Global Stock Market Crash, What Happens Next?
Stock-Markets / Financial Crash Nov 08, 2008 - 11:32 AMBy: Eric_Chevrette
Alas global stocks still look like they “want” to keep well and deep inside the downward tracks of their tight EW_MS connection with the US $: as it has been previously stated in details with “Global stocks: time to think of the unthinkable?” on October 24 and further supported with “Global stock market inverted crash” on October 26, there is an obvious EW link between the current meltdown in global stock markets and the seemingly surprising rise of the US $. But, as previously discussed, it does not take a lot of thinking to understand that the current liquidation of global stocks is underpinning a massive wave of forced deleveraging which is in turn leading to a mechanical wave of buying to the full benefit of the US $. If you then look at global stocks and the US $ week by week, you will note that since early July 2008 each mini wave up of the US $ is coming with a mini wave down for global stocks, while each minor pause of the US $ is coming with a temporary relief for global stocks (see chart #3 in “Global stock market inverted crash”). As a consequence, a simultaneous EW tracking of global stocks and the US $ should lead to higher precision because of the continuous intertwined slide of both markets since early July.
This is exactly what GEW is presenting in its most recent articles as a putative case to establish the methodical validity of EW_MS , especially when the overall purpose is to achieve a higher precision in “degree assessment”.
Indeed, if we can reasonably assume that both ADR (global stocks) and the Euro/$ exchange rate did merge into a single common EW rhythm bound to prevail for several months (see chart #11 in “Global stocks: time to think of the unthinkable ?”), we should now grow extremely wary in the face of the latest developments on both markets.
As a matter of fact, the update of chart #1 from “Global stock market inverted crash” is a no surprise work to be done with the highest care (see chart #1 below featuring the previous chart #1 and its update): according to the undeniable EW_MS currently at work, it is clear that the 3 last days of the week ending Friday, October 7, 2008 are linked to the innings of a new wave of massive buying into the US currency.
Indeed, the upper part of chart #1 does clearly revel that “all worked according to the expected EW road map” which was previously detailed on October 24 (see the lower part in chart #1 ): the expected dip below blue wave iv took place while we have all technical ground to assume that a new surge of the US $ is already unfolding thru violet i/ii/iii/iv . It remains to be checked whether that violet i/ii/iii/iv/v is going to be brown wave iii in full (most likely assumption) OR the start of an extension within brown wave iii .
Chart #1
Alas, the ONLY question now worth your time is not whether we shall get new lows with global stocks and raw materials in the near future along with new highs for the US $ BUT WHETHER this new wave (down with global stocks and up with the US $) is “the main dish” at last or not thru the current slaughter.
First of all, The Mexican case (please refer to charts #7&8 in “Time to think of the unthinkable?”) is still around to make VOID what would be the most obvious EW path for global stocks: should ADR have already registered a fully extended green wave 3 as red i/ii/iii/iv/v as it is presented below in the upper part of chart #2 , then the Mexican Bolsa index would NOT have bent the “no overlap” key rule as it did at the MOST crucial point of the entire move (please refer to “Time to think of the unthinkable for technical explanations about the EW_MS concept and its workings).
Chart #2
Please understand that the greatest benefit of EW_MS is that the straightaway application of basic EW rules does lead to AUTOMATIC elimination of alternate counts with no “double thoughts”; as a consequence, “thinking” is more straightforward with less possibilities hanging around.
Besides the Mexican case, we still have the XBD case pointing towards the case of acceleration thru the current bear leg. You may refer to chart #5 in “Critical juncture towards a generational depression” from August 20, 2008 for more explanations about the major relevance of this KEY sector to the global market. Indeed, the “Bank Broker Dealer index” ( XBD ) is tracking the emotional jitters of those who were among the “top players” responsible for the current worldwide mess. Though Lehman Brothers has been made an early cripple in this index by the refusal of the FED to save the company from bankruptcy, the message from the rest of the “pack” can be trusted until the last gasp is given with XBD hitting below 50.
