Technical Analysis Works Well in Bitcoin Market

A market dominated by amateurs and emotion. If TA and Elliot Wave work, this is when they should shine.
Someone on Reddit predicted a crash on January 15 based on Elliot Wave. Off by only one day.

Trading in Soon to Be Delisted Firm Surges After Fake Text Message Claims It's An IPO

The insanity that is China's A-share retail market continues:

Earlier this month: Dan Dong Xin Tai Electric becomes first to be delisted over IPO fraud in China

China's securities regulator said on Friday it will force Dan Dong Xin Tai Electric Co Ltd to delist for initial public offering (IPO) fraud, the first company to be removed from the Chinese stock market due to issues over IPO disclosure.

In a move to clean up the market, the China Securities Regulatory Commission (CSRC) has fined and reprimanded 17 current and former officials in Xin Tai Electric for forging financial data for their IPO in 2014, CSRC said in a statement on Friday.

This leads to: The first delisting for IPO fraud triggers curious trading fallout

According to information circulating on social media, mass text messages sent under the name Shenwan Hongyuan Securities Co Ltd went out investors, urging them to subscribe for IPO shares under the stock code 300372 — which actually is the code of Xintai.

The ruse played on the investor mania for new shares, which usually generate huge initial profits as investors in the secondary market seek to pick up more shares than they were allowed in the primary offering.

Shenwan Hongyuan later issued a statement saying its name had been falsely used, and the brokerage never sent such a message. Even Xintai, in a filing with the exchange, disavowed the hoax.

The Shenzhen Stock Exchange issued a warning to the company and brokerages about exposing investors to potential risks. All the clarifications seem to have little effect. In the days that followed, nearly 90 million yuan of Xintai shares traded hands.

“I have no clue why there are still people buying the company’s shares because the delisting of Xintai is already a done deal,” said Qian Qimin, an analyst at Shenwan Hongyuan. “Whoever is buying them is taking a huge risk.”

A number of theories tried to explain away the stupidity, but in the end, Occam's razor wins:

Tu said the more likely explanation is that some investors simply aren’t paying enough attention to what’s going on in the market and see the declining price of Xintai shares as a buying opportunity.

Sina: 谁在博傻永久退市的*欣泰：2994名散户前赴后继

The post The Problem With China's Stock Market: Retail Investors has links to a few other idiotic trading surges in the past couple of months.

7% Rebound in A-Shares, Foreign Buying, Mood Reversal or Both?

Here's a question from the comments:

Any insights into what caused the whipsaw reflation in today's Shanghai market? It was down 2.5% at lunch and then was up just a few minutes afterwards - new easing news released or Chinese plunge protection team stepping in?

When I checked at noon there were ~2300 stocks down on the day and the remaining ~400 up. I cannot imagine that a millions of farmers, within a few minutes, decided that this was now the proper time to buy the dips.

The best explanation, if there is one, is foreign buying through the Shanghai connect.

QQ: 沪指V型反转 70亿沪股通资金入场抄底. Net purchases were almost ￥7 billion (￥13 billion in buys, ￥6 billion in sells).

Foreigners also turned bullish via options on the U.S. traded ETF ASHR: Big Investors Bet on China Despite Recent Losses

Other than that, I didn't see much of an explanation. I checked this article from iFeng 股民晚报：部委重要消息汇总及点评 抄底资金都买了些啥, it is a summary of the day's events for investors. The top story is Xi Jinping talking on the phone with Indonesia's president. This isn't the 新闻联播 (xinwen lianbo); if there was market moving news it would be on top. If you click through and Google translate it, there's some discussion from brokers at the bottom, generally saying the market will rebound and blaming margin worries for the drop.

My personal take:

The major fundamental explanation for last week's drop is the IPO cash lockup. In the past, big lockups have been associated with falling share prices. The smart money buys during lock-up periods and the dumb money is frozen.

Aside from that, I lean towards psychology for an explanation. Last week, there were reports of negative rumors circulating online and regulators felt the need to refute them with an official statement, but rumors are constant background noise. Why those particular rumors caught fire with investors and why the regulators commented, is best explained by shifting mood.

There's been a lot of discussion about margin and stories of people losing everything. The margin issue was always there, but it flared up in the past couple of weeks.

Purely an anecdote, but a friend of mine who asks for stock advice from time to time hasn't talked to me in a few months, but today she messaged me asking for a stock tip, she wants to get back into the market.

Crashes do tend to end with a V-shape bounce. The selling in the AM was people panicking for three days hoping for a chance to sell.

