Clash Of The Titans

The clash of the titans is upon us. Make no mistake – it’s make or break time for the bears as they are running out of time as well as wave sub divisions here. Emotionally everyone has been ripped to pieces, but from a technical perspective things could not be much clearer. Either the bears close the deal right here and now or they will be squashed and again be relegated to watching the bulls take their lunch money and fuck their prom queen.

The financial establishment is fighting for its survival – with tooth and nails – as it has been for the past two years. They have used every trick in the book and some unprecedented ones that hadn’t been written yet. They’ve gotten every break and get out of jail pass one can possibly imagine – but despite having the wind in their backs the upside momentum has stalled for about one year now. But don’t underestimate them for a second – until the fat lady sings the incumbents will continue to do exactly what they have been doing and they will never ever give up.

For their survival depends on it.

We now find ourselves at a major inflection point and the big question that remains now is whether the deflationists or the inflationists will win the war. Robert Prechter and friends insist the Fed can’t possible stem the bursting of the credit bubble through continued quantitative easing initiatives. I used to be convinced of that – but having seen what I have seen for the past two years I’m not so sure anymore. I’m also now mindful of various and concerted currency games which seem to provide almost infinite support and thus a permanent floor to equities.

So perhaps the combined forces of banksters worldwide may somehow get the job done and simply socialize those losses to the rest of us – thus in the process finally destroying what ever remains of our teetering middle class. We shall see – either way we’ll probably see some fireworks before it’s all said and done – and I’m not talking about hypothetical ones.

Whatever we’ll get – I’m dressed for the occasion (yes, I’m almost that handsome – well, almost). Now, that I’ve set the stage for you guys (and have the attention of the girls), let’s look at some charts:

The least important chart today is our wave count. Quite frankly – it’s quite clear at this stage that we are in a downtrend that either resolves itself or may paint a bottom and turn into something else.

Clockwork Orange keeps us locked in that current down channel. Which means we may pop a little on Monday morning but then reverse and paint new lows later in the week.

Soylent Green territory begins after 1070 – if we push much above that we will see many funds throw their weight behind a wonderful short squeeze opportunity. Either bears or the bulls are getting squeezed next week. The bears most likely early in the week and if we push higher quite possibly the bulls. I may however point out that if we don’t turn around at the 1100 mark then we’re talking about something completely different. But we’re not there – so let’s not worry about that yet.

But those are just the current high probability scenarios going out for a week or two – what’s a lot more important here is that the current count does not leave much more room for further sub divisions – at some point this bitch has to drop like a rock. After all this is what should be happening around here. In 2008 we had a similar situation and it was driving everyone nuts. I was telling Berk how the slide was overdue and that it simply wasn’t happening. Then it happened – suddenly – without warning – fast and hard. By the time everyone realized what was happening it was pretty much over.

So, when I say that it needs to happen now then it doesn’t mean that I can’t happen. What I’m saying is that it needs to happen by early October – and by that time it should be almost over. So, that leaves us with a very narrow window for a big slide. It has happened before – and there is no doubt that it can happen. But the important message to take away here is that the whole ‘waiting for Godot game’ we had to put up with will come to an end in early fall.

Now that I have shown you the least important chart let’s look at the most important chart for next week. I posted this one last week while we were hovering around that equilibrium center line of that one year channel I suggested. And sure enough we reversed right at the 25% mark – which coincides with that magic 1040 level the funds have been having fun with for the past few months now. Buying the dip here has been a literal gold mine and like Pavlov’s dogs they will continue to do it until they get their ass spanked in a serious way.

The higher we climb in this chart the less credible the short/medium bearish scenario. At the center point the odds are about 50/50. If we push to 1100 the bears have one last opportunity to squeeze the bulls and turn this market to the downside. At the top line around 1130 the odds for the bulls will have increased significantly compared with the odds around 1140.

We need to clear this channel – one way or the other. If we push above it the bears will be in a world of hurt as the ensuing feedback loop will bring buyers back to the table. I’m not sure that’s what the Fed wants – after all a climb in equities supports rising yields in treasuries. But their game may be something completely different and I’m not putting any of my coin on anyone’s interpretation of the Fed’s game. If we breach 1130 I will anticipate further upside and will trade accordingly. Unless of course my momos scream sell sell sell at me. If that happens – well, I will be here to tell you all about it.

If we finally breach 1040 and then 1020 it will be a starting signal for what Primary {3} – there is very little doubt about that. The majority of the longs will draw their line in the sand right there and should we breach it will most likely head for cover. Maybe politics and the November election make this scenario questionable – at least that’s what some claim. Then again – it happened in 2008, didn’t it? 😉

The daily Zero has been pretty lackluster as of late. Just compare the magnitude of spikes we saw early in the year with the snooze fest we had to put up with since mid of July. Yes, that may have been merely seasonal, and if that’s true then it gives additional credence to my perspective that September will be the make or break point for the bears. The big boys are returning now and we should see considerable increase in volume and participation.

The last buy signal we got (see dotted line) was pretty weak and it was only good for a moderate bounce. Thus far we did not see a new low accompanied by a major divergence. But then again, we did not see a big spike down either that would signal that bearish momentum was on the rise. So, I’m split here and thus the odds are split in my mind as well.

Copper started to point up last week and – to no surprise – equities followed suit. Note however, how equities have lagged in comparison with similar levels in copper. This suggests that bullish moves in equities are lagging those we see in copper – a bearish indication. Nevertheless, we are also at a pretty important level for copper – which I have tried to highlight via a blue rectangle on the lower panel. But it’s actually a lot more clear on the point and figure chart:

See, isn’t that so much nicer? I love P&Fs for support/resistance lines. And copper just touched the 340 mark which should pose quite some resistance. If it breaks above then the bearish price objective of 296 may have been revised. Maybe some P&F aficionados can chime in here as well. I have the rules somewhere but don’t have the time to dig them up tonight.

The message to take away here is to watch copper like an eagle. A breach higher would be another ace in the sleeves of the bulls.

My gold:silver ratio chart plotted against the SPX also has touched my one year sell line. Usually bearish things happen at this lower diagonal and this time should not be any exception. Again, a breach here may greatly weaken the short to medium term bearish scenario in equities – so I will be keeping an eye on it.

Currencies is really where the game is being played these days. The AUD/JPY has seemingly been set up with a turbo charger running on high explosive mix of nitro, fuel and oxygen. Seems that the BOJ has had it with lagging exports and is putting the squeeze on the Yen longs by buying the Australian Dollar. Maybe some FX traders could shed a bit more light on this for the benefit of us all.

We are close to the breaching the upper line on my stochastic but that doesn’t mean much. We may push above and become embedded after all – so who knows how high this thing may climb. And that is probably the most worrisome chart for the bears – if equities follow suit here then we’ll see 1100 on the SPX in a very short order. But if it lags then it will give the bears additional ammunition for a long squeeze once the AUD/JPY rolls over.

The DXY is clinging to 82.87 – and not seeing the Dollar getting killed is a plus for the bears. After all, the 18 month climb in equities has been greatly fueld by stomping on the Dollar in the process. You may remember the chart I posted last week which showed the SPX valued in Gold.

Bottom Line:

It’s now or at least not for quite a while for the bears. I won’t say never of course. But the wave count does not give us too many wiggles to postpone the grand finale here. If this is a Minor 3 of Intermediate (1) then it needs to start showing its colors. And the A/D ratio of 5.0+ we saw on Friday should be an anomaly that cannot be followed up – otherwise we have to concede that something else is going on. That simple.

Public Service Announcement:

In the past month I have again put additional emphasis on refining some of my automated trading strategies, with quite some success if I may say. A major reason for my revived focus is a growing realization that the retail trader is slowly going the way of the dodo. I love you guys but just don’t think there will be many of you left in one or two years from now. The market simply has become to complex, narrow, and brutal. And as the old saying goes:

If you can’t beat them – join them.

Now, I have been blessed with some pretty considerable programming experience – after all I used to be a software engineer for 15 years until I decided to retire and focus exclusively on my trading. That however doesn’t mean that I stopped hacking code – quite on the contrary: I merely had become tired of working on other people’s projects and quickly found that my skills were a lot better used working on trading strategies. I seem to have a knack for seeing patterns and putting my observations into code and thus working strategies is a very rewarding endeavor for me – mentally as well as monetary.

Incidentally, the strategies I am testing and continue to optimize until I am ready all have been back tested starting January 2007 to the present. The reason for that is that I believe that any strategy which was able to survive the past four years should at least have a fighting chance moving forward. After all, we are talking about some very dynamic and contrasting market conditions here.

There will be several announcements in the next few weeks – and I believe you will appreciate the kind of stuff I have been cooking up. And over the next few months you may see a slow shift towards automated trading. Some of it in the same fashion as Geronimo or evil.rat – which means via email or SMS notifications. But I may also finally hook into Collective2 or a similar service and thus give you guys the opportunity to trade various strategies through an automated framework.

What concerns me a bit is that Collective2 takes a big chunk out of my profits and being the greedy market megalomaniac that I am it would be preferable to find a different solution. So, if you are reading this and know of a better framework please let me know – I’m open to anything as long as it represents a viable and secure solution.

See you on the other side, folks.

Cheers,

Mole