Chart #3
The only change to be noticed from chart #5 (see “Critical juncture…..”) is that XBD has progressed on its way towards the REQUIRED “moment of despair” below blue wave 4 . As you can note in chart #3 above, the 1929_1932 chart of the DJIA has been mentioned in clear coordination with the present XBD case. We had already mentioned the 1929 bear case in coordination with the Shanghai Composite index (see chart #3 in “Time to think of the unthinkable ”) because it is a textbook case about how a downward channel may be a full ILLUSION proving unable to contain the bearish energy within the lower trend of the channel: as the bearish energy becomes higher, the market does accelerate into a steeper channel towards the true “capitulation point”.
If you have some doubt that the steeper channel is already doing its work with XBD , you should fancy a quick look first at chart #4 then at the lower part of chart #8 around the end of this article: as it is clear from chart #8 , Wednesday, October 5 and Thursday, October 6 were the 2 days last week which did mark the EXPECTED point #4 within the new trending channel; of course, that point was due to mark the RENEWAL of the bear towards NEW LOWS not only for XBD BUT for ANY other stock market index in USA and the rest of the world (global EW_MS principle). And that is EXACTLY what did happen: on the very same day when XBD did meet its “reversal point” at the upper trend of its new channel, ALL other stock market indexes in the world did meet the end of their respective rally from the late October lows. The global relevance of this “reversal point” will be discussed in details further in this paper; for the time being, it does suffice to understand that XBD is ACCELERATING its downward spiral into a steeper channel. Quite obviously, that is reminiscent of what happened in the course of the 1929_1932 debacle.
Chart #4
Besides, a medium term weekly view (see chart #4 ) has the great benefit to show you how the acceleration of the XBD bear started right when the US $ entered its red abc rally . In other words, there should be NO hope to see XBD (nor the rest of global stock markets) ever slow down before the US $ bull has reached its ultimate top……..
Chart #5
Though it has been previously mentioned (see chart #12 in “Time to think of the unthinkable?”), it is worth stating again that the current deleveraging pushing the US $ thru its red abc rally is affecting ALL asset classes including raw materials. As it is here strongly hinted at with chart #5 , raw materials as a whole may plunge to “unthinkable levels” in the coming weeks.
Like we said a few lines above about global stocks, there should be NO hope to see raw materials as a whole ever slow down before the US $ bull has reached its ultimate top……..
You may even take the low risk of some easy computations based on the fact that XBD will hit 50 at some point in the course of the current bear leg. For example, if you refer to the 1929_1932 bear case, you can count that the bear lasted about 3 years while 2 out of these 3 years passed before the final acceleration entered the stage. Should that time ratio prevail thru the current bear market, the bear phase from mid May 2007 to mid September 2008 would make up for 2/3 of the entire bear market: (7.5+8.5)=16 months standing for 2/3 of the bear, we would gauge the entire bear market around 24 months (bear market ending around May 2009). That of course would open a time window large enough for all asset classes to reach “unthinkable levels” (why not OIL@$40 ?) which would clearly reflect the full blown LIQUIDATION of the previously mentioned 25 year credit mania. In this regard, one should keep in mind the current SILENT but effective unwinding of the “derivative bubble” whose size might be estimated around $ 1 QUADRILLION (please, note that it is the BIS estimate, not mine!). That is $ 1,000 TRILLIONS …..
No matter if central banks as a whole have now come up with $ 7 trillions of various “bailouts in disguise” further supported by easy monetary policies implemented over the last few weeks in a way which would make you think that central banks were using machine guns to shoot their “rate cuts”, massive worldwide deleveraging can NOT be stopped and REFLATION is failing for the first time ever since 1982. Alas, the latest rate cut by the ECB this past week was duly punished by 2 sharp days down.
Chart #6
Why so?...........
Well, chart #6 is explicit enough to support the case previously made (see “Stocks bear market has NOT hit bottom” from October 14, 2008) that further rate cuts will only succeed in heightening the financial cost of servicing existing debt. As we now experience a hectic “run for cash” amidst unsustainable debt, it is hardly a surprise that all rate cuts, which were so much beloved by the bulls thru more than 25 years of credit mania, now fail one after another to raise a wink from them in global stock markets.
Though the “run for cash” has not permeated yet to all economic groups, it is as if the explosion of the 25 year credit bubble is resounding loud enough for anyone to understand at last the reality behind lower rates: indeed, each rate cut is now greeted with a swift plunge in stock markets, which is a clear sign that anyone is consciously or not understanding that a bigger share of company profit is going to be devoted to debt servicing before anything else.
