Henning: Into the No World Order, Part IV

       The Frankenstein debt monster is beginning to implode as the bond market has confirmed to the downside with rising rates. The stock market has developed a lovely bearish Dow's Theory divergence as the Elliott Wave tea leaves have matured while major supply/demand measurements have smashed to the downside. In short, the markets are suggesting that the bubble is just beginning to burst and the economy is moving into anarchy, into a void.
        A mountain of Fed verbiage has been piled up-my own included, but in the final analysis, the savvy player must live in the more mundane world of converting all of the hot air into profit.
        Let's survey the markets.
        The bond market has cracked to the downside after completing a cyclic bull market that started in August, 1982. The final upleg of the cycle is counted out on the Weekly Bond chart.
        Correlating with this rise in rates is a downside smashing of the housing and mortgage stocks, Fannie and Freddie, along with increasing levels of unsold homes suggesting that the housing bubble is bursting. A bust of the housing bubble will trigger a bust of the debt bubble.
        The gold complex has launched a cyclic bull market after bottoming in late 2000 as illustrated by the Weekly XAU chart. Nearer term, the complex has been in a broad consolidation phase digesting the upleg from 44 to 112, basis the XAU. My slightly- favored wave count suggests that the next primary upleg within the larger cycle has started, but to confirm that concept, the XAU has to close cleanly above the recent high of 115. I'm a bit uncomfortable with the XAU not getting into high gear as the metal has followed through to the upside into new high ground. At the risk of sounding like a weasel, there are alternate counts suggesting an extension of the consolidation phase, but while I can't rule these counts out, I tend to minimize this probability.
        To maintain sanity, the gold bugs should not get cute and overtrade the bull move, but simply remember the old cliché: "The trend is your friend."
        In relation to the gold, the Dollar Index has been in a cyclic bear market since 2001.
        Near term, an upside consolidation has been evolving, digesting the downleg from 120-80. Recently, the Index has scored a new high with the internals not confirming the move, which suggests that the upside digestion is terminal. However, to confirm the internals, a close at 90 or lower would hint that the next downleg is starting. A close at 88 or lower would bust the Weekly Hard Momentum to the downside, which would strongly suggest that the next downleg is starting.
        Assuming that this breakdown occurs, keep an eye on the gold complex, because a Dollar breakdown would hint at a run from worthless currencies.
        The stock market bull cycle that started in 1982 is terminal. While not shown, the Elliott Wave count is complete and, as the market has been moving sideways for the last two years, the major supply/demand indicators have turned totally bearish. The recent upleg off of the October low was putrid in terms of upside/downside volume studies and Advance/Decline Breadth. This recent upleg has all of the earmarks of an idiot or tag-on rally. Those rallies usually look impressive on the surface but are loaded with internal rot; they end suddenly and are followed by real downside smashes.
        To put the cherry on the whipped cream, a lovely Dow's Theory bearish divergence has evolved as the Transports scored a new high unconfirmed by the Industrials. This is illustrated by the comparative trendlines.
        To confirm a breakdown, closes below Dow 10,210, Transports 3580, as illustrated would signal the start of a cyclic bear market having the life expectancy of about a decade.
To sum up the situation, the bonds have busted, triggering an uptrend in rates, which will bust the debt bubble. The gold complex has probably started the next primary upleg in the bull cycle, needing upside confirmation by the XAU to validate this concept. The stock market has waved out a bull cycle that started in 1982 as a near-term topping process is looking complete, needing a downside break to launch a cyclic bear market with a life expectancy of about a decade.
        To give perspective, General Motors and Ford are virtually bankrupt; the housing stocks and mortgage holders are falling out of bed; and the boys in the derivatives are playing with 5% margin or less. Now that the bond market is busted, it's a cinch that these derivative clowns are getting squeezed. This squeeze will put a strain on the net worth accounts of the banks holding the paper, not to mention the squeeze created by mortgage defaults. Look out for bank failures which will trigger economic anarchy.
        With a stock market bust below key levels, do not rule out a crash. As Bette Davis said in All About Eve, "Strap on your seatbelts, it's going to be a bumpy ride."