Very few traders are using any type of fundamental valuation and most Chinese stock investors are more properly termed traders. Technical analysis is central on Chinese investment shows. The drop on Friday took the Shanghai Composite almost to the 60-day MA (a widely followed MA). This article (originally published in Shanghai Securities News) is telling investors to watch that line: 关注60日均线支撑作用. The 60-day MA is broken on Tuesday, but then recovered:

Finally, I do believe millions of people can coordinate their action through mass psychology. There are few markets in the world with a greater imbalance between reason and emotion than China's A-share market. Maybe foreign buying was the spark, but at the time no one knew who was buying. They reacted emotionally to a sudden rebound in prices.

Secession Push Continues in Maryland

I don't think these people have any chance of forming a new state, but they're pushing on.

Some Western Md. Residents Want To Form Their Own State

“If your vote doesn’t count, it’s the same as having no vote. We’re not free,” Strzelczyk said. “We’re doing exactly what they did in 1776. I just simply want to live as a free human being with limited government intrusion in my life and that’s really why I do this.”

They claim Maryland’s lawmakers don’t listen to their concerns so they want to form a state more in sync with their beliefs.

“I’ve gone down to Annapolis. I’ve complained; I’ve been in rallies,” said Parr. “It all falls on deaf ears.”

“The attitude is sit down, shut up, we don’t care what you think,” said Olden.

“We are enslaved to this government in Maryland that we want nothing to do with. All we simply want to do is peacefully leave,” Strzelczyk said.

One cannot argue with the logic of it. The American system is designed to be decentralized; the reason for leaving England was for these very reasons. The Civil War did not settle the issue of secession (as some try to argue), it only showed that sometimes one side can use violence to compel the other to live under its rules. The ideas behind America's founding, found at the beginning of the Declaration of Independence:

When in the Course of human events, it becomes necessary for one people to dissolve the political bands which have connected them with another, and to assume among the powers of the earth, the separate and equal station to which the Laws of Nature and of Nature's God entitle them, a decent respect to the opinions of mankind requires that they should declare the causes which impel them to the separation.

How long will social mood remain in a primary negative trend? This is the big question. If negative mood bottoms out in the next 10 years or so (or has already hit bottom), this will likely go down as a period like the 1970s, only longer. If instead 2000 was a grand supercycle top and social mood will fall for years and hit a much lower bottom, then the odds of a significant political event increases greatly. There are secession movements in Arizona, Colorado, California, Maryland and Michigan, not to mention existing/former movements in Vermont and New York. While the secession movement appears to be mostly driven from the right, it is a non-ideological issue. If enough Democrats and Republicans decide it makes more sense to separate into new political arrangements, they can agree on this issue even if they disagree on everything else.

States should be allowed to re-form: see if it makes sense for Western Maryland to merge into Pennsylvania, or for Northern California to join Oregon, since creating new and very small states is unlikely. If Western Marlyand can become a separate state, any city with population of a few hundred thousand could declare itself a state and I see no desire on the part of the government to allow hundreds of states. If instead they cannot become a state, and cannot join with other states, then the secession movement will have to look for political allies. Right now, there seems to be no coordination between all of these movements, but that can change. Once a national secession movement begins, it can move in lots of directions because at that point, some states may decide that leaving the United States is a viable option.

While this may all sound like far off speculation (and it is today), the key to remember is what happens as social mood declines. Ten to fifteen years from now, the U.S. economy could be in dire straits, with high taxes needed to finance the debt and probably a foreign war. The burden of union would be very great and the hatred between left and right will have grown far more intense. The conservative (non-political meaning) first step is to alleviate the desire to secede, as Giuliani did with Staten Island in 1993. The next best step is to allow some limited form of secession, such as joining another existing political unit. Ignoring the problem and dismissing it as not worth worrying about is to gamble that social mood will not decline.

PBOC Pops the Bitcoin Bubble

What China buys goes up in price. What Chinese regulators crack down on, collapses in price.

The Google translation is pretty bad on this one, but it conveys the negative news as the central bank cracks down on third party payment.

First here's English coverage of the rumored shift, based on closed door meetings between Bitcoin companies and the PBOC yesterday.

China Bans Payment Companies from Working With Bitcoin Exchanges, Sources Claim

A reputable source told CoinDesk that the People’s Bank of China (PBOC) met with most of the top third-party payment companies this morning.

The source said the meeting topic was unrelated to bitcoin, but digital currency became an important part of the discussion.

“PBOC, in no uncertain terms, directed third-party payment companies not to do business with bitcoin exchanges in China,” they explained.

.......They went on to say that if and when this happens, people will still be able to withdraw their money from Chinese exchanges, they just won’t be able to deposit new funds.

“There’s no need to panic and do a run on the bank. People will still be able to sell their bitcoins for local currency and then withdraw that currency,” they concluded.