How far the current liquidation of the global economy is going to unfold has been detailed in previous articles, especially with chart #9 in “Time to think of the unthinkable?” from October 24. Alas, chart #7 below is giving more ground to the case of a decennial ABC pattern presented in this extended article from October 24.
Chart #7
After all, maybe all those thinking (better say dreaming) that the new US President B. Obama may turn things about swiftly should be given a chance to take a deep look at this chart #7 .
Even a quick look should be enough to make you better understand that the imminent future should bring a strong delusion, especially if you are American and you voted for Obama mainly as a protective move for your 401K plan (because he would fix “it” with appropriate measure s). No matter what good changes the next US president has in mind, he as you should better know that the economy does not care a wink nor a dime about politics (these days a wink might even be worth more than a dime): the now bluntly DEAD 34 year wave of global expansion (see chart #9 from “Time to think of the unthinkable?”) did NOT care about politics AND the future decade will NOT care about politics either.
Indeed society did here evolve from 1982 to 2007 thru a multi decennial wave of growing optimism in which each added degree of confirmed optimism insidiously became a sound ground for a lower degree in caution until NO safeguard would remain to protect risk takers against their naked illusions. In other plain words, politics did NOTHING but FOLLOW the collective mood wave and take measures that would nurture the growing optimism. In other words, the political decisions in economical matters were less active decisions than sheer REACTIONS to the prevailing mood stream. Thinking that the arrival of US President Obama is signalling a dawning era of reason may prove another fatal illusion about human nature eventually.
Even Democrats did play the game of optimism: anyone should remember that it is President B. Clinton who signed into law the Gramm-Leach-Bliley Act on November 12, 1999 which did repeal the Glass-Steagall Act of 1933. In the most ironical shortcut thru history, the Democrat President F.D. Roosevelt had taken reactive measures in 1933 with the Glass-Steagall Act to avert any possibility in the future that loose banking practices would ever again bring about the calamity of the Great Depression. Alas, these safeguard measures were to be suppressed by another Democrat President some 66 years later according to the prevailing mood stream.
Indeed, though it is little “advertised”, the repeal of the Glass-Steagall Act is one of the key elements which helped US banks to fuel their “emotional drive” to climb one fatal step higher on their multi decennial ladder of loose practices. Beyond its good words and intentions, President B. Clinton would do nothing but be a prisoner of the prevailing collective mood.
In a similar manner, it is much wiser to expect President B. Obama to be most of all a prisoner of the current collective mood which did reverse in 2007 from “think of plus” to “think of less”: now that the “immature child” (we mean the GLOBAL collective mind ) has been burnt to death by the fire (we mean excessive optimism), you should be ready for the child to SHY AWAY from the fire until it (the child) gets driven mad by its own excessive pessimism (like it was driven mad by its own excessive optimism); that is exactly what happened from 1929 to 1938 when pessimism would grow step by step relentlessly until the global collective mind was so much bleak and driven mad by pessimism that WAR had grown ultimately to become an acceptable “social game”. Sadly enough, that should nevertheless be the main direction for your “expectations” over the next decade or so.
Indeed, the lesson to be gathered from the wave principle is a dire one: humanity as a whole is as immature as a child; humanity always wants to get closer to the fire until it does touch the fire at last and gets burnt. Humanity does so thru trans-generational waves of collective optimism as it does so thru trans-generational waves of pessimism. As a matter of fact, 2007 is not just any “reversal point” but THE reversal point from where the global mind is now turning to “outright pessimism” bound to grow for quite many years if not more than a decade; 1929 was such an ignition point for a wave of pessimism that would prevail until 1948; as you can for example see from chart #7 , 1906 and 1966 were similar points to 2007 for the collective mind: what unfolded after 1906 did differ from the events following the peak in 1966. But both periods did have the smell of “space contraction”.
As a matter of fact, you can already sniff that unpleasant smell around you: as of late, the IMF has adapted its global forecast and is now announcing the worst recession since 1945 for the developed world; don't be mistaken, that is just one piece of evidence about how the “child” is now sliding step by step into its self inflicted “corner of desperation”. Indeed, you should beware that this latest statement from the IMF is only one of the many steps which the “child” will make until it is definitely caught into complete despair around the end of the decennial ABC now at work (please refer to chart #9 in “Time to think of the unthinkable?”).
