Why 2009 Deleveraging Stock Market and Commodities Crash is Ripe
Stock-Markets / Financial Crash Jan 04, 2009 - 12:40 PMBy: Eric_Chevrette
Since the medium term EW scheme for the future end of the global liquidation wave was presented 12 weeks ago in “Stocks bear market has NOT hit bottom” on October 14, “The great stocks and commodities deleveraging crash of 2009” published on Dec 21 featured the most appropriate network of converging evidence meant to solve this issue with accuracy; in the present article, we shall look at one more key factor seemingly lying in extremely tight correlation with the elements brought to your attention on Dec 21.
To cut it short, the current article is strongly reinforcing the conclusion from Dec 21 that an 8 week liquidation leg is soon to happen for commodities and global stocks.
One of the most visible aspects thru the current liquidation is an extremely high volatility: indeed, why not take a look at market volatility?.......
Chart #1
As you can see with chart #1 , the volatility index ( VIX ) did register 2 strong upward moves since mid May last year. Of course, you will immediately note that VIX is assumed to be travelling thru a 5 wave move extending as red 12345 since mid May. As a matter of fact, it does seem clear that red wave 1 was extended as blue i/ii/iii/iv/v while a standard reversal took place just below blue wave iv (a standard DBPW4 –dip below previous wave 4-) at the low of red wave 2 . Again, it does look like we had another 5 wave move extending as green i/ii/iii/iv/v , which was followed by a regular red abc correction where red wave c is a standard 5 wave move as black i/ii/iii/iv/v reaching below green wave iv …………
But the real simplicity of the VIX technical input does fully come to light when we match VIX versus any global stock market index ( DJW in chart #2 ).
Chart #2
While it is still assumed that DJW is caught inside a green 12345 move to the downside, it is easily checked (see the vertical blue lines in chart #2 ) that each move inside green 12345 does fully coincide with a twin VIX move inside red 12345 : had you trusted the VIX dip below blue wave iv to be the end of red wave 2 marking the innings of a new surge of volatility, you would have got in early August a timely point for buying reversed ETFs like DOG ……
Chart #3
In order to make the VIX point easier to grasp, chart #3 does feature VIX versus two INVERTED stock indexes (NYSE Composite, Nikkei average): it is then clear (see the 3 rd vertical blue line to the right) that the drop in volatility over the last 10 weeks is a regular abc correction that does fully coincide with a 10 week twin abc corrective pattern for stocks (please note that we get a regular abc with the Nikkei while the abc pattern is irregular for the Nyse with a higher green b top ).
Chart #4
As VIX now seems to have completed black wave v of red wave c extended as black i/ii/iii/iv/v within its red abc corrective pattern AND as this 5 wave red wave c has now achieved a standard dip below green wave iv , it should really be the right time to ponder whether the positive trading sessions lately registered worldwide with common stocks wouldn't be the standard luring end of a 10 week abc corrective pattern; as a matter of fact, like it was the case at the end of VIX red wave 2 in August last year, we should now be inclined to “buy” the market volatility with the expectation to see global markets (stocks and raw materials) suffer big losses in the coming weeks….
Besides, chart #4 is worth your attention: indeed, it can hardly be a surprise to you that the last 10 week consolidation with stocks and volatility does coincide with the 10 week consolidation already mentioned for the US $ and YEN/Euro ( XJY2XEU ) cross-rate……
In other words, the end of the VIX consolidation thru VIX red wave 4 as indicated by the dip below green wave iv at the end of a 5 wave red c (please turn to chart #1 and attached comments) does really look like it should be best considered as a common trigger point for global stocks, raw materials and currencies (sell global stocks, sell raw materials, buy the US $). As to the duration of the move to be expected, it is easily gathered from the wave equality rule: while red wave 1 (see chart #1 ) lasted 8 weeks, we can expect the next leg to last about the same time (8 weeks). Though this article was not meant to deal with gold, it should suffice to say here that gold and mines shouldn't reasonably be expected to fare well thru these 8 weeks, especially as time should now benefit the US $....….