Here's the Chinese article, Google Translated below.

央行约谈第三方支付防范比特币风险 (Central Bank interviews with third-party payment bitcoin risk)

"The central bank regulations third party payment institution shall not provide hosting bitcoin trading site for the trading business." Yesterday afternoon, the central bank called third-party payment companies meeting revealed the news.

　　"First Financial Daily" reporters learned exclusively, December 5 issued "on guard against the risk of Bitcoin notice" (the "Notice") Following the central bank again yesterday, "attack", interviews with more than 10 third-party payment companies relevant person in charge, it may not be explicitly requested to Bitcoin, Wright credits (LTC) and other trading sites offer payment and settlement business.

　　In less than two weeks time, the central bank even out "two trick" to prevent the risk of Bitcoin, and convey the spirit of the meeting is to be interpreted as "drastic" Many Bitcoin insiders.

　　Third-party payment "three line"

　　A large third-party payment company, told reporters that the participants who, yesterday morning, more than 10 third-party payment companies convened by the central bank, in Beijing held a closed-door meeting. Such persons in an interview with this reporter revealed that the meeting, Deputy Director of the settlement payment was chaired by the Secretary golden week the central bank, every company has sent 1 to 2 participants stakeholders.

　　"Justice Week at the beginning of the meeting made it clear that the meeting was not convened to discuss whether the companies about Bitcoin-related businesses can conduct, but to convey the attitude of senior central bank, which may not be the first third-party payment companies to bitcoin, Wright currency and other trading sites provide payment and settlement services; Secondly, for payment institutions business cooperation has occurred should be lifted, the stock of money at the latest to complete the withdrawal before the Spring Festival, the new payment services may not occur; Third, strict implementation of the December 5 the central bank issued a "notice". "these third-party payment companies told this reporter.

　　According to newspaper reporter to get a third-party payment companies participants recorded meeting minutes, the meeting, in addition to domestic regulations do not allow third-party payment agencies engaged in related businesses bitcoins, the central bank will also be After studying the relevant requirements for access in the territory of Bitcoin-related businesses overseas payment mechanism.

　　After Golden Week convey relevant spiritual, individual companies have made the payment that he will strictly enforce the above three requirements. But it is worth noting that one of the world's most active trading site BTCC (bitcoin China) as well as Bitcoin, Wright currency trading site OKCOIN have third-party payment agencies from the original co-pay through fiscal replaced by another third-party payment Companies, meanwhile, have users complained that two sites are currently only using money paid through withdrawals, but not through its recharge.

　　"Alipay has not any bitcoin trading site had business cooperation," Alipay stakeholders in an interview with this reporter, said, "If investors find recharge channels Alipay, you need to be alert to whether the other individual accounts, if really is a personal account, the investor must be aware of the risks. "

　　There Bitcoin Insiders believe that the contents of the central bank from yesterday's meeting, the central bank for risk prevention efforts may result in a larger bitcoin, but he also expressed puzzled, because this might make the original line open and transparent Bitcoin trading platform is transferred to the ground, the difficulty of monitoring will also rise.

　　Bitcoin bleak future in China?


　　"Come after" notice "is issued, we are in this thing to worry about third-party payment will not do it, did not think of a prophecy." Bitcoin transaction, a person in charge after hearing the news of the newspaper Reporter said.

　　After the "notice" issued by the vast majority of people in the industry believe that the "caliber looser" or even "a regulatory innovation" is different, the spirit of the meeting of the central bank to bitcoin industry obviously caused some blow. Many industry insiders have said that bitcoin future development of the situation in China worrying, will choose different levels of "escape", or transferred to offshore trading platform Bitcoin transactions.

　　Earlier, the central bank's "notice" had explicitly requested at this stage of financial institutions and payment institutions shall not conduct business associated with bitcoins are not allowed to bitcoin for a product or service pricing, may not be sold or traded as a central counterparty bitcoin not covered with Bitcoin-related insurance business or insurance bitcoins into range. After the "notice" is issued, although Bitcoin market has movement fell short, but soon that recover "lost."

　　Yesterday's meeting will have much impact on prices bitcoins is still unknown, but as of press time newspaper reporter, BTCC Bitcoin price has fallen from yesterday's highest 5335 yuan to 4600 yuan, a decrease of 15%.

H/T: ZeroHedge

Social Mood Sinks, Stock Market To Follow; Loss of Filibuster Signals America's Decline

In May I wrote Will Obama Be Impeached? Watch The Stock Market. The stock market has climbed to new high after new high. Yet social mood is collapsing if we look at how the country feels about Washington, politics and Obamacare. I was mulling this over in my head, thinking about whether a drop in the market is coming, and today I came across this:

Elliott Wave Update ~ 20 November 2013

Social mood seems to be bursting lower in a some kind of wave three down if you look at the Presidential polling numbers. Yes Obamacare is quite the disaster, but social mood had already been in a downturn and thus the problems of Obamacare are quite amplified by the state of mood.

