Bull Hunting Season!

I think it was Karl Denninger who said:

You can dress up a pig and call it daisy but in the end it’s still a pig.

If I think back and reflect on the past year the one salient sentiment that stands out is a complete and utter disregard for reality. Trillions of tax payer dollars have been pumped into obviously insolvent banks, GSEs, and other financial entities – and this is what we got in return:

Just take a step back and marvel at this chart for a minute or so, and then reflect on the fact that during each and every small retracement the financial ‘experts’ on CNBC, Barrons, MSN, etc. claimed that the bottom was in and that now was a good time to shop for bargains. As the old saying goes: Analysts – you really don’t need them in bull markets – and you definitely don’t want them in bear markets.

Hillary Clinton just returned from an Asia beg-a-thon as overseas money is increasingly pulling out of GSE paper, which they now want to be guaranteed (FYI – GSE’s are government supported but not guaranteed). Of course we cannot do that without blowing up the treasury market as this would send yields into the sky – the opposite of what Uncle Ben wants to have happen. Yes, the law of of unintended consequence – it never fails to strike, especially when the levers of our economy are being played like a medieval pipe organ during Sunday mass:

Last week’s tape was ugly for the mouth breathers – breadth was clearly negative every single day and it seems that the 2009 Bull Hunting Season started in mid February. If you didn’t bag your 2000 pound bull just yet, no worries – the bears are just getting started and there’s plenty of downside left to enjoy. BTW, in case you guys ever wondered what Tim and I do during our weekends – here’s a recent snapshot:

Okay, let’s get serious – we’ve got tons of charts to look at, but I promise you that you’ll like what you’ll see.

On Friday I mentioned that the DJI had breached its November 21 low of 7449.38- and that pretty much was the death knell for the pesky triangle scenario. Good riddance, you shan’t be missed! BTW, for now just make a mental note of that 7,197.49 line I marked on the chart – we will get back to that one a few charts down.

Although it is still a theoretical possibility for the SPX, at this point probabilities clearly favor our intermediate (5) scenario. I am now projecting two possible paths going forward. Either the little rally on Friday was it for the expected consolidation and we continue our trajectory downwards or we retrace up to 780 or maybe towards the 800 zone before we drop into the abyss. There are some interesting fib cross-overs which I have taken the liberty to highlight for you rats.

Orange: We are half way in Minuette (iii) of Minute {iii} of Minor 3 of Intermediate (5). The path from here is straight down and it should be violent, especially if we take out the November 741.02 low, which in this scenario would probably happen later this week.

Blue: We are in Minuette (a) of Minute {ii} of Minor 3 of Intermediate (5). We consolidate, maybe very quickly as bottom feeders (and the PPT perhaps) step in again to bang up the tape one last time. After we touch 780 – 800 bearish sentiment should should catch up with them just like gravity hitting a burned out Titan booster module at 60,000 feet. Seriously now – if this turns out to be the count my target zone highlighted above would be extremely conservative.

For obvious reasons I would prefer the blue scenario as I am looking for an opportunity to reload – besides we’ve seen five down days in a row now and a little bounce would re-energize our downside potential. Remember, the market rarely continues in one direction for an extended period of time.

Remember that 7,197.49 mark I mentioned above? Well, it just so happens to be the very bottom of the 2002 cycle a wave. The 2007 ‘bull market’ peak was nothing else but the end of this Supercycle’s b wave. We are now in the beginning stage of the c wave, and if you think you’ve seen the worst you’ve got another thing coming. This bear market is just coming out of hibernation as we are now only completing Primary {1} of Cycle wave c – we’ve got 4 more waves to go.

But in the immediate future – what do you think will happen once we breach and eventually close below that 7,197.49 low? Your imagination is as good as mine but I can promise you that it won’t be pleasant for the bulls. Unless of course you enjoy wearing battery charger clamps on your testicles – to each his/her own. How’s that as a visual for you? 😉

As you know I recently started to count the wiggles on Mr. VIX as well. Again, I must point out that any conclusions are still premature but it seems that my current count strongly supports the Intermediate (5) scenario in equities. Based on the above we are now pushing into Intermediate (3) and the target zone here would be 75 -80. So, better enjoy your ‘cheap’ options while they last – volatility should challenge those prior peaks in a fairly short order.

I am the first one to admit that I didn’t expect to see 1000 before we would see 650 in Gold but here we are. Bullish sentiment among Gold traders is now well established in the 90 percentile – and no matter what the count is at this point (and I will follow up on this next week) it’s time for a retracement, just like in March 2008. I’ll be loading up on GLD puts and maybe some ZG contracts when I see signs of a rollover (e.g. stochastic divergence, lack of volume, etc.). Remember that commodities often trace out an extended fifth wave (while equities like to put in extended thirds), so I think we need to give Gold a bit more time – but not much.

While I’m typing this the Yen is doing exactly what I told you guys it would do – slingshot back from the lower border of its 2.0 Bollinger band. That can’t be good for equities tomorrow – I actually hoped they’d keep a lid on it for another day or two – I really want that damn counter rally!! &@%*#*

That’s all I got for tonight – I could go on with various measures, correlations, etc. – but it’s becoming quite clear where we’re heading, which is down. One word of encouragement: If we rally it’ll probably be very violent and you’ll see some long candles as a lot of pent up upside momentum has accumulated – Keirsten mentioned something on Friday about the quiet accumulation of calls by institutional traders. I personally will not let any counter rallies discourage me from grabbing index puts left and right while they’re on sale. Frankly, at this stage I will continue to load up even if we push past the 800 mark and maybe towards 820/830. The DJI is at a new low and so are the Dow Transports (DJT), the Dow Jones Composite (COMP), and last but not least the S&P 100 (OEX). These are bearish Dow Theory confirmation signals and the probability for a counter rally at this stage has been greatly diminished.

UPDATE: I meant to post this earlier and just remembered:

Cheers!

Mole