What's Next?

Well that was interesting finally. The market has spoken decisively, by breaking major months long supports. So, what's next. Well, I am happy to tell you that the alternate scenario for the dollar has not played out. That does not mean it is entirely eliminated. It is possible that off the current market support levels, we get a forceful rally and possibly a retest for some kind. But let me preface by saying, that is NOT what I am looking for. The market was clearly overcome buy lack of uncommitted dollars being available to fund new equity purchases. Investors have no more money left, they are all in. The dollar chart says it all. Assets are being liquidated to pay credits.

Over the last six months, this rally has been funded first by short covering and bail out funds supplied to banks. (invested in call options they bought from scared pension funds and retirees). The problem is now the FDIC, deficit and pressure on the Fed is making fiat liquidity scarce. The Fed knows it can not take the risks it is used to being able to take. As the pressure on the fed, and against their 90 year campaign to short the dollar, increases...it will be visible as the shortage of available cash dollars as increasing prices in the chart below. The fact is, the system has come to a grinding halt. The Fed can't print the way they were used to, they can not lie about their balance sheet investments like that have done because Ron Paul, a large amount of americans and 280 congressmen are breathing down their throats.

I am looking for a dollar break over the red line on the chart below to signal the next round of deflation is in full throttle. It certainly is galloping along, but could hide for a little longer if the powers that be or markets wanted to look past it. Over that red line around 78.39...irrevocably declares a trend change in the dollar and likely the beginning of the end of Fed's campaign to destroy it.

All action in the market will be guided by the dollar in my opinion. The upper trendline is my immediate target and could be met tomorrow or monday if the market wants to do it. Given the action in the VIX and the dollar, I would look for a pullback consolidation in the two and then a resumption of the upward move. If the dollar can break cleanly through that upper trend line without pullback or consolidation...then the severity of the situation in the markets will likely intensify very quickly. I think that this is a significant possibility. But, more likely I would look for a good size rally for a larger corrective bounce after the dollar reaches resistance.

Market Observations

VIX, RUT, SPX and DJ have taken out key levels....

Wedges compromised.

Dollar - Hanging on the Edge

The dollar is hanging on to the declining wedge. It has not rallied impulsively. It needs to bounce hard tomorrow, otherwise, it looks potentially like it will attempt to match the 100% target for wave 5 down. This is around the 74 to 74.20 area and would coordinate well with a push in early October till the 7 to 9th. However, the reason that I suggested that the dollar configuration could be consolidative is there are multiple elements that are not pointing to a substantial rally in the markets here. The VIX is one of them. The VIX was up solidly as was the Put/Call. The positive VIX indicates a trend emerging to me, and the put/call may indicate a reaction in the market of a little more upside. I would not prefer to see the dollar fullfill the pattern below. But, the structure for Gold and Gold related stocks and Oil point to higher prices unless we get immediate or very quick reversals. The VIX supports the potential reversal scenario.

So, given the put/call and the $VIX setup, perhaps we are looking at a finishing move up in the am for the transports and indexes and then as sharp reversal. I will be buying into the reversal scenario if VIX takes out the recent highs.

Dollar - Oil - Market

The dollar strangely has sold off with he market...additionally, the market has sold off hard and bounced...

Oil has had the largest rally I have seen in a long time and it is looking more and more like we need to consider a capitulation may be coming in the form of a dollar exodus (which was very mild so far, overall dollar pattern looks consolidative sofar) and some sort of emotional equity market reaction if that were to occur...the problem is that at this time the dollar should not be pulling back hard and transports should hold below the breakdown attempt...currently they have bounced nicely off the 50 day MA...all very interesting and disorienting...just what you would expect at a change in direction.

This market is unbelievable to swing trade...day trading is the only option with the market like this.

Transports - Breakdown

Surfing a Tsunami

Do you occasionally feel like this guy...

Transports - Breakdown Around the Corner

Spiral Fib Time Projections

From Chris Carolan...If you are wondering, I think he is the best analyst at EWI hands down.

Martin Weiss, Phd? - "SIX DAYS LEFT to start profiting from the dollar disaster!"

"In just six short days, you will have missed your opportunity to register free for next week’s all-important online seminar.

The topic: Washington’s Secret War on the Dollar

The date: Next Tuesday, October 6 

The time: 2 PM Eastern (11 AM Pacific, 7 PM GMT)

Your cost: Zero!

But the ONLY way we can make sure you get your instructions for attending in time is for you to reserve your place well ahead of time!

At this event, my colleague Larry Edelson will reveal ...

Why the real national debt is more than EIGHT TIMES GREATER than Washington claims: Why the full weight of our debt addiction is beginning to hammer the dollar NOW ... and why our leaders have no choice but to slash the dollar's value in sheer self-defense.

Why the world’s governments, central banks, financial institutions and super-rich investors are fed up with Washington ... why increasing numbers don’t want to touch the dollar with a ten-foot pole ... and what they’re doing to protect themselves at YOUR expense.

What the news media isn’t telling you about Bernanke and the dollar: And how global plans to stop using the U.S. dollar as a safe haven or for international trade will impact your buying power and standard of living.

What’s the next shoe to drop in this great global war on the dollar? Could the G-20 be secretly scheming right now behind closed doors to accelerate the dollar’s plunge? (My answer is admittedly outrageous and has tremendous implications for your financial security!)

Critical steps you should be taking right now to protect yourself from this great dollar disaster: PLUS, the three investments that are most likely to preserve your wealth as the greenback continues to plunge in value worldwide.

SEVEN often-overlooked investments Larry believes are the most profitable ways to harness this massive, long-term dollar decline: What to buy ... where to buy it ... and when!

But again: The ONLY way we can make sure you receive your instructions for attending in time is for you to register soon! Simply click this link to grab your complimentary registration now.

