May 28, significant technical breakdown on markets

I think I'm going to alter my view as to what I think will happen to the market. While I think the short term lows are likely in, I won't say that we will make new highs for the year in the SPY. It's possible that we could make new highs (ie. we only hit the 200 DMA once during this bull run, and the recent correction could be just to shake out the weak hands). But what is also possible is a very bearish head and shoulders pattern as illustrated in the chart of the SPY above. We could also get the bearish head and shoulders pattern, and then fail the bearish pattern and make new highs for the year. Again anything is possible, and I will be lying if I said I knew what will happen. The point is that we must be flexible to what will possibly happen. I will say that the markets on the SPY could probably rally to 118 in the next couple of weeks, but then we have to re-evaluate what will happen later, but judging by the chart of oil, it's possible that we have already seen the highs for the SPY for the year.

Looking at the chart of oil (USO) it is really ugly. We have significant technical breakdown, and I no longer think that printing money will just inflate oil prices. The market obviously thinks something is really wrong with oil (and the markets), and have sold off oil accordingly. At this point in time, looking at the chart, any rally in oil will probably will probably lead to 38 on the USO and we will have significant resistance there. Again anything is possible, but oil is telling us that we have real troubles in the economy.

Lastly gold, looking at that chart it appears to be the only thing that is healthy these days. The bull for gold seems like it will continue. It will be a safe haven in market uncertainty like what we're experiencing now, and also good when governments around the world print money. Any violent dips in gold can likely be safely bought.

will we roll over and die, or will the markets recover

Well, alot of what will happen in the markets depends on the price action that will happen early next week. Despite what I think will ultimately lead to a 'death spiral' in the markets, I somehow don't believe that the death spiral is upon us yet. I think the powers that be will try their best to delay this death spiral, which should ultimately lead to higher energy prices due to money printing, and that's when a real death spiral will occur as the powers that be cannot print their way to lower energy prices.

Anyways, looking at the SPY chart, the markets ended Friday on a very sour note, however, it is resting on an ascending orange trendline, that dates back to July 2009. It also filled the gap from the previous Friday's gap lower, to Monday's gap higher, making the SPY sitting on some kind of support. If the market has any chance of recovering (in the short term) it must stay above this orange trendline, otherwise this death spiral in the markets will occur much sooner than I anticipated. What happened with the 1000 point plunge in the Dow, and the market selloff last week really caused lots of fear in the market. If you look at the chart of the USD (not posted), it's at new highs for the year and really extended upwards. Considering the huge rally in the USD, I'm surprised the market didn't really tank further. Anyways if the USD pullbacks, expect the rally to rally.

I charted the SPY on the weekly chart, and noticed that there is a descending 200 week moving average at about 123. I will make a revision to my forecast of the SPY. We'll be lucky to hit 125 on the SPY, before the market in all likelihood starts crashing down. (Just look at what happened between July 2007 and October 2007)

what might happen before the death spiral...

In my previous post I noted what I believed was the 'death spiral' in the markets and the economy in the weeks and months to come. Well this post will detail what I think will happen in the next few days to weeks.

Gaps are meant to be filled. They are magnets. From the Friday lows to the Monday gap up is a lot of air, and that gap has to be somehow filled. We are now sitting on resistance 50 day MA on the daily chart @ 117.5. 118.5 will be a very heavy resistance level. In the near term, the market should pull back to gap window (115.2) and possibly gap fill (110-112), and in the extreme case, a retest of the lows last Thursday (105), which also happens to be the February 2010 lows. Then the market should rally higher and make highs for the year (125-140) before the death spiral that I believe will happen.

the beginning of the death spiral?

I'm more than convinced that in the near future we are going to see a market crash that makes 2008 look like a joke, and possibly even the great depression look like a joke. We have Greece and the PIIGS countries basically living on borrowed time, the European Central bank finally caves in and prints money.

A normal functioning market in a healthy economy does not plunge 1000 points in one day. The news all claim it was the "fat finger" pressing a B instead of a M for trading PG. Do you actually believe that nonsense? Basically to make money these days means to buy shares at low prices and sell them at high prices. And some guy was playing a game to make people sell stock at distressed prices. Example, PG was trading at about 60 before the crash last Thursday. It plunged to $39, and recovered back to $62 as of yesterday. A lot of stop losses set in the 50s or 40s probably got taken out, and really this is how a transfer of wealth takes place from the guy who is scared and sells to the vicious shark on Wall St. You can't possibly win this game. Wall St has the tools to create any market outcome they want making this game even worse than wagering in a casino these days. In a healthy market, games like this don't happen too often at least not like that magnitude of what happened last Thursday.

So really I think this all are signs of an impending death spiral in the markets that will make 2008 look like a joke. It's what happened in the initial 50% recovery from the crash of 1929 and it is what I think is happening now. In the meantime if you are still inclined to play this game, I believe the market is ready to make a push to new highs of the year (possibly 130-140 on the SPY) in a few weeks or months, before the party ends. After all, Wall St. has to sell stocks at expensive prices which they picked up for cheap last Thursday. With every government on earth printing money that will spike oil prices, and with unemployment everywhere, I think the consumer finally rolls over.