Bernanke cut the fed funds rates a full 75 basis points, effectively putting the short-term interest rates at 0-0.25%.   All this is done in an effort to ease the credit markets and the equity markets responded with a romp higher on Tuesday.  Is this reason to cheer?

It creates an awkward situation where anyone holding money market funds are effectively shackled with negative returns.  This is of particular concern to anyone living on fixed-income investments (most retirees).  It will have little or no impact on credit card debt; it will just make the credit card companies richer.

Dollar dump

I’ve been writing a lot about the technical issues with the dollar.  It officially tagged the downside head & shoulders measurement today, meaning that it took less than a month to cut five months of gains in half (for technicians, this is a Fibonacci 50% retrace).  US consumers are faced with a -10% slide in buying power in less than two weeks.

The dollar is now the carry trade of choice, effectively replacing the much-shorted yen of yesteryear.  This means that is pays to exchange all your bucks into any other currency - Euros, Aussie Dollars, Japanese Yen, Swiss Francs, or physical gold.  State Street Global Markets, a unit of the world’s largest money manager for institutions, said the Fed’s move is “perilous” for the dollar as investors accumulated an “extreme” long position on the currency, or bets it will climb.

Competitive Devaluation

International governments are racing to devalue their currencies as fast as possible.  Russia provides a rather interesting insight into the psychology of a primary cash-based economy since the use of credit facilities is almost unknown, and most consumer transactions are done with hard cash.  People withdraw their money from banks and immediately buy up whatever is for sale, effectively exchanging worthless paper for hard goods.

This is the intended effect that Bernanke’s cuts are supposed to have on the American consumer.  Given the precipitous drop in consumer spending over the past months, the idea is to enforce a ‘cash is trash’ policy, yet another spin on ‘dropping dollars from a helicopter’ monetary policy.  By making it difficult to hold ever-depreciating dollars, it should encourage everyone to do as the Russians - spend.spend.spend since your money will clearly be getting you fewer goods the longer you hold onto your savings.

The overnite futures contract falls well below target levels, and achieves a rising channel breakdown target right on the open. What is perhaps more disturbing is that the dollar has confirmed the head & shoulders setup and is now testing the neckline - a solid 5% drop in buying power in less than four days.

10:30 am update - a solid elliott 5-wave advance is registered on the 1min chart. The markets are rallying on the exceptionally weak dollar to keep all things equal. At this juncture, however, a short can be initiated with a 2 pt stop.

2:30 pm update - An impulse down wave shows. The measured move sequence will target 889 levels.

3:20 update - An opening range reversal pattern is now in play. The last move down showed very little / no overlapping structure and must be considered an impulse wave (elliott wave 3 in action).

The first signs of a technical difficulty has been registered in the dollar index - a violation of a 3 month rising channel in overnight trading. Looking closer, this could be the beginnings of a head & shoulders pattern setting up (both head and right shoulder have been accompanied with bearish divergence of higher prices, lower momentum). This is bullish for the stock indicies which will rise to keep all things equivalent, as well as commodities which have seen a staggering decline this last month.

In early trading, the S&P gap up to form a small island reversal from the previous Monday’s downdraught. A high of 911 is registered as the rising channel is recaptured.

3:40pm update - a small bearish divergence shows on the 5/10/15min timeframe charts = higher prices, lower momentum. This suggests a profit-taking wave will take place in the final minutes of the day. Expect something like the 14 handle swoon that took place after 911 was tagged into the first lift.

7:40 pm update - The pullback is a bit larger than expected, resulting in a 17.75 handle downdraught. As part of larger a-b-c measured move, a bullish gartley pattern is on the radar into a 78% retrace of the 26.5 handle advance off the intraday lows. Thanks again to rin for providing an excellent chart analysis.

As Americans, we are made to believe that we are stewards of the world.  The US is billed as a balance against the ‘axis of evil’ and supposed to counteract the communistic forces of the former Soviet Republic.  The dollar is intended to be the reserve currency of choice and continues to see inflows as investors flee from emerging markets.  Yet beneath the surface, this is just a veil of egotistical rantings - instead, we must take a pause in this thinking and consider the possibility that the United States superpower status is in decline.

Just as the New World came into power following the concentration of colonial power in Spain and England during the 18th century, so the baton is being passed onto new economic power houses.  Even US Intelligence reports indicate that the balance is shifting eastward towards the emerging economies of China and India.  The report, “Global Trends 2025: A Transformed World,” was drafted by the National Intelligence Council to better inform U.S. policymakers about international trends and political ramifications facing president-elect Barack Obama.  The Euro zone should also take note, since the European Union has been characterized as a future “hobbled giant” crippled by internal bickering and infighting between member states with competing domestic interests.  The economies will be threatened by the expense of paying for retiring baby-boomers; today it is in the form of bickering about healthcare and attempts to save pension plans weighing down century-old industries (automakers).

