What If a Double Dip Turns Into Another Great Depression?

By Jeffrey Cooper  AUG 04, 2011 1:00 PM

In April 1930, market participants believed the crash was a one-off. They assumed lightening doesn't strike twice. Sound familiar?


I did a careful study of the action of the great post-crash rally that occurred during late 1929 into early 1930. The rally was a beauty, stirring up more excitement and volume than did the advances in 1928 to the 1929 top.
--Richard Russell

You can imagine that market participants during the spectacular advance into April 1930 were convinced that it was resurgence, a revival of the powerful 1921-1929 bull market. Speculators clamored back into the market, thinking it was great opportunity -- they weren’t going to be left standing at the station as the train took off for another great decade of gains.

Truth be told, records shows the economy had actually topped out in late 1928, fading throughout 1929. The market was running on empty. The economy continued to deteriorate as the market roared ahead from late 1929 into April 1930. Just like the market roared ahead into April 2011 as the economy deteriorated?

But then like a bolt out of the blue, the market and the economy came back into correlation and stocks turned down decisively. Just like they turned down decisively in July 2011 as Rosy Scenario divorced Mr. Economy and the fundamental figures could no longer be painted pretty.

With the ending of QE2, the tape could no longer be painted.

With the debt ceiling debate raging, perhaps the funds were no longer easily available for the Plunge Protection Team. Isn’t it special that one day after a debt deal is reached, and funds can be found for The Working Group without the scrutiny of political subterfuge that stocks stage a big reversal? Just happenstance I’m sure. My papa taught me cynicism well.

Who knows if a double dip will really turn into the Greater Depression. But what is remarkable is that back then the dollar was strong, the US was a creditor nation. Now the dollar and our debt debacle are laughing stocks. Yet most of the jaw jackals, pundits, and financial personalities are sharpening their pencils and ‘calling’ the most likely objective of where the pullback will end and when the next great buying opportunity will arrive.

What if they are all wrong? What if the leg down into the March 2009 low was a big Wave 1, the advance into May 2011 was a big Wave 2, and the stiletto-like angle of attack to the downside since July 2011 is the beginning of a menacing Wave 3?

Few if any are calling for a decline to below 666 S&P. Those that entertain the idea are boys that cry wolf. They are taken serious by few, the financially frail -- those who have fought with and struggled against monster moves in leading names like hyperventilating Faye Rays in the grip of King Kong.

What if?

What if the guns of QE2 are unholstered and the market walks up to Ben Bernanke like Dirty Harry:

“I know what you’re thinking. Did he fire six shots or only five? Well, to tell you the truth, in all this excitement I kind of lost track myself. But being as this is a .44 Magnum, the most powerful handgun in the world, and would blow your head clean off, you’ve got to ask yourself one question: do I feel lucky? Well, do ya, punk?”

You feelin’ lucky, Ben?

What if the 4-year or Fibonacci fractal of 1440 degrees from the big top in July 2007 is exerting its influence. What if the pattern of the big spread double bottoms in 2007 that led to a crash when they were broken is repeating here and now with the big double bottoms in 2011 having just broken? Of course, just as the sign of the Bear was flashed in 2008 on the double bottom break, the market backtested the breakdown point. That’s on the monthly charts and the market slid substantially before that backtest played out into May 2008. Be that as it may, a mini-fractal of that pattern could play out now with the S&P backtesting 1260/1264 or even 1280, satisfying a backtest of the broken angle up from March 2009.

What if?

In April 1930, market participants believed the crash was a one-off. They assumed lightening doesn’t strike twice. Sound familiar?

Conclusion: Tuesday was 90 calendar days from a high which often defines a turning point. As it turned out, Tuesday proved to be a closing low -- for this particular losing streak anyway. On Wednesday the market opened up, implying there was more work to do on the downside. The market proceeded to roll over on top of Tuesday’s flushout with the S&P finally arresting momentum at 1234.

The range from the 1011 low in July 2010 to the 1371 high in May 2011 was 360 points. A Fibonacci .382 retrace of the range is 1234. The closing low so far occurred on August 2nd, 90 days from May 2nd.

However, since 1264 (270 degrees down from high) was broken with authority, the S&P should satisfy a 360 degree move down from the high which equates to 1227. This would accomplish a full backtest of last November’s high (that occurred on November 5th and 1227 ties to November 5th, so these square outs of time and price are worth paying attention to).

Checking an hourly chart of the SPY for the week shows yesterday’s plunge to 1234 may be an Inverse Right Shoulder looking for an undercut, which could define an Inverse Head near 1227 (of an Inverse H&S short term bottom).

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No positions in stocks mentioned.

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