So there exists a major "disconnect" between current social mood and the stock market. In Elliott Wave theory social mood turns first then economic results follow (to include stock market declines). So I would not hold my breath on a new market high however the wave count allows for it.

Also, the Senate just killed a centuries long tradition in American politics.

Senate Dems Curb Filibuster, Risk Future Problems

"The silver lining is that there will come a day when the roles are reversed," said Iowa Sen. Charles Grassley, top Republican on the Senate Judiciary Committee. He warned that when his party wins a Senate majority they likely will apply the 51-vote filibuster threshold to a Republican president's Supreme Court nominees.

"The tyranny of the majority. That's what it's going to be" at some point in the future, predicted Steve Bell, a former top Senate Republican aide who is now a senior director at the Bipartisan Policy Center, which advocates partisan cooperation.

...But Sen. Carl Levin of Michigan, one of three Democrats who voted against diluting the filibuster, noted that past Democratic minorities have used the procedure to block GOP moves to limit abortion rights and repeal the estate tax.

He said he feared that a future Senate majority would weaken filibusters against legislation and "down the road, the hard-won protections and benefits for our people's health and welfare will be lost."

This is not a Democrat versus Republican issue, but rather the slow motion collapse of the United States of America into tyranny. This is the slippery slope: once one side changes the rules, the other side doesn't respond by restoring them, they respond by changing them more in the future. The result could well be the continual breakdown of politics and an eventual descent into tyranny.

If you are imagining American tyranny in the future, you would have to imagine the end of the filibuster because it protects minority rights. The U.S. is headed in a dark direction politically, regardless of who wins. From a historical perspective, this is a huge shift towards unrestrained power.

Lending to Small and Medium Business Back Near All-Time High

Is this a double top or will the economy pick up steam?

Another View of the Grand Super Cycle Top

The Blip

What if everything we've come to think of as American is predicated on a freak coincidence of economic history? And what if that coincidence has run its course?

Picture this, arranged along a time line.

For all of measurable human history up until the year 1750, nothing happened that mattered. This isn't to say history was stagnant, or that life was only grim and blank, but the well-being of average people did not perceptibly improve. All of the wars, literature, love affairs, and religious schisms, the schemes for empire-making and ocean-crossing and simple profit and freedom, the entire human theater of ambition and deceit and redemption took place on a scale too small to register, too minor to much improve the lot of ordinary human beings. In England before the middle of the eighteenth century, where industrialization first began, the pace of progress was so slow that it took 350 years for a family to double its standard of living. In Sweden, during a similar 200-year period, there was essentially no improvement at all. By the middle of the eighteenth century, the state of technology and the luxury and quality of life afforded the average individual were litt le better than they had been two millennia earlier, in ancient Rome.

Then two things happened that did matter, and they were so grand that they dwarfed everything that had come before and encompassed most everything that has come since: the first industrial revolution, beginning in 1750 or so in the north of England, and the second industrial revolution, beginning around 1870 and created mostly in this country. That the second industrial revolution happened just as the first had begun to dissipate was an incredible stroke of good luck. It meant that during the whole modern era from 1750 onward – which contains, not coincidentally, the full life span of the United States – human well-being accelerated at a rate that could barely have been contemplated before. Instead of permanent stagnation, growth became so rapid and so seemingly automatic that by the fifties and sixties the average American would roughly double his or her parents' standard of living. In the space of a single generation, for most everybody, life was ge tting twice as good.

At some point in the late sixties or early seventies, this great acceleration began to taper off. The shift was modest at first, and it was concealed in the hectic up-and-down of yearly data. But if you examine the growth data since the early seventies, and if you are mathematically astute enough to fit a curve to it, you can see a clear trend: The rate at which life is improving here, on the frontier of human well-being, has slowed.

If you are like most economists – until a couple of years ago, it was virtually all economists – you are not greatly troubled by this story, which is, with some variation, the consensus long-arc view of economic history. The machinery of innovation, after all, is now more organized and sophisticated than it has ever been, human intelligence is more efficiently marshaled by spreading education and expanding global connectedness, and the examples of the Internet, and perhaps artificial intelligence, suggest that progress continues to be rapid.

