Monday, July 19, 2010

Morning Update/ Market Thread 7/19

Good Morning,

Equity futures are slightly higher this morning. The dollar and bonds are close to even, oil is flat, and gold is down. This week’s economic reports are dominated by housing data, the housing market index is released at 10 Eastern today. The LEI, which lags the ECRI, is released on Thursday.

Friday’s 261 point plunge was the 19th 90%+ NYSE volume day since we topped in April – another HFT extreme, 95.7% of the volume was on the downside. The score is now 11 down, 8 up, which is a very dangerous combination.

Last week produced another key reversal on the weekly candle by producing a new high and finishing lower. This is often a sign of a coming decline. I think it is highly likely that wave 3 of 3 of 3 (of 1) began Friday. There is an alternative, but in either count much lower is likely dead ahead – the target of the H&S top is 860ish.

I want to point out that the EW people who believe we are in a new bull market (I believe they are just wrong) think that this pullback is wave 2, and that the rise from March ’09 was wave 1. Thus they expect that once wave 2 finishes that we’ll go roaring onto new highs in wave 3 up. That means that what happens after we arrive at the 860ish area will be critical. We will probably then bounce with them believing wave 3 up has begun, and people like me believing that wave 2 up has begun. I think the bears will be proven right, and as evidence I simply have to point at the levels of debt which are still obscene. This is why it is critical that we consider the true underlying fundamentals of the market. Then there are the people who believe that the economic data can continue to be bad, but stocks still rise like post 1932 during the depression… to that I agree, however, I do not believe that enough debt has been cleared yet for that to happen – that our timeline is longer than then as events are unfolding more slowly due to the larger scale of the problems and massive intervention.

For now it is clear that we just made a new lower high, turning right on resistance and once again failing to get over the moving averages. Speaking of moving averages, the 50dma is now nearly 2% beneath the 200dma on the SPX, this virtually assures that there will be no quick whipsaw on the death cross indication. Note on the daily chart below that the daily stochastics are just rolling over, so there is a long way to go to oversold on this timeframe. We closed beneath 1070 which I believe opens the door to get back below 1040 and to create a new low soon:

On the shorter time scale, however, we are oversold and can expect some sideways to up action following the large down move on Friday. Also, on the 60 minute chart below you can see that there is now a new down slopping Head & Shoulder’s pattern that is worth approximately 120 SPX points… that slopping neckline will be in roughly the 1000 area by the time we descend to it and the target will thus be in the 880is area, very near the larger H&S target area of 860ish. I like it when multiple patterns target the same general area, the markets are talking loud and clear on where we are headed:

I was reminded that yet another long term indicator triggered a long term sell signal at the end of last month… that occurred when monthly prices closed below the 20 month exponential moving average. This is the 4th long term indicator to issue a long term sell signal in the past month:

Note that the gap between the Shanghai index and the SPX has yet to narrow – this gap should not be ignored, the world functions largely together and you can see that historically they work to close the gap:

It’s been awhile since I updated the Point & Figure diagrams, below you can see that the SPX P&F is targeting 900 – again close to the H&S target area:

The DOW’s P&F diagram is targeting 8,700:

Everyone was breathing easier over the cap on the BP well head holding… and then the truth emerges that indeed there are leaks coming from the sea bed floor. Tragic – my fear is that keeping the cap on makes the damage to the well worse, I would think they will have to uncap it soon. Fingers are crossed that they can kill it later this month. As I read what is occurring, the one thing that makes me extremely angry is the lack of transparency from our own government. This Admiral Allen has acted like a BP spokesman and his latest release provides zero information about what is happening on the sea floor – exactly what a BP spokesman would want to provide.

Obama’s “debt panel” is finally talking… and what are they talking? Why austerity of course:
Obama's debt panel: Hints of an endgame

NEW YORK ( -- How to get the federal budget back on the right track? Here are just two ideas from the co-chair of the president's bipartisan debt commission: Rein in tax breaks. Set hard caps on federal revenue and spending.