What are some of the reprocussions facing the world?  Most certainly it will be driven by resource constraints in the basic necessities - water and food.  Interesting enough, the Global Trends project has been under way for a year, but was completed before the global financial crisis occurred.  The full text of the report is available on the CIA Web site ( http://www.dni.gov/nic/PDF_2025/2025_Global_Trends_Final_Report.pdf ).

 

China

Which economy will be the first to recover from the current financial crisis?  Just like gold experienced a trendline breakout in 2001 which signalled the start of a bull run in commodities, the Chinese stock market is the first chart to show the signs of a bottoming process.  In the last month, it has traded back to a solid support level around 1,700 and has retraced most of the ‘3 waves + a dome’ monthly topping pattern.  Keep a close eye on this chart in future months, since it will most likely lead all other emerging markets as well as any US recovery.

 

Sub-prime deconstructed

There are very few people that speak truths on Wall Street.  Most money managers, investment bankers, and CNBC talking heads are just shills on the corner pawning their wares concealing hidden agendas.  Every once in a while a crusader sticks their neck out and dares to take action - these market mavericks are far and few between, but in his chilling essay, Michael Lewis exposes some of the brave traders that actually stayed one step ahead of the curve as the markets imploded during the financial crisis.  Liar’s Poker was an expose of the Wall Street excess, but paled in comparison to the lies, deceit, and propaganda which dominated the housing crisis.

“That Wall Street has gone down because of this is justice,” Steve Eisman says. “They fucked people. They built a castle to rip people off. Not once in all these years have I come across a person inside a big Wall Street firm who was having a crisis of conscience.”

 

Refried Beans

“Wall Street stages late rally on Geithner news” reads the Reuters headline news as a CNBC report around 3pm on Friday is credited with sparking a recovery.  Announcing a cabinet appointment sure seems like a viable excuse to rally over 6% from 11-year lows on the S&P 500.  Then again, options expiration probably have nothing to do with this stomp and romp, eh?

In a stinging essay entitled “Who are the Architects of Economic Collapse?“, we are asked to examine just who Geithner and Summers actually represent.  In the course of examining their roles in previous administrations, we are reminded that the 1999 Financial Services Modernization Act (FSMA) was conducive to the the repeal of the Glass-Steagall Act of 1933. A pillar of President Roosevelt’s “New Deal”, the Glass-Steagall Act was put in place in response to the climate of corruption, financial manipulation and “insider trading” which resulted in thousands of bank failures precipitated by the 1929 market collapse.  Who were the leading architects of this debacle?  Lawrence Summers, Paul Volker, and Timothy Geithner - all candidates for the treasury secretary position.

As the public is witness to an ever-alarming veil of secrecy surrounding the allocation of $700 billion in TARP bailout funds to banks, former Goldman Sachs CEO (and Bush’s current treasury secretary) Henry Paulson appears shifty-eyed and reticent to release any details of why, who, and how much money is being shovelled from public funds into private equity firms.  Timothy Geithner is CEO of the Federal Reserve Bank of New York, which is the most powerful private financial institution in America.  Summers is currently a Consultant to Goldman Sachs and managing director of a Hedge fund, the D.E. Shaw Group.  Both men were instrumental in the 1997 Asian crisis involving he currency manipulation against Thailand, Indonesia, and South Korea.

Once again the United States is putting the architects of financial deregulation into positions of financial power under the new administration.  Meet the new boss, same as the old boss.  We won’t be fooled again?

“What is black, white, and red all over?”  - stupid American riddle

The answer to the riddle posed most often elicits the automatic response “A newspaper” from Americans, but that is just a twist on the English language that doesn’t translate at all to French, German, or any Asian language.  Many times, reality can be deceiving - in fact, sometimes it is a downright lie.  Such is the nature of perception, and the media often can twist the truth so far that we mistake it for the ‘real deal’.

 

MaxPain

Next week the markets will once again face options expiration.  October’s expiry resulted in an unsustainable lift in the markets that served the main purpose of killing some rather fat put premiums.  Given the technical juncture with the Dow Jones Industrials resting exactly on the 200 month moving average, we must expect some type of artificial lift to present itself.  Will this be billed as another relief rally by the CNBC squawcking heads, or just another side trip on the path to purgatory? 

