SP500 Gap Zone

Market Observations

Below is a chart with all the critical trend lines for the SP500. Additionally, the projection of the optimal turn date for Primary wave 2 or B (depending on nomenclature)...

The irony is that the bottom was at 666 and the turn date starts 9/11/09...this is indicated by the magenta line on the chart. If that were to be the relationship that were to occur which does not seem unlikely then its truly an astounding coincidence. I referred to these two data points in some previous posts.

Also, keep in mind that earnings estimates for the third quarter at $14 for the SP500. That works out to a P/E of 75. This is an astounding number especially when earnings have significant risk of coming in much lower than that. Earnings expectations for this past quarter were cut by nearly 50% already. Companies can beat those lowered expections...but that does not fix the fact that earnings are low and going lower.

Below is a chart of the NDX.  We are in a serious resistance zone here...Two rising wedges at once. Perhaps we get a throw over and then fall through the bottom of the wedge.

Below is XLF, head and shoulders pattern continues to be valid. Financials have not been participating in the rally. Maybe, it more of a short squeeze in general since most of the financial shorts have been decimated well before now...Seems like we have to progress through the whole market squeezing every sector until its rung dry.

The RUT has a confluence of resistance above...seems like the next few days may get interesting. RUT has has had an especially strong rally. I wonder what the crash will be like?

Market update

Nasdaq unable to take out highs so far, SP and YM not confirming highs for Russell and EMD.

Breadth 1.85.

SP500 Backtest Playing out NOW

Either we break out or rollover...in either case the parameters and stops are very close...

Low risk decision point IMO.

SP500 levels

This is an interesting chart of the SP500...along with the retest of the up trend line which we got today (not shown...stockcharts is down)...this trend line at 1041 is a big deal.

We'll see what happens.

to: breakpointtrades.com

danericselliottwaves

I would like to take this opportunity to congratulate dan eric on two prescient calls that he made.

1. The dollar ending diagonal (several weeks ago)
2. The gold triangle (also several weeks ago)

Both of these calls and counts have played out as Dan had illustrated. I wish the P3 would have happened today as we were looking for...but I it looks like were are very nearly complete here.

In any case, I would also like to add that Dan is of course a much better elliotician than I am.  I like to write analytics and code for trading and trading systems, so please defer to his labeling when in doubt...Dan is consistent, timely, accurate and quite an asset for us all. My question to you Dan is: have you ever considered working for EWI? I spoke at length with some of the people there...seems like you could be a tremendous value to them too?

I any event congratulations on your tremendous work...and thanks.
http://danericselliottwaves.blogspot.com/

Speaking of EWI...everyone should hear this hour long interview with Bob Prechter...its very interesting. Click here for the mp3 audio

p.s. please forgive my crude labeling sometimes and thanks for your feedback

Market Observations

VIX was up today...the whole day including from the gap up. Utilities Continued their lackluster hold of support at their channel. XLF head and shoulders are progressing nicely. Breadth was not great today...2.9 to 1.

The story of the day was the dollar which fulfilled the Ending Diagonal potential that I have previously discussed. There could be a small throw over...but overall the Dollar's down move looks finished and counts pretty close to complete. Therefore, this up move in the market is on VERY thin ice. I had been worried that the move down in the dollar could be time consuming...but am pleasantly surprised that it essentially hit my targets in 1.5 days. That shortens this rebound in the stock markets considerably.

DBA was down today regardless of the dollar and Oil traded weakly even though it was up. I was trading oil and made most of the money shorting it.

ES and Breadth

Here is a chart of today's breadth...

UUP Chart

This is a chart that Mathew Fraily has made and been watching with me for over a month...

Nice work Matt. check out matt's other work at BreakPointTrades.com

DBA - Deflation Is Clear and Present

Even with the dollar making its ending diagonal lows, DBA can not get out of its own way...

Dollar - Fullfills Ending Diagonal...

Market rally is a trap...Euro topped. Perhaps we can get a little throw over...but essentially the EURO is done and the Dollar has bottomed. Stock market prices should be a lot higher given the dollar weakness and DX should be confirming DXY prices.