But if you are prone to a more radical sense of what is possible, you might begin to follow a different line of thought. If nothing like the first and second industrial revolutions had ever happened before, what is to say that anything similar will happen again? Then, perhaps, the global economic slump that we have endured since 2008 might not merely be the consequence of the burst housing bubble, or financial entanglement and overreach, or the coming generational trauma of the retiring baby boomers, but instead a glimpse at a far broader change, the slow expiration of a historically singular event. Perhaps our fitful post-crisis recovery is no aberration. This line of thinking would make you an acolyte of a 72-year-old economist at Northwestern named Robert Gordon, and you would probably share his view that it would be crazy to expect something on the scale of the second industrial revolution to ever take place again.

"Some things," Gordon says, and he says it often enough that it has become both a battle cry and a mantra, "can happen only once."

Must read. This is completely in line with Tainter and it matches the prediction of a Grand Supercycle Top in Elliot Wave Theory.

The article ends with a discussion of politics, which will turn sharply to the right and stay there for decades or centuries if this bleak economic forecast is correct. First, society will no long be able to afford expensive lifestyles, such as early retirement and single mothers. Second, change will become very slow, if there is any change at all. Traditional patterns of family, work and religion will return and stay in place. "Freedom" as understood today will become very expensive, as it was prior to the industrial revolution. Ethnic and religious divisions will become huge because there will be a far more zero sum game afoot in global economics. Nations and peoples who grab their shares will survive, while those who cannot or will not defend themselves will be left with little. International travel may decline, while entertainment shifts towards lower cost virtual entertainment on the Internet.

Massive head and shoulders in gold miners; do they signal a market panic?

I noticed this pattern today and I'm not the only one. The downside target is the 2009 lows! Are miners signaling a major correction in stocks?


WHAT WILL HAPPEN TO THE PM SECTOR IF THE BROAD MARKET TANKS...

In the light of all this, how do the PM stock index charts look right now? – in a word they look terrible.

Our 6-year chart for the HUI index shows a massive completing Head-and-Shoulders top. We have observed this menacing pattern for some considerable time, but for a while thought it would abort because of the negative extremes of sentiment already afflicting the sector. However, we should recall from 2008 that sentiment can get even worse as prices plunge precipitously. The relative strength of the sector against the broad market in the recent past has been appalling, and this does not bode at all well for it in the event that the broad market goes into reverse as expected. While we are aware that the sector could go contra-cyclical at any point, as it has traditionally done in the past, and we will always be on the lookout for signs of this happening, at this point it looks like it will be subject to a similar cycle of forced liquidation as in 2008. If the broad stockmarket reverses hard it looks likely that the HUI index will crash the crucial support at the lower boundary of the Head-and-Shoulders top pattern and plunge, with a probable downside target in the vicinity of the 2008 lows, and possibly lower. We have a general stop at 358 on this index and will be out of all remaining holdings in the sector if this fails – we are not going to be caught napping like the unfortunate folks in 2008.

Click the link for much more on the current market technicals, including some Elliot Wave analysis.

Elliot Wave analysis of Bitcoins: Wave 3 Edition

Disclaimer: I'm an amateur at Elliot Wave.

I last covered Bitcoins wave structure in Elliot Wave analysis of Bitcoin and Updated Elliot Wave analysis of Bitcoin, back in June of 2011 when Bitcoin made its first big run.

It appeared to undergo a typical 5 wave structure with a blowoff wave 5. It then consolidated for a year before starting another advance. Depending on where one puts the start (and to restate, I'm an amateur), it appears Bitcoins could be entering wave 3 if it can exceed the 2011 price high of $30, which would be a 7% gain from current levels. If it breaks out, it opens up some potentially high price targets, but for now it needs to get above it's old high.

QE3's fast failure?

In Why QE3 Will Completely Fail, I laid out the case that the amount of monetization by the Fed isn't enough to turn the credit market around.

I didn't make a short-term technical forecast because technical analysis is not my strength, but I did expect the QE3 rally would be shorter than QE1 and QE2. I anticipated a rally into or around the election, before turning south. Instead, the market may be on the cusp of falling lower. One can only guess as to the psychological effect of the stock market falling below pre-QE3 levels, but I'm guessing it won't be good for the bulls.

Here's a couple charts from Daneric's Elliot Waves, Elliott Wave Update ~ 25 September

Deflationists believe the Fed will be shown to be powerless and a less than two-week rally in the market following the QE3 announcement should strengthen the deflationist case.

The market is propped up by billions of fleas

People still refer to the May 2010 stock market crash as a flash crash and explain it away as algorithms gone bad. I believe the crash was real and it was the response to it that turned the market around. It wasn't a mistaken crash, it was a crash that was met with heavy buying. Now we have evidence of another market "flash crashing": the oil market.