The teaching from chart #7 is simple and basic: the human collective mind does travel thru a trans-generational balancing act where the pendulum goes for quite many years thru a “please let me touch the fire” mentality before reversing for several years to a “please help me run away from the fire” mentality. No need to say that it is an outright immature behaviour, which is just proving how little we are learning from history.
Along this trans-generational path of plain immaturity, it should be pointed out that science and technology do little to nothing to help humanity overcome this collective inbuilt behavioural flaw. Much on the contrary, the mission of technology is just meant to provide “new tools” that will serve the purpose of “raising the stakes higher” regardless of the underlying “molecular instability” of society; indeed, if one does understand that “increasing ever higher the intensity of economic activity with ever better technology” is as good as “heating up an atom with a soldering iron”, it becomes clear that at some point “the atom will break apart”.
In other words, unless humanity does accept to set some limits to “risk taking” at last, history will remain a tortuous path swinging forth and back from illusion to pain. As technology does allow for the pursuit of ever higher illusions, one should not discard the true but unspoken risk that humanity at some point in its venture would “build” THE ONE illusion that would prove deadly to the perennity of the human race.
So far, chart #7 in this paper is offering the right perspective into which you should frame chart #9 from “Time to think of the unthinkable?”: the current crash viewed thru this chart #9 is revealing that the “child” has been deadly burnt by the fire while chart #7 is showing to which extent the pain endured is going to keep the child in its self made mental prison (before he does break out again from prison to embark on another multi decennial trip).
Let's just hope that the “child” will NOT PANIC in the face of the current societal mess and NOT REACT in such inappropriate ways that it would inflict too much damage to its “boat” (we mean the structure of society as a whole) and this would cause the “boat” to capsize in the end. Indeed, such a dramatic event would take place if the current generational crisis would ultimately bring USA to exit the trend prevailing since 1813, which would somehow mark the return of some form of “Dark ages” for the entire world at the end of 200 years of “progress” brought about by the Age of Enlightenment. Alas, with so many enemies ( Russia , China , Iran , etc.) only waiting “in the dark” for the right opportunity to take advantage of any weakness in the US leadership, the next decade is bound to appear as a really hard challenge for USA and its leaders.
Another remark should be made from chart #7 ; as you must have noted, it is an INFLATION ADJUSTED chart…. Wouldn't it be appropriate to remember now what you have read about Gold in “Time to think of the unthinkable?” ….
According to chart #7 , the coming decade or so should be heavily suffering from inflation though not necessarily on a continuous stream. But GEW just made the point in “Time to think of the unthinkable?” that Gold should by now have embarked on a large bear leg correcting the entire 10 year bull which started in 1999 (see chart #8 in “Stocks bear market has NOT hit bottom” from October 14)… … So where is the overall logic here?
Alas, the answer should be given by the US $: despite the swiftness of the current bull of the US currency, the key question remaining to answer is “what will happen once the US $ bull has run the full course of its red abc pattern ?”; in plain words, can you reasonably expect that the debt crippled US $ is going to remain safe from the current economical debacle?
If you remember all that we did explain in previous articles about “paper money” and “printing out of thin air”, there should be a bell ringing loud in your mind that the case of hyperinflation can NOT be eluded with a wink. As a matter of fact, there is all ground to assume that the mechanical buying of US $ will only last as long as deleveraging is doing its works thru blue wave C with global stocks. If we imagine that the current liquidation will last approximately until May 2009 as detailed a few lines earlier, it should hit your mind at once that REALITY SHOULD MOST LIKELY STRIKE BACK AS SOON AS BLUE WAVE C HAS RUN ITS FULL COURSE .
In other words, we may imagine that in about 6 months from now deleveraging and liquidation have both run their respective course while Gold would have met its cyclical corrective target at that time (maybe down to $ 500): with no more “liquidating energy” left at all in the pipe, that is when anyone around you would suddenly start to grumble and silently count how many TRILLIONS of US $ and other paper currencies (Euro, Yen, etc.) were printed out of thin air IN VAIN thru the course of the “liquidation”. People would obviously do so because all these trillions were meant to STOP the liquidation of the economy in the first place, which they utterly failed to achieve.
