Has the rally run its course...?

Just when the dark memories of Lehman began fading into a so called “abyss of no return”, I’m impelled to wonder (notwithstanding the breathtaking rally mustered by the DOW ), if the next BIG Man named Goldman isn’t taking on the baton from where its former counterparts left….

……….To take Uncle Sam to revisit the troughs seen in economic activity not so long ago through a prolonged process of what may be called a ‘double-dip’ recession.
Take a look at the chart below.




The Dow Jones, from its lows in March 2009 has retraced a whopping 60% of all losses seen from the peak at 14,000. And this level assumes significance simply because it corresponds to the 61.8% Fibonacci retracement level.
While it may seem a no-brainer to expect a good correction in the Dow from here especially given the relentless rally and massively overbought levels that it has been trading at, a closer look at the rally suggests that the rally has unfolded in a kind of 3 wave pattern.
And this has serious implications in that, if the Dow does not manage to hold above the 61.8% Fibo resistance, then the path of least resistance for the US stock markets would be down for an extended period. That is to say that what we just witnessed the whole of last year – a surging Dow was infact nothing but a BEAR in a bull’s clothing….
Since a 3-wave pattern is typical of a corrective phase, the original trend (namely down) will resume in the Dow Jones. I’ve pasted the price action in euro to highlight the typical nature of a 3 wave pattern.




(As can be seen the euro plunged initially, and then managed to recover in a 3 wave fashion which finally resolved into the previous trend again.)

If the above is true then while this topping of the markets unfold, US will continue to print upside surprises in economic data, hoodwinking many if not most to believe and be convinced that the economic recovery is on sure-footing. And this in itself is the danger because even the last time around, while the markets numerically topped in Oct 2008, the impact on the real economy was felt much later by Feb –March 2009.
If this is anything to go by, then the US economy will most likely be weaker 7-10 months down the line with another round of bankruptcies and collapses to its credit. Conserving cash would be prudent as typically this asset tends to reign as king in such times.