Kilduff: Oil's 'Flash' Fall Is a Warning to All Markets

We have made the point that the actions by the Fed and the ECB are in response to a global economy that is floundering not flourishing. The equity and other markets have rallied due to all of the announced and expected easing measures, predicated on a belief that consumption and economic growth will necessarily follow due to extremely low interest rates and/or the positive effect of inflation on asset values.

Still, it was an odd epiphany that struck the energy market in a moment.

Prices seemed to collapse of their own weight, due to a buyer's strike. The demand outlook for next year has deteriorated markedly, and just this morning FedEx (FDX) has reduced its outlook for the all-important Holiday quarter.

Social mood is negative, but global central banks and global governments are pulling out all the stops to support the economy and financial markets. If at any moment, investors suddenly realize that things aren't going well, that the Federal Reserve and U.S. government aren't all powerful and can no longer prop up the markets, financial marktets could rapidly crash again.

The most important comment in the above: a buyer's strike. Over 70% of stock market volume is due to algorithmic trading, some of which have holding periods measured in milliseconds. Stocks are being supported by billions of micro-transactions. Micro-transactions usually refer to a trade of a small amount, but in this case I refer to a trade of extremely short duration.

Imagine a man holding up a heavy weight. He must use his own strength and he cannot lift too much, but he also can continue supporting this weight using only his own energy. He is the long-term investor who holds his position through thick and thin.

Now imagine a different scenario. Every 1 minute, another man comes and takes his place. Then 30 seconds later, then 5 seconds later, then 1 sec......each time the individual man's strength is less and less important, he only needs to hold the weight for a second. Then imagine that thousands of new men are supporting it every second, each man only needs to contribute a tiny amount of effort. In the abstract, we could imagine billions upon billions of fleas supporting a large weight, with each flea contributing a tiny amount. These are the high-frequency traders, who make millions of transactions per minute. Like a game of hot potato, stocks flutter from one buyer to another.

The energy expended to support the weight is the buyer's desire to hold a stock. A long-term investor who opens a position with the intent to hold for years and buy on the dips, has great desire for the stock. A high-frequency trader who wants to buy and sell the stock 100 times in one second has extremely little desire for the stock.

When more people want to buy (support the weight), the market is pushed higher, when the buyers dry up, it falls. In a healthy market, the long-term investors are the Atlas providing stability in the market. The fleas jumping around add liquidity and support the market.

Today, Atlas has shrugged. There is little long-term investor support in the market; the fleas dominate. They have grown into such a large swarm that no one has noticed Atlas left. But when the music stops, when the traders shut off their algorithms and the fleas disappear, there is nothing supporting asset prices and they rapidly collapse. Risk of extreme volatility has increased—whereas a bear market might have take several months to play out before, it now may only require a few hours.

Bitcoin prices moving higher again

Here's a long-term chart from bitcoin charts.

There's a similar rise in Google Trends for bitcoin.

What's really interesting is what's underlying the move. Blockchain has a whole host of stats and charts on bitcoin, including transaction data:

Bitcoin did a classic 5-wave Elliot Wave structure last year, covered here and here. If that move was the first of a larger wave pattern, it appears wave 2 has completed and we may be in the midst of a larger wave 3. Either way, interest in bitcoins is picking up.

Chinese stock market headed for wave 3 style plunge?

ZeroHedge has eyes on China with a late Friday post on the Chinese market.

As we write, it seems beyond dispute to say that the Chinese hierarchy is battling it out behind closed doors to determine the long term future of the regime and, by implication, the direction of the entire nation. In such momentous times, we would perhaps be foolish to think that the routine application of short-term countercyclical policy will bear overmuch weight in their counsels. Simply out, there is too much political infighting for any large-scale action to be taken as "Having moved against the state-capitalist left of old man Jiang and his Chongqing bruisers, surely the last thing Hu & Co. would want in their final months in office would be to unleash another oligarch-enriching orgy of speculation of the kind such a mass stimulus would be almost bound to foment."

In contrast, while most of the wave counts I've seen make allowances for declines, even to test the 2008 low, they all seem to place the previous high as a wave 1 top, with wave 3 coming next. While social mood remains negative, the market is still the indicator and an upturn in shares would not be immediately correlated with positive news.

Chinese developers rush to unload ￥5 trillion inventory

Chinese developers are putting 100% of their workforce into sales with inventory and debt pressure mounting, as ￥5 trillion in inventory weighs on their balance sheets. Inventory increased 50% in 2011 over 2010; the average inventory per developer is ￥10 billion.

Among them, China Merchants (000024.SZ) had inventory of ￥51.44 billion yuan, an increase of 33% over 2010; Vanke (000002.SZ) inventory reached ￥208.3 billion yuan, up 56%; Beijing Capital Development (600376.SS) ￥43.049 billion, an increase of 72%; Sino-Ocean (3377.HK) inventory is quite small, but the increase was very high, from ￥231 million at the end of 2010 to ￥487 million at the end of 2011, an increase of 111%.

