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 globex overnight futures ramp up in an attempt to entice the public.  Once again, there is a wolfe running in the bull stampede.  At 11:00 am the target is tagged – time for a bounce sequence?  Thanks to scooter in the b-line channel for a great chart and corroborating evidence of AM low.

1:10 pm update – A second wolfewave tags target levels.  Thanks to Makai for chart and setup.

3:20 pm update – A trendline touch is registered.  Consider this a short-term bounce level.  A place for dayshorts to cover AM bets.  Thanks to Ben in b-line.

3:50 pm update – What a bounce.

The Amazing Shrinking Dollar

The dollar continues to exhibit weakness, the game is once again a notion of “cash is trash”, encouraging everyone to put their money into the markets.  It makes American goods cheaper (good for corporate profits), yet bad for the consumer (everything gets more expensive)  It is now approaching the head & shoulders pattern measurement, with spike high support around 81.1 and 80.5 from the weekly charts.  The pattern target is based on 89.7 head – 85.4 neckline = -4.3 measurement; subtracting measurement from the neckline, you get a target at 81.1.  For candlestick fans, an ‘evening doji star’ is registered on the monthly chart.

The FOMC is meeting Monday and Tuesday and expected to drop interest rates another 50 basis points, to 0.5%.  There has been an amazing amount of money poured into government treasuries in the past months as foreigners have parked their money in dollars as a safety measure against a global rush to devaluate currencies – the yen (which cannot drop interest rates any further) has seen a rise to 13 year highs.

Bond, James Bond

At the same time, we must question how much longer foreigners are willing to finance the every-growing debt that the US is tapping from world markets.  This is most likely one of the ‘unconventional approaches’ used by Bernanke to drive mortgage rates lower, yet at the same time, would you be willing to loan money to the United States government for 30 years and expect only 3% in return?  Jim Rogers has also highlighted this conundrum in Fortune’s ‘8 really, really scary predictions‘.  Consider the notion that the dollar has lost 7.2% in value in six trading sessions.  Is the US treasury bond the next bubble waiting to burst?

The smartest mind in bond land is arguable Bill Gross of PIMCO.  In his monthly commentary, he outlines how money flows through asset classes, with the Fed Funds rate at the epicenter of any monetary movements.  His eloquent commentary is a must read, along with a poignant discussion their current investment strategy.

10:05 am – The first short sale is triggered as the SPX approaches the BZ (Brach Zone) running from 867-871.

10:30 am update – Parallel channel projection suggest a bounce at these levels. A ‘b’ wave low? Thanks to tipper in b-line channel.

11:00 update – a completed gartley pattern rises to the 78% retrace level at 871. Another a-b-c measured move is in place. This will require a tight 2 point stop, since the gartley setups have been having difficulty in the last few trading days

1:00 pm update – an amazing resilient market in the face of another round of bad news. A wolfewave is running in the stampede higher. Notice that all scalp trades are best handled with 30 minute entry/exit time horizons.

4:00 pm update – the markets manage to close the AM gap down. Most bulls consider this wildly positive action in the face of ugly news. The fact that the automakers are shot down in a senate vote is certainly far below the radar on this rather rambunctious day. Except for the noon hour, intraday jerk and scream motions are limited to 30 minute scalp plays.

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).

From an elliott-wave perspective, it appears that the S&P has completed a 5-wave up sequence and encountered resistance at the 50 dma (50 day moving average), thanks scooter.  If the markets are indeed facing a reversal sequence, at the current juncture we should expect a complex correction to unfold (abc – x – abc structure) given the rule of alternation.

I have also outlined the bullish perspective in parenthesis – the possibility that there will be one more attempt to breakout up to the ES 975 levels and the structure encountered so far is just a corrective a-b-c and not the beginning of a down impulse. The true make-or-break level will reside right in the ES 906 juncture (62% retrace level) – if the market moves above that key juncture, the bullish count remains in effect. Very confusing, eh? I am electing not to trade this sequence and instead remain an observer due to the lack of clear signals today.

12:45 pm update – as expected, the prices rise to test the 906 level in a complex wave structure. The larger pattern is once again a wolfewave setup, targeting the 888 level into the afternoon session.

2:00 pm update – wolfewave target is met.

4:00 pm update – after closing the AM gap up and target measurement, the market rebounds into the final hour.  A second wolfewave shows into the final minutes suggesting the overnight globex lows will revisit the ES 891.5 levels, perhaps even with a Thursday morning open right in the vicinity of this second pattern target.  Note that this chart is scaled to a 3min time frame.

Overnight trading manages to tag the measured move target around 895. This sets up a bullish gartley pattern as the markets open. Looking at the larger picture, the structure very much resembles a head & shoulders pattern, therefore, keep a close eye on the ES contract (S&P eminis) for a lift with resistance around the 911 area after the first hour’s gyrations subsides. Ideally, the lift will also form an a-b-c retrace structure. Thanks for the excellent charts from Buffy and midge from ensign b-line channel.

From the larger perspective, the markets are now testing the 50dma (daily 50 moving average). This will prove to be a key make-or-break level for the remainder of this week.

1:45 update – Another measured move completes following intraday highs.