Also, DXU09 is not confirming DXY price. usually the spread is 9 cents...now its over 25 cents.

[update: 9:23 am DX 77.5 DXY 77.19 = 31 cents spread - lower 2 - 4 line target for DXY is 76.7]

Ok...now we start to hear it. "UN Says New Currency Is Needed to Fix Broken ‘Confidence Game’"

 The dollar’s role in international trade should be reduced by establishing a new currency to protect emerging markets from the “confidence game” of financial speculation, the United Nations said.

UN countries should agree on the creation of a global reserve bank to issue the currency and to monitor the national exchange rates of its members, the Geneva-based UN Conference on Trade and Development said today in a report.

China, India, Brazil and Russia this year called for a replacement to the dollar as the main reserve currency after the financial crisis sparked by the collapse of the U.S. mortgage market led to the worst global recession since World War II. China, the world’s largest holder of dollar reserves, said a supranational currency such as the International Monetary Fund’s special drawing rights, or SDRs, may add stability.

“There’s a much better chance of achieving a stable pattern of exchange rates in a multilaterally-agreed framework for exchange-rate management,” Heiner Flassbeck, co-author of the report and a UNCTAD director, said in an interview from Geneva. “An initiative equivalent to Bretton Woods or the European Monetary System is needed.”

The 1944 Bretton Woods agreement created the modern global economic system and institutions including the IMF and World Bank.

Enhanced SDRs

While it would be desirable to strengthen SDRs, a unit of account based on a basket of currencies, it wouldn’t be enough to aid emerging markets most in need of liquidity, said Flassbeck, a former German deputy finance minister who worked in 1997-1998 with then U.S. Deputy Treasury Secretary Lawrence Summers to contain the Asian financial crisis.

Emerging-market countries are underrepresented at the IMF, hindering the effectiveness of enhanced SDR allocations, the UN said. An organization should be created to manage real exchange rates between countries measured by purchasing power and adjusted to inflation differentials and development levels, it said.

“The most important lesson of the global crisis is that financial markets don’t get prices right,” Flassbeck said. “Governments are being tempted by the resulting confidence game catering to financial-market participants who have shown they’re inept at assessing risk.”

The 45-year-old UN group, run by former World Trade Organization chief Supachai Panitchpakdi, “promotes integration of developing countries in the world economy,” according to its Web site. Emerging-market nations should consider restricting capital mobility until a new system is in place, the group said.

The world body began issuing warnings in 2006 about financial imbalances leading to a global recession.

The UN Trade and Development report is being held for release via print media until 6 p.m. London time.

see full article at: http://www.bloomberg.com/apps/news?pid=newsarchive&sid=aSp9VoPeHquI


If there ever was a sign for a coming bottom in the dollar this is it. If there was ever a sign that Bernake is a liar this is it. Ron Paul called it...


If derivatives could not solve the problem for these manipulators, the best choice is to create a global currency...but you need a really good excuse for that. Derivatives were a good first try. Please see my posts on the dollar. (Derivatives...what the heck were they for?, More dollar what-if discussion, crash warning and recommendations, The Future of the Dollar - the biggest short squeeze ever and The EURO - starting a trip to oblivion) 


This is much further along than I expected. 

These guys will stop at nothing.

Rep. Turner questions former Treasury Secretary Henry Paulson

A must watch video of Rep. Turner

Fed's Hoenig is worried about inflation...

"As we become more confident that we are at the bottom of the recession and are moving into recovery, we must become more resolute in systematically reducing our balance sheet and raising interest rates."

"If the government, the banks and consumers address the difficult issues of debt and the Federal Reserve begins to remove the significant stimulus in an orderly fashion, then we will come out of this recession without an inflationary hangover. Noninflationary growth will follow, new wealth will be generated, and we will continue to be the strongest, most successful economy in the world. But in the short run, these actions will involve painful choices, and it is the responsibility of citizens like you, and policymakers like me, to consider the impact of today’s choices on tomorrow. We must choose well."  

"If the monetary stimulus does not come out, the price level trend shown earlier in Chart 9 will only worsen. As a reminder of what that might imply, you need only study the early ’80s when high inflation undermined our economic system. "

"In considering these charts and the matters of policy, we should be aware of two pieces of legislation that I suggest influenced their contours: the 1946 Employment Act and the 1977 Amendment to the Federal Reserve Act. The 1946 Employment Act established as a national priority a goal of low unemployment.  Low unemployment is a worthy goal and one that I share, but it cannot be achieved by systematically keeping interest rates low.  In 1977, Congress passed the Amendment to the Federal Reserve Act—also called the Humphrey-Hawkins Act—which called upon the Federal Reserve, as the central bank of the United States, to pursue a dual mandate of promoting long-run stable economic growth and stable prices." 

"Assume for a moment that the 20 largest institutions were required either to raise new equity, or to reduce their total assets to meet the 6 percent equity capital ratio.  This would require that they raise more than $300 billion in new capital or, as Chart 2 shows, they would need to shrink in size by $5 trillion, or some combination of the two options. The numbers in Chart 2 make clear how much of an advantage the larger institutions have over smaller banks, and show the excess leverage the largest banks have accumulated."

full text available here: Thomas M Hoenig Text

The above are quotes from Thomas M Hoenig, President Federal Reserve Bank of Kansas City. Clearly, Hoenig makes some very good points regarding our financial institutions over leveraged condition and debt situation overall. I would say its too little too late however. Isn't this something they were supposed to be watching for the last 25 years?

But worst of all, as professed students of the Great Depression and keepers of the money...he apparently thinks that the Fed has been successful in its mandate of promoting stable growth and stable prices. If you look at the dollar chart...a 96% decline IS NOT STABLE PRICES. It may be stable growth, but it is definitely NOT STABLE PRICES.

Additionally, Hoenig is worried about inflation. Can you see inflation in that DBA chart? I can't. And what does this depression have in common with the 1974 recession? Not much - I will tell you. All the Fed does is worry about inflation, because they need inflation in order to continue their policies regarding fiat currency and fractional reserve lending.

Clearly, he may be a smart man and certainly seems much more sensible than Bernake...but he should not have his job if I can understand the financial system better than he does. This is astonishing.

End the FED.

DBA - Ready for wave 5 down?

After a very long wave 4...DBA, despite Jim Rogers prognostications, looks rather negative here...again Tuesday is make or break. Given that the weakness in the dollar did not help DBA and the condition of oil - this does look like 4th time could be a charm. If indeed this is occurring this is a picture of deflation in progress...and likely herald the same for the stock markets.

Just a simple chart...

Utilities also made a very unconvincing bounce after their pullback...its at a support area could try to bounce a bit more...but looks weak.

Junk Bonds ratio to treasuries sport a completed impulse wave. This is something to keep an eye on.

Derivatives...what the heck were they for?

Let's discuss a few things regarding money. The creation of money as I have indicated in my previous posts is the creation of debt. (See: More dollar what-if discussion, crash warning and recommendations and The Future of the Dollar - the biggest short squeeze ever and The EURO - starting a trip to oblivion). We know from my earlier posts on the subject, that it is a banker's fantasy to dilute a currency while selling it for a positive return at 30 to 300 times leverage.

I am a factory owner. I make widgets. I am the only one who makes these particular widgets and they are terrific and everyone wants them. Now, I have a new and improved widget which I have not sold to anyone yet. An intelligent entrepreneur comes to me with an idea after he sees them. He thinks they are the best thing since sliced bread, so, he wants me to lend him 100 improved widgets and he promises to return my original 100 improved widgets in five years plus 8 of my improved widgets per year over a term of 5 years. 

Its an unconventional deal - but I think about it. "Good deal" I say "ok...lets do it". Now I like this deal be cause he is effectively short 40 improved widgets of which I control the supply. So, if he wants to get those 40 and they are not available I will control the transaction terms. 

He signs on the dotted line and we are all done. He now has an obligation to repay me 100+40 improved widgets. His first year in business goes very well with my improved widgets. And at the end of the year he attempts to locate 8 of them to give to me according to our deal. He looks in the market and is unable to locate any of my improved widgets anywhere. So, he says what the heck, business is good - I'll just deliver 8 of my 100 widgets and then I'll figure out how to get more later. So, our hapless entrepreneur is continuing on in his pursuits - business is going well - until next year when he is on the prowl for those widgets to deliver as per our transaction terms. He is astounded to find out that, I only created 100 of these things and I loaned them all to him. Clearly this is an unworkable situation and he should try to renegotiate the terms. But that's not the point of the story. 

When the entrepreneur borrowed 100 of my improved widgets...I created 100. He promised to repay 140. But I never created the additional 40. Ordinarily, you would think that me being a clever business man, I would want to sell as many of these new things as possible - thereby giving him a market to locate these 40 widgets he is short. However, that would only mask the conflict in the transaction. 

In order for me to create widgets based on the agreed terms, I need to create the stock and I need to create the 40 widgets that the entrepreneur is obligated to deliver. This is technically, a monopoly game. And the important point is that if I never create the additional 40 widgets, for what ever reason...the agreement falls apart but the entrepreneur is still obligated to deliver. If i create a lot of widgets, ultimately there is still an imbalance of 40 widgets that should be returned to me that theoretically do not exist - even though the market place would have plenty of stock available and would likely allow that imbalance to go unnoticed...until it mattered. 

The book report

Well, what I have described above? Its the mechanism by which money is created. Firstly, a bank is a factory for the creation of new money - a bank's job and earnings generation is predicated on the manufacture of new money in the financial system. Therefore, money is created when the bank (factory in the above example) loans you principle. An imbalance is created when you promise to repay money that does not exist - in the form of interest.

I know this is difficult to rationalize. But its the way things work. As long as ponzi scheme bankers can keep giving out loans and increasing the money supply the imbalance is not apparent. Until it is of course.

Now, if I was a smart ponzi scheme banker (and they are). What I would do is, try to create theoretical money. Imaginary money that everyone believed actually existed and could be used to settle future obligations - such as Warren Buffett's potential $50 billion+ obligation on his european style puts. (see: Warren Buffett - the ultimate bull-market manifestation)

This is like creating imaginary widgets in the story above. If the guy could simply turn over an imaginary widget to me and I would be satisfied with it - then he's fine and business goes on smoothly.

The vast pools of money

You have probably heard of the vast global pool of money - its supposed to be around $70 trillion. This pool of money simply trades the debt money created by fractional reserve lending activity - paper. $70 trillion does not even begin to touch the amount of debt + interest obligations there are in the world. One of the key elements of fractional reserve lending is that once a credit is created...a note or paper is created that represents the value of the borrowers promise to repay and assets he posts as collateral. That is what trades in the vast global pools of money. And as long as the music is playing - everyone is dancing. Credit (Money), however, is not for the most part created by these pools of money (theoretically that could represent value and that would not be good for growth). In the majority, it is created by regulation via fiat when fractional reserve lending takes place. And this is why the dollar chart looks the way that it does. The banks have shorted the dollar into oblivion and sold it to suckers who think buying a depreciating asset and paying interest for it is great if they can invest that money in inflating assets that theoretically outperform the depreciation of their dollars. Obviously, this is a hair brained plan and can not work when the music stops. It also blows up when your inflation assets depreciate.

Just to announce it formally - the MUSIC HAS OFFICIALLY STOPPED...but the fed is still dancing.

So this brings is to derivatives. 

Ok, we have all heard of naked shorting. This essentially means that people are selling shares that don't even exist. I have seen instances where the float of a company was tripled due to naked shorting. This operation creates theoretical shares. This is what the banks do with our financial system every day - only with currency.

Now what are derivatives? Who came up with them? Why did they come up with them? 

There are a lot of reasons that people will give as to why a derivative is useful or required.

1. Hedging
2. Risk Management
3. Speculation

But do we need them and why were they created?

Let me answer that question in two parts. Firstly, people who work at banks do not ask themselves what money is. The question seems almost too ridiculous. So, most bank employees can not give you the correct answer as to what money is and how it is created. So, we have a lot of smart people furthering a scheme that they don't even know they are participating in. As long as its not illegal they go along with it.

With derivatives we have a similar situation. A lot of brain surgeon types never asked essential questions about what the real impacts of their work was. But lets look at what that is.

Theoretical money

1. Asset appreciation
2. Credit
3. Interest on credit
4. Modeled Obligations

When stocks or real estate go up, money is created that never existed before. When they go down the opposite happens.

When a loan is given, new money is created.

Interest on credit theoretically exists...but the credits (Money) for that interest money need to be created somehow. This is why we need derivatives or vehicles like them, to create the money for the interest due on debt money that is created by banks.

If I loan $100,000 to someone on a 30 mortgage at 7.5%. I create $100,000 of new money...but the person promises to repay me  $251,717.22. So, I need to create $151,717.22 somehow. If on the basis of that issue of credit I create more credit, I will have to create a lot more than $151,717.22. In any case, the only way to create the interest money is to create credit - which creates interest obligations (and that debt money does not exist) and ultimately blows up the system.

Modeled Obligations - to the rescue - they can create money at a whim similarly to how the stock market does...theoretically with no standard interest requirements and very few participants which is rather advantageous when compared to the stock market or other publically owned and priced assets. Essentially, if the most simplistic assessment of a derivative's function were to be accepted, the function is to defray risk and therefore insure against defaults. If defaults are insured, or accepted as such, then the money to cover a default exists and thusly debts can theoretically be satisfied. This, as in 1987 is a completely false interpretation or reality and a symptom of ponzinomics.

If I have a fraudulent money system. I need mechanisms that can create money (Debt) without requiring interest. That's what derivatives are for. And that's why we had 790 trillion dollars of them at one point and why JP Morgan currently has 89 trillion of them on their books (all perfectly hedged mind you).

But what are derivatives?

Derivatives are Modeled Obligations.

1. Options
2. Futures
3. Exotic Agreements 
4. CDS's
5. CMO's
6. CDO's
7. Structured Products

Options are fairly simple - though spreads and volatility make them complicated. All derivatives have option characteristics. Options themselves do not usually create very much new money.

Futures are also quite simple. However, highly leveraged. With 1 future you can control 40, 50, 60, 80, 100 times the money requirement to trade the future. Guess what? That creates money...theoretically of course. Since you have agreed to take on all the risks of that position - the 100,000 of theoretical money can be written into the books - again theoretically of course. If you look at what it costs you to control that amount of money there is a problem. Clearly this credit is being supplied at such a high discount that there is barely a cost in the standard form of credit issuance. Therefore the money system is creating new money that can be theoretically used to pay the interest on existing credit with debt money that creates very little interest. Remember, how our money system operates - theoretically - of course.

Most of the other structured products and other derivatives operate on the same basis except even more leveraged and primarily based on ratios of one agreement to another...bundled up as a unit they can considered a single derivative - i.e. a derivative is usually built out of multiple subordinate derivatives.

What's our total debt?

The total dollar debt in the world is roughly in the 350 trillion area...with interest requirements that over the term of those notes requires 500 to 600 trillion of theoretical money to be created...this can be done as I indicated earlier through inflation or through theoretical mechanisms. Derivatives are the Fed authorized/endorsed/promoted mechanisms capable of theoretical money creation that does not implicitly create large interest obligations and can be used to support expanding asset inflation and as a result create enough money to theoretically repay all the interest on the total outstanding obligations.

When Tim Geithner discusses the need for Derivatives regulation, keep in mind that the development of derivatives was explicitly developed under his watch and Greenspan's auspices. These guys knew we needed derivatives. It was their only way out. And they implemented the scheme deliberately, promoting SIV's and off balance sheet transactions combined with flakey accounting along the way for spice, so that Bank balance sheets could be manipulated and theoretical money could be created without standard interest obligations.

The Fed is the driver of the Fraud. JP Morgan, among a very select few other we all know by name, is one of the primary vehicles for it and the most dangerous bank in the world.

This is big subject I will follow up with a lot more details as I get time... theoretically of course.