The consequence would be IMMEDIATE : despite the fact that recession/depression call it how you wish would be around every corner, inflation would start again to eat away your savings and earnings. Indeed, it is a fatal blunder to assume that “inflation” can only result from excessive demand outpacing offer. Though it is kept widely unadvertised by authorized economists, the most common and most vicious form of inflation does arise from excessive “paper money printing”, especially when it is outpacing what the economy is producing in value.
With a contracting global economy in the coming months, it is all too obvious that the current massive “printing policy” pursued by the FED and all other central banks is opening some kind of “scissors” that will snap and cut your fingers at some point in the future. Of course, the peak of the current debacle with stocks and raw materials ( blue wave C for ADR ) is likely to be one of the key moments when hyperinflation should start to show its true face and reveal the hyperinflationary disaster engineered by the FED and other central banks as they mistakenly applied loose monetary policies thru the course of the “liquidation”.
According to what we said at the very beginning of this article, let's now further discuss the ominous message from XBD about this “reversal point” which took place just 3 days ago. In order to grasp the full significance of that point, we did feature 3 markets at once with chart #8 .
This 3 floor “ EW_MS tower ” is a fast lane towards a deeper understanding of the “emotional mechanics” currently at work; all you need to do is to concentrate on the brown points P1 and P2 which have been marked for each level inside the “tower”. Brown P1 is the ignition point of red wave c for the US $ while it is at the same time the starting point of the entire bear leg that took global stock markets down until their common low (see the green vertical line joining that key low thru the 3 levels of the “tower”). Would you only look at ADR , there would be no easy way to grasp the ominous significance of brown P2 .
Chart #8
But the vertical blue line joining brown P2 thru the 3 levels of the “tower” is clearly emphasizing that it should prove devastating for investors in a very near future if they were to bypass brown P2 and its significance: as brown P2 is an expected reversal point for XBD along its new red downtrend as well as a highly probable ignition point for a new 5 wave move (we mean violet i/ii/iii/iv/v ) towards higher prices for the US $ at the very same time, we get here an interacting reciprocal confirmation of both assumptions, which is then reflecting upon global stocks thru ADR .
Chart #9
While keeping chart #8 in mind, you may now understand the broader significance of brown P2 with chart #9 . Indeed, we're just days away from a new bear leg that will carry global stocks to clear new lows. As to the question about the size of that bear leg, we did already present several elements supporting the case that “the main dish has not been served yet”. Moreover, the fact that the latest rally was triggered by a regulatory ban on short sales in Japan in the first instance does not speak for bright days; as a matter of fact, any experience you may have with such bans is that they end up feeding renewed violence thru the next bear leg (see notes in chart #8 ) . Just put it in a simple way: should you expect a “capitulation point” to be planned and implemented by governmental authorities?
Alas, the latest Japanese move is one more hint that we're now just days away from a severe global crashing impulse that could prove to be the “main dish” which many people regard as “already served and eaten” . As a consequence, it will be quite interesting if not thrilling to see what happens next with global markets around November 15 when the G20 is due to meet; it is for example tempting to figure out (see chart #8 ) that violet wave iii of the US $ may have come a good part of its way by November 15. Should that happen, the G20 would meet amidst a climate of extreme tension; indeed, new lows for global stocks would not fail to raise far reaching doubts among the G20 participants about all the measures recently taken by the G7 members………..
Chart #10
No matter what the G20 may achieve or not, chart #10 is at least a rather comforting view for the young generation currently enjoying its first years at school. According to the most likely 200 year EW path, it seems that “the child will not destroy its toy” within the next decade or so: indeed, the previously mentioned risk that the consequences of the current mess might cause USA to exit its long term path of “progress” in the end seems to be definitely discarded by the best possible application of EW rules.
Though it is no longer likely that USA and the rest of the world may ever again enjoy a “prosperity window” matching the length of blue wave 3 (which lasted 49 years from 1857 to 1906), the minimum case looks to be a last surge of “prosperity” before the impulse from the Age of Enlightenment does reach its final apogee. Alas, this new “prosperity wave” should prove to be rather unstable as China and USA will be forced to compete (peacefully?) for access to raw materials in order to sustain their respective “growth”…..
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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dagger
09 Nov 08, 01:48 |
stocks crash
another excellent article...congrats eric |
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