Erskine Bowles, co-chairman of the panel and White House chief of staff under former President Clinton, has twice in recent weeks mused in public about what he'd like to see in a debt-reduction plan.

The commission has much work left, and Bowles only gets one vote. But if the commission can't agree on its own set of official recommendations, he is likely to play an influential role in shaping the advice given to President Obama.

Obama, for his part, has said he will deliver serious deficit-reduction proposals next year after reviewing the commission's report, which is due Dec. 1.

If Bowles has his druthers, no plan would take effect before 2012. "The economy is too fragile," he said at the commission's last public meeting and reiterated again at a jobs summit last week at the U.S. Chamber of Commerce.
Note the psychology shift – austerity is the plan now and not stimulus! Welcome to wave C, however, we must first wait… and wait… and wait… as the economy is “still too fragile.” No kidding… and the deficits mount and mount while we hear the sound of the very empty can rattle down the road as it gets repeatedly kicked. Eventually an event or series of events will come along that draw everyone’s attention away – unfortunately history says that those events will be very significant in nature.

And as I’ve been shouting since the 9/11 attacks, our reaction to it has been one of fiscal suicide. We spent and spent in order to “be secure,” but in so doing we bankrupted our nation unwittingly in the end making our nation far less secure – oh, the end we have not seen yet, it’s coming. “Those who would sacrifice freedom for security deserve neither” to paraphrase Benjamin Franklin.
Report: U.S. intelligence community inefficient, unmanageable

Washington (CNN) -- The September 11, 2001, attacks have created an intelligence community so large and unwieldy that it's unmanageable and inefficient -- and no one knows how much it costs, according to a two-year-long investigation by the Washington Post.

Ahead of the publication, many in the intelligence community worried that the stories would disclose too much information about contractors and the classified tasks they handle.

The Post article that appeared in Monday's edition says its investigation uncovered "a Top Secret America hidden from public view and lacking in thorough oversight. After nine years of unprecedented spending and growth, the result is that the system put in place to keep the United States safe is so massive that its effectiveness is impossible to determine."

The Post investigation found that "33 building complexes for top-secret intelligence work are under construction or have been built since September 2001," or the equivalent of nearly three Pentagons.
"Some 1,271 government organizations and 1,931 private companies work on programs related to counterterrorism, homeland security and intelligence in about 10,000 locations across the United States," according to the Post, with an estimated 854,000 people holding top-secret security clearances.

Two years to study it and it's so unweildy that they can't even count the money spent...

To those who still believe that our reaction was appropriate all I can say is that we are all about to be spanked severely for our lack of clear thought, and none of us are going to like it. I already don’t like it – from the perspective of a thinking airline pilot, it was a disgrace. Just yesterday evening I drove to the local store and passed a completely unmarked police car, with dark windows and hidden lights, pulling over a local in my small community… does my little town spend heavily on unmarked vehicles to pull over locals for speeding? WHY? Then my wife and I drove down to the Tacoma waterfront for dinner – passed the defense industry stop light cameras and permanently installed speeding traps (tickets by mail) to arrive at the waterfront. At the beginning of the waterfront drive – a police car. In the middle – two police cars. We go for a walk and see 3 more. Sweet, what a nice lifestyle, the land of the free – heck, I almost felt safe except for the fact that I am living in a total police state where the state does not have the means to pay for it. My local town deserves to be bankrupt. I was just reading how the city of Federal Way earns $2.2 million per month from automated tickets by mail – they are now addicted to that money… oh, and the DOD company that build them, they take 40% of the haul. Federal Way’s court system is now so busy with cases that they are backed up and need to hire more judges – sweet!

Me? I moved out of the town of Lakewood due to this very thing and I’ll be heading to another town that is not a police state, as far away from this type of crap as possible. If that town then proceeds to do likewise I’ll move again. Hopefully the cleansing that’s coming will cure this type of nonsense, but again I fear that we may only see more of it – I am on guard and make my opinions known to local politicians regarding these issues, I hope you do too.

Jimi Hendrix - All Along the Watchtower: