Sunday, July 3, 2011


Everyone is so focused on not getting short and run over by a truck again that there virtually no credible talk regarding the head and shoulders pattern that is clearly setting up. Instead any excuse to look higher is the theme of the day. Of course rising wedges have been the theme for the market for the last several years...and I show one of these diagonals on the S&P500 weekly linear scaled chart below. However, there are two things to note, advanced diagonal patterns rarely make it to the extreme trendline on the last wave, especially when a huge breakout maybe setting up out of such a pattern. This is a whacky market, so nothing can be ruled out entirely...but the pattern is not my preferred because everyone is looking for new highs - they are NOT looking down. When everyone is looking one direction they are likely to get the very thing they are not looking for - stage left.

Secondly, the resistance that we ran into is formidable and the price patterns indicated a major deleveraging was taking place...most likely either a large institution in Europe or some more central planning intervention. I believe that a (or several) large European institutions is (are) failing and were required to liquidate their US Treasury assets and the equity hedges against them. As I said earlier, I think this is a trap and that the results of the highly leverage financial system are that people are not chasing good investments they are chasing momentum caused by liquidation and insolvency due to leverage. Market participants are chasing other peoples misfortune whether they realise or not. Once that entity or individuals misfortune is liquidated the pattern will stop until a liquidation cascade develops in the other direction. This is what credit and leverage accomplishes - the exact inverse of what we feel is happening. It feels like buying...but is it? Certainly short-covering qualifies as buying...but a liquidating short-seller does not qualify as a strong hand...and a market with strong momentum needs strong hands to keep it going. Sadly that is not the case here and you can squarely blame the over leveraged financial system and its promulgators at the central banks for it.

With China actually on a US Treasury bond buying spree over the last couple years, they have been significantly benefited by the fear was it was otherwise. In fact, China is still accumulating more US debt than published in secondary markets and foreign markets intermediaries. So, the question is, just who was selling Treasuries last week? It certainly was not the Chinese.

© 2009 m3, ltd. All rights reserved.