Credit remain tight, trust loans are coming due and the inventory has become a nightmare for the developers. Ren Zhongwei of Beijing Normal University's Institute for Monetary Research estimates the inventory has a cost of capital of ￥345. In 2011, the property sector had profits of ￥500 billion, but this will fall in 2012 and that could put the industry close to break even.

Industry analysts say that after the "winter" comes the selling season. Sales dried up at the end of 2011 and into 2012, while prices declined. Now comes the rush to unload inventory and what I expect will be the waterfall price declines, as I wrote here:

To sum things up: home prices need to fall at least 20% in order for buyers to see their costs decline, due to higher interest rates and taxes. There's some local differences such as the high transaction tax in Beijing, but overall, it seems that 20% is a good rough estimate. On top of that, prices will need to fall at least another 5 to 10% to attract buyers who now expect price declines. Now we're talking about a 30% price decline as the baseline scenario! Markets always overshoot and China will be no different. Waterfall price declines are coming in 2012; local government and the banking sector will be severely impacted.

I do not have a wave count on Chinese home prices, but to put it into terms of Elliot Wave, wave 3 is coming. The "winter" of 2011 and early 2012 was wave 1, the recent thaw that's seen transaction volumes and some prices rebound is wave 2.

Source: 500强房企库存近5万亿 开发商进入全员卖房模式

Chinese real estate market on the verge of explosive price declines

上海开发商强势降价20% 第二波降价潮爆发? (Shanghai developers mighty 20% price cut, is the second wave of cuts breaking out?)

Developer Poly Group has slashed prices on a Shanghai development, a move the media is dubbing the first cut of 2012 and a sign that a new wave of price cuts may hit Shanghai. The property in question wase selling for 19,000 yuan/square meter. Today, the price is 17,000 yuan/sqm plus 2,000 yuan/sqm in furnishings. This amounts to a 10.5% price cut and a 21% total reduction.

Another property in the Baoshan Songnan area announced a 5,000 yuan/sqm price cut as part of a group buy promotion, cutting the price to 19,500 yuan/sqm, about 20% below the previous price.

New home inventory in Shanghai is headed for 10 million square meters. An analyst said this inventory would have been sold in 6 months in 2010, 3 months in 2009 and 13 months in 2008, the year of the crisis. At today's optimistic pace of 600,000 square meters sold per mont, it would take 15 months to absorb the inventory.

上周12大重点城市新房成交套数环比齐涨 (Sales in 12 key cities rose in the past week)

Real estate transactions increased in the past week for 12 major cities. This news is greeted warmly by the industry and media, but an analyst at the end of the piece says sales increases will depend on whether developers continue to give huge discounts.

招商地产掀全国降价风暴 自称“史无前例” (China Merchants Property Development country wide price cut storm "unprecedented")

[China Merchants Property is the real estate division of China Merchants bank (0144.HK); the real estate division has two share classes: A shares trade under symbol 000024.SZ; B shares 200024; and in Singapore: C03.]

China Merchants Property will cut prices by 20% in as many as 14 cities: Beijing, Shanghai, Guangzhou, Shenzhen, Suzhou , Nanjing , Chongqing, Chengdu, Zhenjiang, Xiamen , Zhangzhou, Foshan and Tianjin. There are 4 projects in Shenzhen; 3 in Chongqing and Tianjing; and 1 or 2 in the remaining cities. Internal sources place the value of the price cut at 1 billion yuan.

Real estate firms have enjoyed gross margins of 40% in China and up to 50% by mid-2011. According to an internal source, China Merchants Property 2011 sales reached 20 billion yuan, an all-time high, but inventory also reached an all-time high at more than ￥40 billion.

A look at their inventory shows rapid growth (data through September 2011):

Profit margin is about 20%. Last year net profit for 9 months through September was about 2 billion yuan. Even assuming 2012 is about even with 2011 in terms of profits, a cut of 1 billion yuan would lower earnings on the order of 35% or more. Their asset-to-liability ratio hit 66.9% in the third quarter of 2011, the first time it ever exceeded 65%. Analyst Liu Ning said if the market doesn't shift, the sales pressure will be enormous.

A Dongxing Securities report says that developers will change strategy: they will increase turnover to recoup capital, but it will put downward pressure on margins.

