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Bernankeynesian Economics Spreads to Japan – Selling Climax in the Commodity Sector

Posted by nexvucapital on April 4, 2013

Last evening we saw our first expansion of Bernankeynesian Economics within the Developed World. Japan will now embark on a massive effort to reflate Japanese financial assets. The US Fed has demonstrated (so far) that against the backdrop of excess industrial capacity and a deflating Private Debt Crisis, unprecedented Monetary Intervention in a consumption based economy can induce reflation in equities and real estate while supporting the bond market (as the Central Bank becomes the marginal buyer of Government Bonds and Mortgages). In the US, the reflation in the value of real estate and the equity market against a backdrop of secular low interest rates is creating a measurable improvement in US GDP. The issue at the end-of-the-day will be the balancing act between continuing intervention and the effect of improving GDP growth on the excess capacity in industrial production. The ability of a Central Bank to hold domestic assets (Bonds and Mortgages) to maturity is a mitigating factor here that is not often discussed but is of imperative importance to the eventual unwind.

Enough economics…how about some reality…

This morning we are in Day 3 of the washout capitulation (selling climax) in the junior resource sector.  It should be noted that the Seniors and Intermediates are generally experiencing strong upward price moves on the back of the overnight Intervention announcement from Japan. The image below demonstrates the Psychology of a Market Cycle and from what we can see it would appear that we are currently sitting in the centre of the Trough in the Junior Resource Market Cycle (see red areas below which represent the “point of maximum financial opportunity” in any market cycle).

market-cycle

Time for a little knowledge (we can never get enough right). The Basic Elliott Wave Cycle in a correction is highlighted in the following image which is self-explanatory with the standard 5 Wave correction followed by a 3 Wave “abc” recovery…

Elliott_Wave

Now, what does this look like in the real world? The following is a Weekly Chart of the CDNX (S&P Venture Index in Canada) the pre-eminent junior resource equity exchange in the world. Taking what we have learned above in the basic Elliott Wave corrective pattern we now chart the CDNX. What we see is the standard 5 Wave corrective process and we also see the current selling climax – highlighted in the green circle. We have taken the liberty of pointing out the previous points of failed support that should act as resistance in the 3 Wave “abc” recovery phase and have highlighted this process in the green box for clarity. In the financial markets the capitulation of one is the opportunity of another.

CDNX_Capitulation_and_Recovery

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