Good luck and God bless!

Martin"

Since Weiss is putting the hard sell on this just like he did the Leveraged short ETF's - I think we should be considering the opposite side of this trade.

I despise high pressure tactics like Weiss uses. The best thing about this email...is that the cost is likely worth as much as the advice.

Ron Paul - Audit will expose Fed as a massive fraud

Paul The Real Reasons Behind Fed Secrecy (9/28/09)

Gaps on the ES contract

These make good target zones...to be aware of...

Market observations - Back Test Time

I would like to reiterate that there are gaps on the ES that need to fill in the 1074 area...In my opinion we have to test that area or exceed it. It is entirely possible that the market fails to make a new high and instead confirms wave 2 for our impulse wave down. This could be fulfilled with a move to the 1077 area on the SPX cash.

As you can see the VIX has made another attempt to break its down trendline. This is accompanied by a MACD cross and RSI over 50...something to keep a close eye on...VIX is currently only backtesting this trendline...it could drop below it again...or preferably consolidate and rally straight from here.

Transports had their huge sell day last week...the largest volume selling day in the $TRAN history. If the markets do continue up...into the Oct 2 to 7th area...any new high will not likely be confirmed by the $TRAN. This is a very good cue that these highs will be a top of consequence.

Oil is at an important support...and with the dollar showing strength today...it could easily break the down-trend line and take a quick trip to 57. The alternate view is that the dollar needs a consolidation and will allow for some upside for Oil - though that should not amount to much.

Agriculture commodities are struggling and remain below the emerging 2-4 line of the pattern...a break of that huge support line below will likely coincide with a strong move down. Upside looks like it would be quite limited...and this chart does not look healthy at all.

The dow could get its legs, in fact it has to tomorrow...otherwise this whole pattern, VIX, Trans and DJ look like simple backtests of resistance. Personally, I think there is some remaining upside...though nothing substantial.

Dollar Strong, Market Strong - which wins?

I am betting the dollar...

perhaps a little push is left for the market...but the dollar string the certainly a powerful divergence to that move.

Very Recent Dollar Related Headlines...

Gee, people are getting a little sure of themselves...

1. Sentiment suggests gold pullback a mere correction

2. Five ways to profit from the weaker dollar

3. A pledge from the Group of 20 leaders to bring the global economy back into balance is not seen as good for the dollar

4. Warning over US dollar as world reserve

World Bank President Robert Zoellick on Sunday warned that the United States should not "take for granted" the US dollar's role as preeminent global reserve currency.

"The United States would be mistaken to take for granted the dollar's place as the world's predominant reserve currency, Zoellick said, in excerpts of a speech to be delivered Monday.

6. The dollar is dead - long live the renminbi

Market observations

Below are some great charts that I was discussing with Matt Fraily at breakpointtrades.com. I highly recommend that you sign up for the newsletter using the form on the side of my blog. Matt, run's a very high quality service and has some really good automated/mechanical systems that are not available anywhere else. We work together on a lot of them. There will be some great products coming from the site related to mechanical systems and proprietary indicators that will be out soon...it's definitely worth a look.

Clearly the dollar pattern is maturing nicely and being confirmed by the inverse indexes. These inverse indexes are the 1x unleveraged versions. They reflect the market patterns much better plus they do not lose 50% of their value due to manipulation and slippage.

The charts are very well commented...I will be posting more prior to the open

A sign of things to come...Spain

In a release, the government [of Spain] said it now forecasts a total 2010 budget deficit equal to 8.1% of gross domestic product, compared to 8.4% previously, but still in excess of the 3%-of-GDP limit for users of the euro.

"The new budget maintains our commitment to social services, a productive economy and keeps our investment in research and development," Spain's finance minister Elena Salgado said in a meeting with journalists after Saturday's cabinet meeting.

Spending this year is shooting far over budget as the result of anti-crisis measures and spiraling unemployment benefit payments.

Following the collapse of the labor-intensive construction industry, nearly one in five Spanish workers is unemployed.

The European Commission, the EU's executive arm, has given Spain until 2012 to bring its deficit within 3% of GDP, the limit for users of the euro currency.

To help counter the shortfall, Spain's socialist government said it plans to raise a series of taxes to add nearly €11 billion to public coffers. In July of 2010 it will increase the general VAT tax to 18% from 16% and the special VAT tax, applied to services, food production and art objects to 8% from 7%.

The government will also scrap an annual income tax deduction of €400 per worker introduced last year and increase capital gains taxes.

The government's plans to raise taxes have been controversial, drawing criticism from opposition politicians, and some independent economists say it is too soon for Spain to start raising taxes with its economy still deep in recession.

While some European economies have already begun to show small positive growth rates, Spain isn't expected to do so until late next year.

18% VAT tax is insane in a depression. They should be reducing the tax not increasing it. (Or how about some off-balance-sheet transactions. Gee that would fix it in a giffy. Shazam - 3% of GDP. Call the JP Morgan guys or Bernake, they will show you how to do it.) The irony is that Spain will gain no revenue from any of these increases since already weak demand and buying power is simply being eroded further and that will just reduce consumption. So the net net is this action will reduce government revenue not increase it. This is why the EURO system will ultimately fail - it just does not makes sense.

Spain can not fix its deficit or account for the collapse in value of its domestic assets (which are not even discussed in their budget) with tax increases that will actually reduce revenue. Spain is only ONE of the problems on this one way street - Deflation Street. (Please read: The EURO - starting a trip to oblivion)

All it takes, is another shock...something like an inevitable systemic failure or a Bank of America, JP Morgan collapse...and the whole ponzi scheme will fall apart. Don't forget, the guys who designed the Euro reserve system are essentially the same guys who collapsed the dollar from 100 cents to 3.6 cents.

End The Fed