Recession or Depression? Finding the Trigger ...

Recession or Depression? Finding the Trigger ...

Posted By:Daryl Guppy

The key question facing markets these days is the difference between recession and depression. A recession is an economic slowdown that may last for 6 to 18 months. A depression is an economic pullback that may last from two to four years. We'd rather not have a recession at all but if we have to choose one or the other, I'd rather be recessed than depressed!

In either case, the market moves in anticipation of the event. The market decline develops before the fundamental signs of a recession or depression become evident. The market leads the confirmation of conditions.

The market also leads a recovery. In a recession, the market will develop strong trending behavior many months prior to the official confirmation of the end of a recession. This recovery provides trend trading opportunities.

In a depression the market will develop a long-term consolidation pattern. This is an investment period that lays the foundations for generational fortunes. Trend-trading opportunities do not develop for several years. This consolidation and accumulation phase concentrates on creating income flow from dividends. The fundamental end of a depression is not recognized until many months after the market has already reacted.

Right now, market is hovering near significant support levels. The closest of these we call recession support targets. The lowest of these we call depression targets. Many analysts have compared the current market situation to the market collapse in 1929. This week we look at charts from the 1929 period. In particular we look at the similarity of behavior.

The above chart is the weekly Dow for 1929 to 1930. The significant features are these:

• The rapid fall is followed by a rebound and rebound failure.
• The primary rebound failure occurs rapidly with another market collapse.
• The pile driver low is retested within 12 months
• Support, defined by the pile driver low, is not successful

The pink circle shows the comparable position of today’s market. This is a period of high volatility, but volatility lessens and the market moves into a more clearly defined trending behavior. This pattern of behavior suggests that a rebound from the current support levels may persist for around 20 weeks.

The important feature is the rapid failure of the trend line followed by a rapid failure of the pile driver low support-level. The failure of pile driver support brings the really bad news. This failure is acute because the pile driver low support does not equal any previous historical support level.

The low of the market develops in 1932, about three years after the 1929 crash. The key trigger is the failure of support set by the pile driver low. The disaster is that it takes 25 years for the market to exceed the high of 380 set in July 1929. This is why the Depression is referred to as a generational event. The current situation has the potential to have the same generational impact.

The key trigger that separates a recession from a depression is the behavior of the rebound from the pile driver low. After the 1987 crash the rebound quickly developed strong trending behavior. The move above the midway point in the market fall signaled a continuation of the uptrend. This is recession behavior. Depression behavior is when the market fails to move above the midpoint of the extreme fall area.

On the current Dow chart, the area near 12,000 is the key level to watch. Failure to move above this level suggests a depression scenario may develop.

A sustained move above 12,000 signals a recession. There is one caution in this analysis. The Dow has not yet developed a confirmed pile driver bottom pattern on the weekly chart. The low of this pattern will determine the mid-point resistance level that is used to signal a recession recovery.

Markets will not behave the same way as in 1930, but they will develop in a similar fashion. There is a high probability that these behaviors will develop in shorter time frames.

3) FKLI - intraday trade

3)20.11>FKLI SHOT 3@854-BUY 3@850 = +12 (20.11)

2) FKLI - position trade

2)20.11>FKLI SHOT 2@852-BUY 2@872 = -40 (27.11)*POSITION TRADE

BEHIND THE MONEY: Dow's Bermuda 'Triangle' Points to More Lost Returns Ahead, Analysts Say

BEHIND THE MONEY: Dow's Bermuda 'Triangle' Points to More Lost Returns Ahead, Analysts Say

The Dow average is forming a pattern that's generating a lot of chatter among the technical analyst community (there's a community?) and the Fast Money traders. Using a bar chart for the Dow, draw a trend line from the September intraday high diagonally down, touch the November 4 high and keep going. Then draw a straight line across the lows, touching the October 10 intraday low and the low made during the day last Thursday (right before the monster intraday rebound) until you connect with the hypotenuse. You're looking at a right triangle, also called a wedge among chart worshippers. The Dow is clearly bouncing around within this triangle, posting lower high after lower high.

"We know only that 'triangles' such as this one tend to resolve themselves to the downside,'' writes Dennis Gartman this morning in The Gartman Letter, which is standard reading on Wall Street trading floors everywhere. But he's not alone by any means.

"A case can be made that the equity base could be a 'triangle,' which is often a continuation pattern within a dominant trend," said Mary Ann Bartels, Merrill Lynch's Technical Research Analyst, in a note to clients yesterday. "In the S&P 500's case, the triangle carries the risk for a breakdown" of another 13 to 19 percent, said Bartels, who was the No. 2 ranked technical analyst in the latest Institutional Investor magazine poll.

And our very own Jeff Macke said on the Fast Money conference call this morning, "It sounds silly, but I've made a lot of money trading evil triangles." He cautions that a few more fake rallies within this triangle could point to a pretty severe breakdown as frustrated investors throw in the towel.

Are enough people talking about this Bermuda "triangle" that it will become a self-fulfilling prophecy? That's pretty much what technical analysis is all about. Voodoo or not. It is being talked about enough to give some credible traders some pause.If we form yet another lower high today (which looks like the case), watch for the triangle chatter to get even louder.