In any case, the name of the game for this week is MaxPain.  The boys over in Chicago will do their best to flush out any remaining value in the fat puts once again.  Individual stocks can be traded to a given ‘peg value’, but the real action in markets can be speculated when examining such exchange traded funds (ETFs) as DIA, SPY, and QQQQ.  Just be aware of a series of smoke and mirrors as gyrations early in the week will most likely be head fakes, followed by violent swings towards established options peg levels.

 

Bucking Bronco

Where is the most likely source of a relief valve?  The dollar index.  A gap down on Friday on retest of the measured move target of 88 gave an ever-so-slight warning signal.  Foreign exchange traders should keep 92.53 on the radar; this level was 2005 high experienced as the Bush administration continued to depreciate the greenback in order to give an appearance that the markets were soaring to ever-higher levels.   A -28% drop in the dollar over the next three years was nicely balanced against a lift of +25% in the S&P 500.  In the end, it all evens out very nicely as the markets barely were able to tread water when measured against the underlying currency (and prevent the overall buoyant bull party mood from being spoiled). 

Expect the same gyrations in foreign exchange markets to balance against any expiry lift.

 

Goosing the Banks

Why is Bearnake desperately trying to put a floor beneath the banks?  As an avid student of the depression era, he is most likely attempting to avoid that which he so much fears, and effectively short-circuit the sector rotation model which normally prevails during ‘normal’ business cycles.  Money managers who have seen this before continue to play a defensive game, constrasted against Bernake’s offensive (pun intended) actions.  He is trying to lift the sector which normally signals an economic recovery sequence, with very little success.

This chart shows how markets attempt to anticipate the future, and often proceed any meaningful economic recovery by about 6-12 months.  An excellent read can be found at stockcharts.com based on Sam Stovall’s S&P’s Guide to Sector Rotation.

As far as the overall market direction, I believe that traders would be best served to look no further than the Nikkei which topped in 1989, was followed by a booming housing bubble as interest rates slowly dropped, yet had to fight against a deflationary period for the next decade under the burdon of bad debt which was hidden in Japanese bank balance sheets. Heck, in America we learn from others’ mistakes, right? Maybe, but it certainly won’t happen at the lightening speed expected from our short attention spans and certainly the US doesn’t have the luxury of a 17% savings rate experienced at the stock market peak. Quite to the contrary, Americans are buried under a mountain of debt, negative savings rate, and are just now adjusting their future expectations. Time to send out a real S.O.S. signal.

  “

The original title of this essay started out as the ‘Fox in the Hen House’, an elaboration of some of the meals served by our master chef President Bush, but I will reserve that for a later topic. Instead, it dawned on me that the Internet is a wishing well. Yeah, right dude .. whatcha been drinkin’, eh? Well, let me elaborate….

If you peruse the Google candidate acceptance package, you will find a very interesting elaboration on the company’s morals and goals. The one that gets software developers the most excited is “Don’t be evil” as adapted by Sergey and Larry after a seminal meeting in 2001. I was very close (a couple Sobrato buildings away) to this fledgling company and you could feel the genesis of this modern-day powerhouse. It has since grown to devour the old SGI buildings (and much of their staff) in Mountain View. Today, we don’t search, we ‘Google’ something. Google knows what you want.

Soooooooo, when you go to find something, where is the starting point? Do you realize all your wishes, fears, hates, friends, foes, family, and lovers are all but a few key presses away. Furthermore, so does Google. They know their addresses. Maybe even shopping habits if they or you bought something. Sign up for Analytics?? They know who visits your site, both coming and going. Have a Google toolbar or popup blocker??? Perhaps they know where you are going because you needed directions, and your home address is most certainly saved. You guys like porn, right?????? So do I. Ahhhhh.. but what do you really wish for in the dark of the night when nobody is around, you know, that dirty little secret. Google knows, too. Do you filter your mail though G-mail to get rid of spam??????? Well, you must have forgot your password some time back and had an e-mail reminder sent so you can log back into your account. Google knows that account, too. And the password. And how about those new fancy G-Phones???????? I just gotta get one this Xmas ……….

Software developers are made to wonder at the efficiency of functional programming and simplicity of Map-Reduce. Behold the usage of high-speed networks to tie together vast seas of commodity PCs into cloud computing (interesting twist on words). In the end, it is just matrix math on a global scale, and you occupy a distinct cell within the giant redundant, fault-tolerant, interconnected, non-heterogeneous storage brick we call Google. Welcome to the Matrix Revisited.

Make a wish and it is yours, Master.

No big deal, right? Tiger Woods would remind us all that any thought, whether positive or negative is reinforced. Every golfer can attest to this truism, and probably give you a great story to boot. The brain cannot distinguish between “Don’t hit it in the water” and “Hit it into the water”. Just ask Ryder Cup captain Paul Azinger whether Boo and J.B. needed this little piece of advice.

