One Down – One To Go!

Apologies for the late post, but manipulating Senate votes via my remote hypnotic-rays isn’t as easy as I make it look. But evil prevailed as usual, thanks to yours truly – now send me a few bags of cash (non-series NZ Dollars please) as the premise of a once again functioning option market has just slipped closer into our greedy grasps. If you just were released out of jail or were busy urinating into your neighbors yard – yes, the U.S. Senate approved a slightly porked out Bailout Boondoogle Bill and the House is supposed to vote on the new monstrosity on Friday.

It’s been a long day and I’ll make this uncharacteristically short tonight as my wife is standing by with her pinroller to administer my weekly punishment for being a petty husband. My paltry pleas attempting to blame the broken option market are falling on deaf ears and I better get this done while I’m still physically capable.

SPX probabilities for the coming days.

I have little doubt that we’re pushing up in the coming days, as the market is a psychological basket case and is trading Washington, not Wall Street right now. Besides we’re still pretty oversold on the bullish percent indicator and Mr. VIX is picking out wall paper at the 40 point mark. But the eviction order should be presented in a short order as we’re most likely will see a bit of profit taking in the morning (buy the rumor, sell the news) as Tim Knight will be selling his 10 Million Cubes options. After that I expect a slight mock rally followed by more sideways grinding but a lot less fun than what I’m used to at our local nudiebar.

Friday or Monday (depending when the House snails are done casting their vote) I see three possibilities, and all three of them have propabilities attached to them based on the fact that Intratrade predicts a 90% chance that the House will put this new bill into law (see chart below):

• House rejects the new bill – probability 20% (I’m being generous). In this case we would most likely make a U-turn wherever we’re trading and subside into hell. I think the 50% fib line is a realistic upper boundary for that case, plus there is some strong diagonal resistance as indicated on the chart.
• House approves bill A: probability 40%. We rally (of course) but it fizzles out around the 61.8% fib line. I would give this a bit more of a chance if there was some kind of resistance line based on traditional TA.
• House approves bill B: probability 40%: Same vote but we rally and bust through 61.8% fib – next resistance is the 78.6% fib with added overhead resistance from a diagonal touching the peaks of 2 and {ii}.

MPrice for US Government bailout plan to be passed by Congress at intrade.com

Of course it is possible that we bust through all the lines, but then all bets are off and I would have to go back to the old drawing board and change the wavecount. As for the timing of these scenarios – we’re talking days at this point, and maybe 2-3 weeks at the very most. There are some analysts out there who are considering the possibility that minor wave 3 of intermediate {3} finished on the 29th and that we are now embarking on a multi-week consolidation rally of wave 4 of {3}, but I great doubts that this is the case here. This would have been a very disappointing and greatly abbreviated wave 3, which is more than doubtful. Looking at basic equity and credit market fundamentals it is abundantly clear that there are some very ugly events on the horizon, no matter of many hundreds of Billions the PPT and their henchmen throw at the problem. This is a worldwide event which will exert continuous downward pressure on our markes, and I’m convinced that wave 3 of 3 will accompany us well below the DJI 10,000 mark.

I have no opinion on Gold right now, except that it’s a loser and that it should be pushing towards 1000. It’s so bad it doesn’t even deserve a chart tonight. Perhaps it’s being manipulated, but who cares – there’s nothing we can do about that anyway. I don’t see an entry and it can go either way right now, so best to just stay away from it. My personal sentiment leans towards the bearish side.

The Dollar completed its {a},{b},{c} and never looked back, just as predicted. The chart is painting a gap there, which I don’t think is for real – it’s either the Prophet feed or it’s because I’m showing the DXY index and not the actual futures. Either way, the Dollar has embarked on his 5th motive wave and should meander up into the 85 region and possibly beyond. Meanwhile the Euro is still getting the Rodney Dangerfield treatment – no respect there. A strengthening Dollar is of course not good for crude which was getting hammered again today and closed below the 100 mark at 99.1. Keep those relationships in mind as a rising Dollar plus a deflating economy exerts pressure on the commodity markets. Copper is traditionally a great indicator on the health of the economy.

While you’re at it, also keep an eye on the TNX (30 year treasury yields) and the Yen in the coming days – the correlation is alive and well and offers you a nice ‘tell’ into what the market may do next if you’re trading on a short term basis. (Yen down – Dow up; TNX up market up).

For the record – I’m pretty excited about the vote tonight while being exasperated about having to wait until Friday or perhaps even Monday for a resolution of this Mexican Market Standoff (patent pending). I’m running out of naughty websites for crying out loud! But as they say – all evil deeds take time, so in the interim I keeping my stance of staying mostly in cash with a few selected positions here and there. Hopefully a rising market will heal some wounds on this busted options market, as the current bid/ask spreads make us evil speculators look like boyscouts compared with those market makers.

Cheers!

UPDATE: The SEC extended the short selling ban until three days after the $850 billion financial rescue legislation is enacted into law. It won’t extend beyond 11:59 p.m. on Oct. 17.