Some more technical views to assert the imminent 8 week bear leg……
Chart #5
According to the line chart of the US $ ( chart #5 ), the 3 rd wave of currency deleveraging bound to affect stocks and commodities has already started (see the pink circle in chart #5 )…………..
Chart #6
We've already dealt long and large with the irregular green abc registered thru green 4 for global stocks; but it MUST be stated again that the BEST clarity (remember we deal with EW shapes ) is to be gathered from TRULY GLOBAL indexes: in other words, the famous DJIA is LESS global than ADR ………..
Chart #6 is an easy way to assess this point: while interconnected EW_MS is clearly assessing the reality of the irregular green wave 4 (please refer to “the great stocks and commodities deleveraging crash of 2009” on Dec 21), we should expect the final wave c of that irregular abc to build a 5 wave move…
According to the 5 wave shape registered with ADR over the last 7 weeks (mind green wave c extending as blue i/ii/iii/iv/v in chart #6 ), it does really look like we are reaching the far end of green wave 4 . Besides, this “far end” is being reached exactly when the market volatility is looking like a “buy me please” offer…………. Indeed, the 7 week green wave c of ADR (extending as blue i/ii/iii/iv/v ) did materialize week after week in full time synchronicity with the 7 week red wave c of VIX (extending as black i/ii/iii/iv/v )…. All in all, it is truly a BIG load of “market synchronicity”…
Besides, it is even NOT ironical at all under the given circumstances that VIX is reaching the last stage of its corrective move while stock markets have brighter days: indeed, EW does make you psychologically ready in advance for an upward pointing abc correction to end (abruptly) with “good days” (which is why the technical theme of “false breakouts at the end of wave 4” was raised in “the unwelcome Xmas guests” on Dec 24)………..
Another way to assess the technical EW superiority of ADR versus the worldwide famous but dogmatic DJIA based approach is deriving from reality: ADR did peak out in October 2007 (4 months after the DJIA peak in July) while the world stock market capitalization reached its peak level in October 2007 as well at 63.05 trillions US $ (see the World Federation of Exchanges at http://www.world-exchanges.org )......
Chart #7
Meanwhile, chart #7 is making clear that the Russian stock market should be one to suffer most thru the coming bear leg…… This is neither encouraging for oil prices nor is it a surprise when you consider that Russia is nothing but an oil tube economy………. Of course, given the internal destabilization of the Russian economy due to fast sliding oil prices, it is best to be ready in the near future for Russia to divert “domestic attention” thru more “external initiatives” (so far, we had Russian tanks to Georgia and Russian boats to Cuba)……
As a matter of fact, no matter what best wishes people may have worded lately in Russia , USA , Japan , Brazil or Germany about 2009, harsh global technical facts now favour more than ever before an imminent 8 week continuation of the global bear. Besides, should this last leg materialize as expected, the chance is high that the Obama administration would take some new drastic measures right at the end of this final slide. Something like a big hammer strike in the face of the last drop of capitulation; as a matter of fact, with a clear 5 wave move now at hand for green wave c of green wave 4 with ADR (refer to chart #6 ), not more than a week or so should pass before this last drop of capitulation goes on dripping on the computer screens…..
By Eric F.M. Chevrette
France
eric_chevrette@yahoo.fr
Fone: 00.237.9.660.53.59
© 2008 Eric F.M. Chevrette
Eric Chevrette translated Bob Prechter's “Elliott Wave Principle” in 1989 after graduating in 1984 from the ESCP (Ecole Supérieure de Commerce de Paris, see http://www.escp-eap.net ) which has been ranked 6 best business school in Europe by the Financial Times in 2006. He since has become interested in “market forecasting” and “global economical analysis” since 1987 and is currently helping people to protect and grow their assets while anticipating the big trends.
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