Tuesday, May 25, 2010

Morning Update/ Market Thread 5/25

Good Morning,

Equity futures are down significantly, the DOW is down approximately 200 points prior to the open. Below is a 5 minute chart of the DOW on the left and hourly chart of the S&P on the right so that you can see the overnight action and the move that comprises a likely wave 3 of 1 of C down. This current move is likely subwave 5 of 3:

There was a small movement in the McClelland Oscillator yesterday, obviously indicating a large move today. When I know those have occurred, I am more likely to hold a position longer for a short term trade.

The dollar is higher, euro lower once again. You can see that the euro appears to be about to break support once more. A daily chart of both follows:

Bonds are significantly higher, oil is lower, and gold is higher.

Yesterday I told you that I thought the movement was a wave 4 and to expect wave 5 lower – that’s what we got. Each of the subwaves of this wave 3 have lasted about a day and a half, that’s it. Thus I would expect that we are not too far away from a short term bottom. Additionally, I have a couple of indicators that are pointing to bullish divergences. Money flows were positive on the DOW yesterday, and the VIX was negative on a down day.

The bounce, when it comes (I’m thinking some point later today or tomorrow), should last about a week – That’s how long wave 2 lasted. This will be a wave 4 move, more sideways than up if I’m reading it correctly. The alternative is that all of wave 1 is finished and we get a larger scale wave 2, but I don’t think so.

The first area of support comes at about the 1,040 level. I’m looking for wave 1 to bottom somewhere near 990 to 1,010 – or possibly lower. That’s where I believe wave 2, a larger scale bounce, is likely to occur.

Obviously this has already gone much farther than most of the pundits were thinking - the flash crash lows are now a ways up there. The February lows have now been exceeded by the S&P and the Industrials. Both the Transports and the Industrials have made lower lows together, the next step for DOW Theory is for the Transports to also break the February lows. That's a ways down, however, and may take awhile.

So now we have the sovereign risk moving into the Spanish banks. The IMF is now making proclamations that Spain should take actions to overhaul their financial institutions. That’s nice for the world’s largest debt pushers to say. There is talk that four large banks in Spain will need to merge. Note the progression of the crisis from one country to the next.

The last famous lie was that Greece was contained, LOL, what a joke – I have the feeling that the word “contained” is going to be a punch line for about the next decade. The truth is that the private banks hold much of the sovereign DEBT instruments that are likely to be defaulted upon. Duh, that makes the private system somewhat insolvent, doesn’t it? So, you now see that the banks pushing their debts onto the public coffers actually caused harm, and did not help. Of course not, that’s what I was screaming as Hank Paulson and his mobsters were driving their TARP get away vehicle out of town - Tommy guns in one hand, billions in the other.

And the distraction of war may be upon us in the Korean Peninsula. The U.S. “fully supports” South Korea and is participating in special joint exercises with the South. The rhetoric is inflammatory on both sides now. Poking Kim Jong Il is a little bit like poking a rabid pit bull who has absolutely nothing to lose and is just looking for a fight. Hey, I’m here to tell you that in another Korean war, it is going to be quite nasty, much more nasty than Afghanistan or Iraq.

Case-Schiller data came out this morning showing a .4% month to month drop in the 10 city home price index. Citizen Confidence will be released at 10 Eastern.

Did you catch that Ing bank in Australia is wanting to issue lifetime no principle paydown loans? Absolutely nuts. Both Australia and Canada’s home markets are bubbles still awaiting the needle to be pricked.

And here in the U.S. we learn that now fully 90% of all mortgages are either Fannie, Freddie, or FHA backed – 90%! That’s certainly not capitalism, it’s certainly not free market, I don’t even know what to call it other than to say I already don’t recognize the America I grew up in and I believe that very large structural changes are coming and they are coming at breakneck pace. These changes are a result of the bad math of DEBT-backed money. Financial reform won’t fix the debt problem, that will require monetary reform. It’s amazing to me that the vast majority of people have yet to really get to the roots of the problem. DEBT – big destroyer…

The Kinks – Destroyer: