Monday, May 24, 2010

Morning Update/ Market Thread 5/24

Good Morning,

Equity futures are down in the premarket, but being a Monday, you should be ready for the attempted run just before and after the open!

Below is a daily chart showing the dollar on the left and the euro on the right. The last candle reflects the movement over the weekend, and as you can see, the dollar is much higher after bouncing off its upper channel trendline, while the euro is significantly lower having fallen back to the bottom of its down channel:

Bonds are higher, oil is close to even, and gold is higher after bouncing off support in the $1,170 area.

Existing Home Sales are released at 10 Eastern this morning. Later in the week we’ll get both Consumer Confidence and Sentiment, a revision to Q1 GDP, and the usual assortment of weekly reports.

Things are getting a little tense on the Korean Peninsula with the North saying last week that should any sanctions whatsoever be imposed on them for sinking the South Korean ship that they would respond with all out war. Of course with Hillary and Obama’s backing, the South Korean President imposed trade sanctions, and threatened the North with immediate retaliation should they enter any of their territory. The drum beat goes on, yet another distraction.

I think this is interesting because it was obvious that the ship had been torpedoed on day one. The reaction was very muted, meaning that no one wanted or was ready for war. Why the change of language now?

Friday’s action in the market produced what appears to be an a,b,c type of correction. If so, wave c was not complete at the close and could possibly travel to the 1,100 area of the S&P if c is equal length to a. This counts pretty cleanly as a wave 4 movement of 3 down of 1 down, possibly of the large wave C down. If this is true, then once this wave 4 is complete (should be soon), then we should get a wave 5 of 1 that takes us to new lows before a larger wave 2 bounce occurs. This was the count I was working last week and it was working well, then I noticed this weekend that McHugh is also on this same count. That’s just one possibility, however, as there are several ways to count the larger picture.

Speaking of the big picture, below is a 5 year chart of the SPX with everything turned off but the weekly candles:

If Elliott Wave guys like Prechter and McHugh are correct and this is a wave C down, then I’d just like to point out that should wave C equal the length of wave A, which is typical, then the SPX would be looking at losing 908 points from wave B’s 1,220 top and that equals a target of only 312. Is that possible? Sure it’s possible… but then again there are a lot of possibilities and much will depend on choices still to be made. It’s a real risk, however, and should not be ignored. That risk is backed up by the fact that in my opinion our entire financial industry is insolvent should they mark their assets to market. Transferring risk onto our government only created another set of problems, it certainly didn’t solve the existing problems.

So yes, it’s fair from my perspective to say that the stock market in the United States, and much of the world, is actually WORTHLESS, or near worthless – as the debt and unrealized losses have not been cleared and far outstrip income’s ability to service it. Thus the fundamental math of debt align with that technical picture from my point of view. There are other EW people who disagree and are in bull mode still. I don’t think the fundamentals back their case, but if the decision is made to decouple from the debt and print, then that possibility could come to fruition. Printing all by itself, of course, would destroy the value of the money. A better and faster path to recovery would occur if nations performed equity for debt swaps, printing money and using that money to pay down debt. Without controls and a clear plan, however, that too will lead to other problems as the quantity of money must be kept under control in order to assure that confidence is not lost. Two words… Freedom’s Vision.

I’d like to point out that on Friday the TNX (ten year Treasuries) matched the inverted peak of its smaller head & shoulders pattern. Any movement beyond the head invalidates the pattern and this is just another signal that deflationary forces are still in control for the time being. The 3.1% area reached Friday is support and thus a bounce here is not unexpected, however, if we get below that point, then a run down to the 2.5% area or even lower may be in store:

Going back to the short time frames in equities here, don’t be surprised if this smaller wave 4 is almost over or is already done. Wave 2 lasted one day and now wave 4 has lasted about a day… to stay proportional, if wave 5 down of 3 is coming, it should start fairly soon. Just keep in mind that wave 5s can end suddenly… they can truncate or extend, and if the count is not what I think it is, then it may not occur at all. That’s the danger in playing in this territory and why I prefer to play on wave 3s.

The bottom line for me is that the central bankers permeated the world with debt, pulling future incomes into the now. They were so successful that incomes can no longer support the debt. This has many people, local and state governments, and even entire nations forced to live on what now seems like a low budget…

The Kinks – Low Budget: