Living Inside a Broken Clock: Friday, Feb. 19, 2010

Bernanke, you shameless trembling excuse of a human being. You just had tilt the playing field in favour of your masters on Wall Street, didn’t you? Did you think that Aug. 17, 2007 and Sept. 18, 2007 had been forgotten?

For those who don’t know or remember, Bernanke pulled the same stunt on August 17, 2007.  Just before the market open, about an hour before, the FED announced a material decrease in the discount rate at the borrowing window – which affected nothing but took a lot of index puts and made them worthless, instantly. Index options settle for cash at the OPEN on OPEX. Now we have the same behaviour. Back then, the FED’s measures really hurt the shorts but kept the market going, limping, for another year.

Please take the time to read MD’s post on the discount rate.

https://evilspeculator.com/?p=14644&success

When I look at the SPX option screen, I see close to the same amount of Feb 1100 puts and calls – so unless GS and their ilk are short calls and long puts, I don’t see how this benefits the banks.  If one wants to pursue the collusion thesis, then they would have to find out if this were true or not.

My pet theory is that the FED wants to have a market event that they can use to iether extend QE or maintain their extraordinary powers that seem to violate both law and constitution. Desperate times call for desperate measures. After all, there are still a few thin dimes to squeeze out of the middle class. Tick. Tock. Tick. Tock.

EQUITY

Although some may sneer at Gartley, I would suggeset that it is as good a thesis as any for how the reversal may transpire. Backtesting by Gartley showed a 70% success. The direction is defined. The targets are defined. There will be no redrawing of waves and “This is the top. No Wait… This it it. Wait. Wait. Now……No…… Now! ” etc.  🙂

 The pattern is drawn on the SPX daily chart. The numbers are here. Look at the chart and see how close SPX has come to 1109.98 – within 2 points.  I believe that SPX will take out that level before the end of next week. If the Monday pattern holds,  it is likely to be then. In any case, I’m not married to the number, I’m just flirting with her.

Here are the numbers I get for SPX:

X = 1150.45 (Jan 19)
A = 1044.50 (Feb 5)
B = 1109.98 (projected)
C = 1058.50 – 1069.50 (projected range)
D = 1124 – 1135 (projected range) Go short here if the pattern holds

Asia was red – but it took a while for this to happen. This means that the consequences of the FED discount rate move were not perceived negatively.  Only Switzerand is green in Europe.  The DAX gapped down a bit but seems to be holding its level and trending sideways. Distribution wasn’t built in a day, it seems.  Sector rotation has made Consumer discretionary, Staples, and Inifo Tech green. Weren’t they the red sectors over the last week? See the trend?

Overnight, it took a while for the repurcussions of panicked USD carry traders to manifest itself in the equity markets.  To repeat: The carry trade in USD means borrowing cheap in USD – belieiving that the currency will remain weak or weaken further – and converting the USD to another currency to invest in assets in that country. Some USD finds its way into commodities – but that is not a pure carry trade in the old school sense.  The unwinding is a frantic heding of USD exposure (i.e. buying DXY futures, or selling FX futures) coupled with a liquidation of the FX asset that was purchased with leveraged USD.  Some may have hedged by selling ES futures – anything semi-liquid that they could get their hands on to hedge USD currency exposure on the debt side.

Overnight, ES traced out a J-Lo bottom and is sitting on teh S1 pivot at the present time. Look for it to follow this line into the open and then to make a move based on the various big money vested interests in pinning individual stocks. Pivots:

• R2: 1115.50 = This had some meaning as reisistance throughout December 2009. Right now, it’s just the pinata to pull the bulls and keep distribution going.
• R1: 1110.50 =  This is above TD resistance and I do NOT think that it is attainable today. It would also put SPX above the Gartley “B” target – but that number is not carved in stone.
• Neutral: 1101.75 = This would likely be the roof for any move today. It was a resistance level yesterday.
• S1: 1096.75 = Current support for ES. I think ES will run along this line into the open – the action is being tightly controlled.  Sizeable (IMO for this hour of the morning) offers are stacked up under 1100.
• S2: 1088 = Below a lot of other TA support lines, including some TD support. Surprising if ES gets here on OPEX.

My best guess is that the ES will be down until after the open. Somehow, somewhere, someone important to Bernanke benefits from SPX opening below 1100.  In any case, I haven’t played OPEX in a long time, and I haven’t owned options into OPEX week (especialyl index options) since the second haf of 2007 (wanna see my scar?).

FX

The USD carry trade was given a lesson in alien probes at the close yesterday. I watched the scrambling and search for liquidity – any volume at all. Spreads were big enough to [pick the analogy of your choice here]. I took a controlled short position in DXY, almost a lottery ticket if you will – in an isolated account where my maximum tolerable loss would trigger an automatic margin call. I went in too early, and the lesson for me is to wait until after lock up for DXY (which is different than ES and the other FX futures) trading – possibly using EUR futures in the interim. I am down a bit – but I think I will recover this and go profitable into next week.

My trade was based on the premise that panicked buying leads to peaks that are not sustainable. This was exacerbated by lack of liquidity, and the removal of a lot of volume on both bid and ask by bigger players – probably waiting for the dust to settle. I expect that things will return to “normal” early next week.

USD is up. CAD, EUR, and GBP are down. JPY is close to flat (this after all the action that happened before midnight).  EUR is putting in a classic bull flag above TD resistance – which is now support, and below the upper Bollinger. I think the mid-bollinger will come up and goose EUR up a bit from here. TD PRessure is heading down to oversold – suggesting caution for a short while. MACD has just turned negative – but with EUR trending sideways.  This suggestt to me that the oversold TA conditions will be relieved without much decline in EUR and any buying coming in will lift the price. Just an opinion. We’ll have to see how it unfolds.

NEWS

FED raises the discount rate in an attempt to maintain its above-the-law-and-constitution grip on financial power.  The EUR broke through one of its FIB supports at 1.3483 (62% FIB retrace of the 1.2457 (march 4) to 1.5144 (Nov 25th) upward move. However, it has recovered to above the FIB. Interesting, no? Does a manipulated break of TA support count? Tiger Woods is going to tell the world that he is sorry he likes ‘strange’ so much. Liar. 🙂

DATA

8:30 = CPI; Don’t be fooled. This isn’t the real reason for the discount rate increase. It has nothing to do with controlling perceived inflation. The discount rate affects NOTHING – especially since no one has borrowed from the window in over a year (net).

10:00 = Mortgage delinquencies. A measure of the continuing credit contraction.

I’m having fun playing my tiny DXY short and watching the EUR creep slowly back. ES has been pulled up  close to 1100 – so if this is an important SPX level, then a bit of a battle should ensue in an hour or so. If not, then the option thesis is just a smoke screen and the FED is ONLY trying to keep financial power – and it has nothing to do with diverting profits to wall street buddies.

Cheers.