Sinking in…

The truth that is – however slowly. Yesterday morning we saw exactly what I was predicting about a week ago going into Labor Day weekend: The big boys returned from their vacations in the Hamptons only to press on with snorting six foot long lines of funny powder and destroying our financial system as we know it. First order of business was to squeeze any remaining short holders out of the market (that would be yours truly), but for some reason about one hour into the fun somehow somewhere on Wall Street reality suddenly started to sink in (a rare event, so mark your calendars). Perhaps by then a sufficient number of market pimps had finally received the ‘You Are So Screwed’ memo that I have been taking the liberty to mass mail out for the last few months. Whatever the reason was, some chain reaction kicked in and the market proceeded to tank like an anvil dropping from 30,000 feet.

It’s been all smiles for the bears since. Today’s tape ended on a slight up tick except on my favorite index, the S&P, which had the decency to put in another low. Breadth was pushing back/forth between 1.3:1 positive or negative – pretty much a non-event. As for the coming days and what to expect – I have some nice charts to show you right after sharing some interesting news I ran across today:

It just so happens that the first in many hedge funds with major exposure in commodities went belly up today. The Ospraie Fund managed to lose 26.7 percent in August, after – I quote “a substantial sell-off in a number of our energy, mining and resource equity holdings” – end of quote. Well, the commodity desks of most of the leading investment banks were the only profit makers in the last few quarters. With commodities dropping through the floor recently this sweet little spigot has now effectively been cut off, which in my mind should be a water shed moment (pun intended) for this sector. What is left for those guys to fall back on? Exactly – nada, zilch, nothing. Hence, expect a lot more ugliness to rear its beautiful head in the glamorous world of investment banks.

Okay, I’m all giddy after today – so let’s get on with it:

Looking better - but still in limbo.

Right off the bat let me disappoint anyone who expected me to predict immediate doom & gloom for tomorrow. We should be so lucky! The S&P futures chart above makes it fairly clear – we are on our way and the last two days were fun, however we are still in limbo land, ladies. We got close to breaching that 1260 low I have been sacrificing a perfectly good chicken for, but then Ralph Elliot ran out of motive waves and we proceeded up for a healthy consolidation. Expect a further push up tomorrow towards the target area of between 1280 – 1290, which magically lines up with 50% – 61.8% fib lines relative to yesterday’s peak and today’s low. After that, it’s back to shedding more points on all averages.

Unless of course we somehow breach that zone and keep pushing up. However, we are okay as long as we stay below 1303 – beyond that it’s bye-bye short term bear scenario and hello more of that dreaded bullish whipsaw upside down inside out fun. Let’s hope we won’t have to even think about that, but I need to make sure ya’ll understand that this scenario has not been invalidated just yet. But WHEN – oh magic Market Oracle who we depend on for every of our trade decision – WHEN can we finally rest in peace without the use of massive amounts of sleep inducing recreational drugs? The answer, my blood sucking depraved disciples is and remains 1260 on the SPX – once we cross that we can kiss the short term upside potential goodbye. However, before you start popping that Mumm champagne bottle you bought off some vagrant for 2 bucks last year – we are not completely out of the bull infested woods until we breach the July 15 lows which remains to tease us from a still safe distance of 1200. We’ll get there, but it’ll take some convincing and continuous action by the bears. Enough said.

Nasdaq leading in every direction.

While we’re looking at indexes let’s also peak at the Nasdaq futures. Now here’s a well behaved average for a change – what can I say – tech stocks just have been hammered lately and I hope the good ole’ NQ is paving the way of what’s to come for the $COMPQ. Again, 1,764 for the NQU8 futures and a little bit more distant 2170 for the $COMPQ cash index are the final confirmation that the bullish consolidation rally from hell has ended.

TNX breached through 37 resistance.

Moving on – somehow surrepticiously in the murky depth of the financial markets something pretty exciting happened today. The 10 year treasury yield managed to close at below 3.7%, which is something I have been waiting for. For the uninitiated – if panic money moves into so called ‘safe investments’ such as treasury bonds, the inversely related yields usually start to drop. We haven’t seen 3.7% since last May and since most of you have been tragically bereft of a long term memory let me remind you that the equity markets weren’t doing so well back then. In a nutshell: A drop in yields usually equals a drop in the equities markets. As you can see, there is not much resistance stopping the yield before 35.5. Not a bad omen to finish the day I might say.

Am I calling it or what?

Finally, on to my favorite precious metal – Gold! Which still can’t get much respect, but first take a closer look at the chart above. This is actually a snapshot of a ‘leftover chart’ which still shows some of the crazy lines I drew on the 25th when I was doing one of my internationally renowned (ahem) predictions for the yellow metal. On closer inspection it becomes clear that the Gold futures did EXACTLY travel the path I projected for it. Expect to see me on Opra and DeGeneres in the near term future where I will perform amazing acts of mind reading and pocket picking (preferably the latter).

Gold poised to fall below 800 soon.

So, can I double down on this? Only the future will tell – as far as I can see Gold had it’s chance for a respectable correction and should now take the express elevator to the basement level at first 720 and eventually 600.

And that’s all for tonight, folks. Berk and I will continue to post our favorite short picks in the coming days as things unfold. We both expect another more significant counter rally, perhaps starting as early as Friday or next week. So, don’t go all bananas about loading up on puts – make sure they are strongly defensible, so you don’t whipsawed out of the market again.

Cheers!