Wednesday, November 4, 2009

Market Update…

Strange day marked by buying ahead of, and even after the FOMC release, but then a meltdown at the end of the day. Fundamentally the Fed is on shaky ground and the market is seeing through all the word games and bullshit. Zero percent interest rates and money printing are their actions, the rest is just spew. Here’s the real deal… loan delinquencies, defaults, and bankruptcies are soaring. Employment is WAY down, and been down so long that people are falling off the roles. We have nearly 12 % of our country living on food stamps. Credit and the shadow banking world of derivatives is collapsing (greater than government stimulus). We have made it through the bulk of subprime resets but are now entering the beginning of the wave of Option-Arm resets. This next wave of resets, along with the simultaneous collapse in commercial real estate will stick a fork in already insolvent banks that are pretending to hang on.

T2 Partners chart of resets, current as of 1 November:

From a technical perspective, today’s action produced some funny looking candles, so let’s take a quick look at the situation to see where we’re likely headed in the short term. To the charts…

Starting with a one month daily chart of the DOW, we can see an odd looking candle with a long rising stem showing that buyers were strong early but the bears came in late. On it’s own, that odd candle doesn’t mean much, sometimes prices will subsequently climb a stem like that, especially when it’s presented as dueling hammers as this appears here . The DIA candle doesn’t look quite as bullish, it’s black meaning that the close was below the open, and the head is not as well formed. The Industrials have been relatively strong in the decline so far, again that’s to be expected as investors initially get defensive:

Not really a lot to look at there, so let’s move on.

The Buffett bombed Transports of yesterday, opened lower and stayed there most of the day. Yesterday’s 5%+ move was aberrant in terms of the fundamentals, the technicals, and the volume that single day produced. I’m certain it will be washed away given a little time. Today’s down move took some of it away, it could be consolidation prior to higher, but then again, a run was made at the 50dma and failed, casting a “cloud” over yesterday’s candle. Note that the 50dma is now sloping down, something that hasn’t happened in the indices for quite some time. We’ll need to see more action to know much here:

The SPX candle is where things really start to get interesting. It looks like a black gravestone doji. The position of a gravestone is important, in this case it follows a little two day uptrend. Definitely looks bearish, but we need to be careful in that assumption as any Gravestone needs confirmation by the following day’s activity. It is also sitting right on the 23.6% fib, a potential area of support. It, too, tried to penetrate above the 50dma and failed:

Here’s a diagram from illustrating and defining a Gravestone Doji, just for your education:

Gravestone doji form when the open, low and close are equal and the high creates a long upper shadow. The resulting candlestick looks like an upside down "T" with a long upper shadow and no lower shadow. Gravestone doji indicate that buyers dominated trading and drove prices higher during the session. However, by the end of the session, sellers resurfaced and pushed prices back to the opening level and the session low.

As with the dragon fly doji and other candlesticks, the reversal implications of gravestone doji depend on previous price action and future confirmation. Even though the long upper shadow indicates a failed rally, the intraday high provides evidence of some buying pressure. After a long downtrend, long black candlestick, or at support, focus turns to the evidence of buying pressure and a potential bullish reversal. After a long uptrend, long white candlestick or at resistance, focus turns to the failed rally and a potential bearish reversal. Bearish or bullish confirmation is required for both situations.

So, there you go, the candlestick on the daily here is at the end of a small uptrend… it would be more pretty at the very top of wave B, but that’s not where it is and thus we need confirmation.

When I drill down into a 30 minute chart of the SPX, I see a few things in play. First of all, let’s do some Elliott Wave counting. If the move in the channel was wave 1 down to a 1,030 bottom, then we have just, over the past three days, produced an A and a B… meaning that next should come wave C up as a part of wave 2. Following that would come 3 down. That could very well be, and C could all happen tomorrow into Friday and then fail (on the employment report?)… just one possibility. There is also a small channel and/or a triangle in play – take your pick. I would also not be surprised by a run back up to the 1,061 pivot which would be coincident with the top of the channel, close to the 50% fib, and likely the top of wave C? Don’t know, but the selloff late day does not look like bullish market action:

Here's the TOS version of the /ES, 30 minute:

The XLF is just flat out bearish looking. Today’s candle looks like cloud cover, a bearish formation. Here, too, the 50dma is now rolling over and the bottom Bollinger is bent down fully, out of the way:

Today the dollar fell pretty hard, closing below 76 once again while gold marched to a new high. But the real action for me was in the bond market where I’m starting to see a wave count that looks like higher interest rates are coming.

TLT, the 20 year fund, broke very cleanly down and out of its sideways channel. I have written much about this already, that sideways channel is a bearish flag. It is worth a monstrous 20 points, and this break could be targeting an eventual move all the way down to 75. That would mean much higher interest rates and would be a disaster for our debt riddled society.

Here’s a closer up, 3 month, view of TLT. This is where I can count the waves… from 100 peak on this chart down to 94 was a 5 wave move lower, let’s call that wave 1. Then it traced out an a-b-c and now looks like it may be beginning wave 3 lower. That would be bad. And notice that this wave structure aligns with the same move occurring in the SPX. Now, doesn’t that just shoot a giant hole in the analysts arguments who keep saying that “rates are normalizing somewhat… it’s a sign of health?” No, higher interest rates are a sign of RISK, and those higher rates increase the burden on everyone; debt saturated individuals, businesses, and governments:

Next is a two year chart of the TNX, the 10 year Treasury ETF. Today sent yields dramatically higher. Note the very large inverted H&S pattern with the double blue lines as the neckline. Should that neckline break, it is targeting interest rates of approximately 6%, much, much higher than the current 3.5% for the ten year. Look closely at the action over the past 2 months and you’ll see yet another, smaller, inverted H&S pattern. Should that neckline break, it will target the 4.0 to 4.1% range and will break the larger neckline in so doing. Will equities think that’s a good thing? Don’t think so. Again, if that chain of events unfolds and 6% is reached, it will break a 30 year downtrend line in rates, waking others up to the fact that the latest era of leverage has ended.

Debt… if you’re an analyst and you look past it, then you are blind. It is the elephant in the room, the object that everyone should be keeping their eye upon. You simply cannot cure a debt problem with more and more debt, to think that you can is absolutely insane. That insane group includes Larry Summers, Timothy Geithner, Barack Obama, Ben Bernanke, and a host of many others. Their insanity is destroying our nation – quickly. This next wave is the wave that cleanses away the nonsense. The lip service will stop, the debts and the markets will burn. It’s a shame that it had to happen, but it cannot be stopped by conventional means, the math is simply too far gone, our political and financial system far too corrupt.

I’m not cheering the collapse on, I know the real pain and suffering that will be endured by real people all over the world. Nonetheless, I know it will only get worse the longer the cleansing is delayed. Thus, I say burn, baby, burn – my satisfaction definitely will come in a chain reaction...