[End article summaries]

The news conforms to the various stages of real estate bubbles. Activity has slowed because buyers anticipate lower prices and developers are holding back from selling, hoping for lower prices. The more aggressive firms, such as Vanke, were first to strike last year with big price cuts in order to move inventory. Now, we may be entering the stage where financial pressure forces the weaker firms into dumping properties. This will exert a major downward pressure on prices and reinforce buyer's expectations of lower prices. This is why I anticipate declines on the order of 40%. Declines of about 20% still dominate the news as the price cuts spread, but the overall declines are still around this level. In stage one of the decline, developers hope the government will step in and most people do not believe the bubble has burst. In stage two (or wave 3 after a small rebound if you're going by Elliot Waves), buyers and sellers realize the magnitude of the problem and prices plummet as buyers vanish and sellers worry about solvency rather than profits.

In terms of a small rebound, property stocks have been climbing despite the worsening conditions in the real estate market. 地产股演绎绝地反击 (Real estate stocks strike back)

From this chart (shown are Poly Group and China Merchants; Guggenheim China Real Estate (TAO) has the same pattern) we can see that real estate stocks were bottoming in October. This is the month when stories of Shanghai residents protesting big price cuts made it into the mainstream press. At this time, I view the rebound in property shares as the move up before the big decline. Investors tend to overreact and things haven't been so bad since the first wave of price declines came; gross margins are still high and firms remain very profitable. Activity is picking up these past couple of weeks and that has people optimistic for a turnaround or at least stabilization, but as we see with China Merchants Property, some firms are in bad financial shape. I expect a turning point for the share market soon, perhaps in the next few weeks. Later, perhaps near the end of Q2, we will see much larger declines in home prices.

If the news is so bad, why is the euro up?

The news on the euro has been nothing but bad. Portugese 3-year bond yields are more than 20%, Greece is on the verge of default and Fitch joins S&P in cutting ratings across Europe. Yet over the past two weeks, the euro rallied from $1.26 to $1.32, including a move higher today, when Fitch announced the downgrades. Maybe the market action reflects something other than headlines?

Updated Elliot Wave analysis of Bitcoin

What a difference a few days make...

It's now looking as though what I though was Wave 5 should be classified as Wave 3, in which case the terminal value for Wave 5 could be north of $37 per Bitcoin (based on Fibonacci), assuming another reworking of the wave count is required. However, I'm mainly interested in the Elliot Wave analysis as a tool for clarifying the socionomic causes.

I predicted the government would become interested if Bitcoins became more popular and this prediction was rapidly fulfilled. Senator Charles Schumer says Bitcoin is money laundering and the DEA is concerned about it and other digital currencies.

Aside from hard drugs mentioned in my last post on the topic, I noticed in my Chinese microblog feed that one guy is offering VPN services for Bitcoins. VPNs allow Internet users in China and other countries to circumvent web censorship. The government constantly blocks free, advertising supported VPNs as soon as enough Chinese use them, and they've been finding ways to disrupt the paid VPNs used by many foreigners.

Finally, I found a better chart site for Bitcoin prices at Bitcoin Charts.

Elliot Wave analysis of Bitcoin

Bitcoins are a digital currency with restricted quantity in order to keep their value. The price of Bitcoins was down around $1, but has recently exploded to more than $18 as the currency gains widespread media attention. Whether this is a one-time move or not—that's wholly dependent on how successful the currency becomes—but several mainstream articles on the currency appear to mark the optimistic and bubbly spike of a fifth wave higher.

Thinking in terms of a social phenomena that is expressed in Elliott Waves, odds favor this being a one-time spike, to be followed by a return to obscurity. Bitcoins are popular with a small portion of the population that understand how the system works. Media coverage has pulled in the bulk of the early adopters and there's unlikely to be enough buyers left to push up the price. This move will exhaust itself soon and the price will collapse in a Wave 2 correction. In order for the next move to take place (Wave 3), a new pool of users/buyers will need to emerge and this is where the rubber will meet the road. First, this pool will be much less sophisticated and they will need a reason to use Bitcoins...possibly some type of "killer app." Second, this second move will attract the attention of government because it will be far more conspicuous. Considering that there's already a "black market" that accepts Bitcoins and has a wide assortment of illegal drugs, an impossible conflict between one and two seem very likely. Based on history, I'd bet on black—the G men.

Disclosure: I have some Bitcoin that I generated by using the Bitcoin application.

Up-to-date charts are available at Mt.Gox.

An update to this post is available here.

Wheat has liftoff

This is how a hyperinflation would kick off, with a rapid run-up in commodity prices. Or, if due to inherent supply-demand issues, the increase in one commodity's price means producers and consumers have to cut back somewhere else (or cutback on their wheat purchases specifically). Either way, this is worth paying attention to.

Here's Elliot Wave International with a short story on wheat. Market Insight: Fasten Your WHEAT Belts. It says the July move in wheat was the largest monthly gain in 50 years.