3:30 pm update – the head&shoulders pattern does assert itself.  The last rebound in the late afternoon confirms resistance at the neckline around 895.

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.

Employers cut 533,000 jobs in November as reported by the government. “In addition, job losses in recent months turned out to be worse than previously reported. October’s loss was revised to show a cut of 320,000, originally given as a 240,000 loss, while September’s drop was revised to 403,000 from 284,000.  That meant 199,000 more jobs were lost in September and October than previously thought and the total reduction in U.S. nonfarm payrolls for the last three months was 1.256 million, with almost 2 million shed in the year so far.”

Based on the 2-day intraday action on the S&P cash index, I expect prices to drift down to the 820 levels (overnight globex lows have already visited this level).  Here is the pattern setup, which also represents a rising channel breakdown target.

Intraday action

Markets open immediately with a 3*push higher sequence, a small wolfewave pattern showing overlapping structure.

10:30 am update: 2-day wolfewave target tagged.

12:30 pm update: after a low print at ES 817, markets rebound. Once again, overlapping structure shows on the 5min chart, pointing to an imminent trend reversal taking shape.

2:00 pm update: Markets have continued to lift on waning volume. A gartley pattern sets up as prices enter the ‘Brach Zone’ (BZ) running from 850-858, a 62%-78% retrace level of the two-day trading range.

4:00 pm update: OUCH! What a bad call to anticipate a partial retrace. An opening range reversal instead takes shape (842 – 817 = 25 pts) with a push well above the target level around 867 (842 + 25 pt measure). One can only construe that the bad jobs number was already ‘baked into’ the price action and has been anticipated by the market. This represents amazing resilience in the face of poor economic measures, and is quite bullish.

Yes, even the automakers can now celebrate a Merry Christmas as they get their wish fulfilled for a government handout.

The consolidation tension has been worked off following last Monday’s ugly down draft. Interestingly enough, the -680 point swoon on the Dow Jones stopped at the 50% retracement level off the November 21 lows to November 28 highs (7,392 – 8,840 = 1,448).

Are we “out of the woods” yet? Technically, prices have moved in a choppy rising channel, and completed a solid wolfewave pattern showing on an intraday basis over the past two trading sessions. Gartley players are positioned exactly at the 78% retrace level of Monday’s impulse down move. Most markets are at ‘grail’ (daily 20 exponential moving average) resistance. Today’s session is once again a make-or-break scenario and should dictate the overall market direction – watch for impulsive action.

Where did the initial bounce on November 21 start at?  Exactly at the 50% retracement of the entire bull run started in 1982.  This is a brilliant chart created by Jeff Cooper which was sent just as the Dow Jones broke below 8,000.  It was accompanied with the warning “One can only wonder what the countertrend rally will look like when it arrives. And arrive it will.”

Intraday action

The ES futures contract fills AM gap down in a small 3*push higher series right into the 10 am turn.  Keep 870 on the radar for hard resistance.

11:00 am update – the first tradeable pattern setup is a wolfewave visible on the 3min chart.  The S&P has lifted a bit above gap fill, but shows a negative divergence (higher prices, lower momentum).

1:45pm update – the lower end of multi-day channel is tested.  Most likely, a short-term bounce can be expected off these levels.

4:00 pm update – markets bounced off 1:45 pm trendline, only to form right shoulder of  intraday head&shoulders pattern.  Once completed, price action accelerates to downside.

“Hegemony is a concept that has been used to describe and explain the dominance of one social group over another, such that the ruling group or hegemon acquires some degree of consent from the subordinate, as opposed to dominance purely by force.” – wikipedia.org

About a month ago, I wrote about the issues facing gold.  Despite the printing presses whirling at an every-alarming rate by our treasury secretary Paulson, the precious metal seems to be unable to advance any significant amount.  Perhaps this is due the perceived notion that the US is now firmly entrenched in a deflationary environment similar to what Japan experienced throughout much of the 90′s.  The hard cold numbers are readily available for examination, and it appears the gold delivery scheduled for November 28, 2008 didn’t inspire a run on bullion that many expected.  Quite the opposite, gold tanked a solid -5% or -$41.6 yesterday.

What can we gleam from the price action?  The initial bounce from the October spike low of $681 to $775 three days later could be considered a nice ‘A’ wave.  ‘B’ wave lows were established around $698 by mid-November, followed by an advance to $833 in another three day wonder – wave ‘C’ (measured move approximating $100 push upward).  Put all the pieces together, and it adds up to another bear flag pattern on the daily charts.  In the larger context, it is a gartley pattern with a rebound very close to a 62% Fibonacci retrace. Examining the weekly chart, gold was barely able to lift into the midpoint of a well-defined downtrend channel.

As mentioned in the last post, gold would need to see a significant reduction in the forward hedging activity before a buy was initiated. This has yet to occur, and quite to the contrary it seems that the forward selling in bullion is picking up each time the price spikes higher. Thanks for nothing, hegemon JPM.

Both the hedged and unhedged gold miners indicies have encountered downtrend channel resistance on their respective daily charts. The chart patterns can also be considered bear flag formations. Sooo, the wait continues for a solid wolfewave pattern to form in the GC futures contract and XAU / HUI indicies – only then will I consider this bear market in gold to have run to its conclusion.