As markets resume plunge, a neat parabola top is defined by 3 peaks

As the markets resume their plunge after a week of rallying, we note that the parabola top formed by the S&P 500 is defined by 3 peaks. Early in the summer I had surmised that their would be a double-peak.

Word that Quantitive Easing may be extended brings temporary market rebound

 Word that Quantitive Easing may be extended in order to quieten the Markets may have been the cause of today's great rebound. However, the trend is still downwards.

Perhaps the slope of the downtrend will moderate. On the other hand, once the Bulls see that the QE rumour is not bringing a full recovery, the down-plunge could become as sharp as before.

The fall of the SPX500, according to my graph, from 19 Sep to 17 Oct 2014 was 9.4%. The rebound over the last two days was a creditable 3.6%, but falling back as I type.

The problem with extending QE once again is that it would be another temporary respite. Unless they decide to make QE permanent, in other words, instead of raising revenue required for government by taxation, to keep on printing Dollars. The end-result would be to continuously increase prices, with a proportionate continuous decrease in value of money.

Two weak signs of down-trend faltering

Two weak signs that the current Downward plunge of the markets may be faltering: A Break-out of the Resistance Line and a levelling of Bottoms. I guess today's vigorous up-swing was a reaction to yesterday's vertical plunge; that it will peter out and the down-plunge continue.

News Reports notice market fall and misinterpret

Yesterday's 3% or so drop in many indexes across the world made News Reports wake up to the fact that the markets are falling.

The Reports blame the slump on the Ebola virus and unsatisfacory reports on global economic growth. Alas, they are misinformed. These items in the news may have been an extra sitmulus to a correction that is already under way. Zero interest and Quantitive Easing pressed prices to their present unsustainable levels, from which they must fall irrespective of economic performance.

However, if the economic report continue bad, the bottom of the correction may be lower than we would otherwise expect. Well-performing economies would arrest the correction at around 1300, whereas economic bad news could do as it did in 2007-8 and send the price crashing through the long-term support line, wiping more than 50% off prices at the apex.

Recovery peters out over-night: sell-off continues

Yesterday's recovery of the markets was short-lived. Overnight, the down-turn resumed. The effect of yesterday's bounce-back was only to widen the range of the down-trend slightly. Line D of my previous charts shifts slightly to the right.

Markets to Bounce or Fall!

Let's recall how we got here:

There are many conflicting indications as to what will happen next. Recalling how we got here may have some benefit.

The economic collapse of 2007/ 2008 brought markets around the world to their knees. The vertical pink line marks the point in time that Quantitive Easing and Zero Interest Rate Policy were introduced.

These policies intended to put cash back into the market place and stimulate the economy. Whatever about that, a side-effect was that people took their cash out of bank accounts and bonds and put them into equities. The stock markets of the world responded positively. Share prices shot up without a sufficient increase of production to substantiate the rise.

Economies are now growing, and eventually production will catch up with prices. For the moment, however, what the market sees is Quantitive Easing ending and Interest Rates rising. Inevitably, equities must fall in proportion.

Yes, there is scope at the present moment for a bounce-back to answer the great slump of the last week, but this recovery, if it occurs, will be short-lived. I see the S&P returning to its natural upslope in due course after a significant correction. There is scope for the correction to happen suddenly or to be spread out in time.

Click on the image to enlarge.

S&P decline: a note of warning

As the American markets continue to plummet, it is no harm to listen to a note of warning (from Kazonomics on TradingView.com):

After the drop we have seen for the last week, a sudden upturn could happen. However, I believe the fear factor will remain high for he present, as the market gears itself up for higher interest rates in the New Year.

The Stock Trader's Almanac 2015 (Almanac Investor Series) last year predicted that the Dow Jones would collapse by 30% or 40% at some time in 2014, and most likely in October. I believe that this correction is now in process.