11/01/11 BullBear Market Report

The market got spooked by the collapse of a minor brokerage firm, MF Global. Perhaps an appropriate Halloween reaction of -2.5% occurred as the firm's demise was at least partially linked to losses stemming from the European debt crisis. Just two sessions earlier, markets spiked on news that a deal had been struck on Greek debt and the "recapitalization" (bailout) of European banks. At this time all of that spike move has been given back. News that Greece is planning a referendum on its debt deal has also sparked a wave of selling since a popular referendum is not likely to pass, raising the specter of a disorderly default and the explosion of the derivatives bomb.

US markets have followed closely the roadmap I set out back in June/July. We completed a first leg down of a bear market in August (Wave A), made a slightly lower low and are now in the process of completing a corrective move higher (Wave B). At the top few believed it was possible for the market to crash so hard; at the bottom few believed it was possible for the market to rally so powerfully. I called for both moves (though the extreme volatility made exact timing difficult). At this time we are seeing mostly skepticism regarding the rally from the mainstream financial news media and the blogosphere alike. That may be one indication that the move higher is not over yet. We'll probably need to see the rally reach heights sufficient to engender widespread speculation that a new bull run is in progress before a real top is in place.

Having said that, there is a setup that allows Major C to begin from here. There is certainly an Elliott Wave structure which arguably completes Major B and most intermediate term indicators have readjusted to a neutral or even overbought condition. Any hangup to the beginning of Major C comes from longer term indicators which in most instances are still hovering near levels frequently associated with major bottoms, not major tops. At this time I am looking for an intermediate term correction of the move off the low (in progress now) which backs the intermediate term indicators off from their neutral to overbought/excessively bullish condition and sets up a final run back at the highs to complete Major B. Ultimately optimism that somehow world monetary and governmental authorities will be able to contain the debt crisis will prove unfounded and a series of Lehman-type events will likely unfold, catalyzing the Major C down in a five wave decline.

I'll start our review of the technical condition of the markets from the very long term and move towards the shorter term.

On the very long term chart we can see that the market is closer to an upside breakout than it is to a downside break. After over 10 years of bear market action and repeated calls and widespread expectations for a market catastrophe, price is not far from the all time high and the recent interim bull market high:

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