That said if we get a first hour low that sustains and a turn up we could get a relief rally toward the bottom of the above trend channel on IWM.
Cyclically, the time frame from today into October 11th corresponds to the period from October 4th to October 19th, 1987.
As well, it corresponds cyclically to the period from October 13th through October 29th (The Big One) in 1929.
From the important March 29th peak, 180 days/degrees ties to the end of September while 270 days/degrees from the SPX all-time Jan 4 high ties to October 4th.
This cluster dovetails with the Gann Panic Zone.
As showed at the time in this space the August 16th top was forecast by a confluence of Ghost Lines (extended from prior pivot highs and lows) that nailed August 17th and 4325.
This strongly indicated that August 16th was the secondary high from the early January ATH.
Most technicians count the Sept 6 low as marking wave 1 of 3 down and September 12 marking corrective wave 2 of 3 down with
Wave 3 of 3 down commencing from September 12.
As such a powerful wave 3 of 3 of 3 unfolded from Sept 21.
However, it is possible a big picture 5th wave is in progress and will culminate shortly as shown in the following SPX.
That said, a 5th wave could extend to the 3520 region.
Why? There is a time/price square out at 352 for early this week.
As shown in this space last week, 371 aligns with Friday and the SPX knifed through 371 like a hot knife through butter Friday.
In this stage of the structure arguing for a capitulation slide, 3520 could be struck at any time.
In this stage of the structure a bear market rally could be sharp but swift in time with 371 (3710) being well-defined resistance.
Only above that region opens the door for higher.
As well, any rally lasting more than 3 days opens the door for a squeeze higher.
In sum, the DJIA has violated and closed below the important June low.
Note the Megaphone Formation which argues for a Papa Bear ultimately.
Following a Tombstone Top, the DJIA broke below the top rail of the Megaphone and closed below it in June.
It attempted to recapture the line in August…closing right on it.
Notably September broke away from the line with authority.
A Snapback to the line offers a downside reversal setup if it plays out near 33000
While the downside objective of the DJIA Megaphone seems ludicrous, so did our call on March 23, 2020 that the SPX would see 4000 within a year…a near double.
So far the market is adhering to our big picture cycle projections given one year ago that “the market will get hit hard in January to kick off a vicious bear market.”
While a 10% rally is likely from a washout low, due this fall, the bear could growl for several years ala the playbook following 1973.
Caution is warranted.
In a bear market, consider the most perilous outcome, not the best.