In the end, what does this mean when the programmers chant “Don’t be evil”?

Be careful what you wish for, it might come true.

The current update as of 11 am EST.

The tiger shows its true stripes. The yen bounced off a 7-year cup & handle pattern - the neckline or rim was exactly at .999. This illustrates the relationship between the index prices and how the dollar can be used to alter the perceived value of the underlying assets (S&P 500, Dow Jones, Nasdaq). At this moment, do you wonder what every treasury secretary meant when he was howling “Strong Dollar Policy”?

The current update as of 2 pm EST.

2:45 pm EST - key turn going into 3:00 pm hour.

3:30 pm EST - rising channel breakdown target measurement.

The closing tally. All makes cents, right?

The dollar continues to exhibit weakness as an early morning down draught lifts the indicies.

The result -> a bounce in the major markets, but there is still a net outflow.

A bounce off the BZ - Brach Zone in the dollar around 85.46 sets up a topping pattern in the ES (s&p 500 emini) contract. This is a classic rounding top in the form of a head and shoulders setup.

Target levels are met within one hour.

Mid-day update, and the USD is now in a slide against all major currencies. Yesterday’s +300 Dow Jones air lift is now deflated and gone. Is someone exacting revenge on the markets, or is this millions of individual votes being cast in an economic landslide consensus?

A wolfewave appears after an extended decline. Overlapping wave structure gives notice an short-term trend change may happen. This YM contract (dow e-mini) is more of a signal to expect a consolidation level.

The day ends with a thud. Unfortunately, a +1.1% bounce in dollar doesn’t quite make up for declines.

At least I wasn’t the only one that noticed the wolfewave running in the pack of bulls***.

Bearnake is doing his best to shovel American dollars onto foreign soil. Interesting how this is also a way to artificially lift the indicies. All things being equal, dropping dollar -1.5% should at least produce a +1.5% pop in the markets just to keep things ‘even’.

Your hard-earned dollars are being deflated as we speak. Intraday results, within one hour of the opening bell on Wall Street. Or perhaps we are seeing a flight out of the Greenback ahead of the election results?

I learned a lot about Fibonacci trading from a trader named <Brach> in ensign chat back in 2002-2004. The most informative piece of trading logic he imparted was the notion of 62% - 78% retraces - the ‘Brach Zone’. This represents the best area of opportunity for the trader to enter with well-defined risk (stops just above 78% retrace) to capture big moves in equities, futures, and foreign exchange. A good place to look for a ‘b’ wave high or low in larger a-b-c retrace context.

As far as running with the pack. a perfect wolfewave setup this morning on ES - E-mini s&p.

In the end, it is all just a zero-sum game, right? But it seems like the markets are doing soo good before the elections - all just smoke and mirrors.

Bernake has finally fired up the helicopter and is raining dollars on the emerging markets.  Although the markets cheered the rate cut, for the average Joe-the-plumber American, this equates to giving the rest of world a fistfull of dollars.  Do you remember just a couple days ago when the media was in a frenzy over the appreciating yen, giddy about sub - $2 gas, and touting the great bargains littering the landscape?  “Sorry, only kidding” will most likely be the new message, because now everything is getting more expensive until the slide in greenback is halted.

I’ve superimposed the intraday chart in lower left to show that we are currently around the 2004 spike lows in the playbook.  It is progressing at a rate of 1 day on hourly chart = 1 year in playbook.  At the current rate, this swing trade will last another four days - if indeed this is a trend reversal, the retrace should end right in the 62%-78% levels around 77, with special attention to the 80.5 spike low price for support.

As far as the stock market, the lifts are quite impressive as shown below. Second largest percentage gain on the Dow Jones Industrials - bear market rallies are indeed a wonder to behold.

Markets have been moving lockstep with the Euro / Japanese Yen (EUR/JPY) cross. The media reaction to the yen’s appreciation has reached a crescendo, and the foreign markets are showing signals of government intervention as mentioned in previous post with a -4% route. Also significant is the lack of fx flows after the equity markets have closed.

Markets are anticipating fed fund rate to be slashed tomorrow, just as the dollar signals that trend started in March 2008 could go into a consolidation sequence - an intraday wolfewave pattern signal shows on 5min chart.

Here is the monthly chart of the US dollar. Superimposed upon the lower left is today’s intraday action as recorded on a 5min chart. One of the beauties of wave structures is the symmetry at key junctures - compare the 3 days of intraday data against the equivalent topping action which unfolded over almost 2 years of monthly swings.