When Paulson announced the possible intervention, he said it was unlikely that the bailout (read ‘nationalisation’) would be needed. At the time I thought: “Hmm, yeah sure! It’s a question of ‘when not if’.
Well, the ‘when’ has occurred and Wall Street has rallied in its night market.
I used the opportunity to take short positions in the BPJY, Gold and QM which also rallied. To understand why, you need to be aware that the technical position in each case had the following characteristics:
- A downtrend in the 18-day swing (my trader’s timeframe).
- The instrument had reached a zone
- The instrument had provided an entry pattern and
- The stats and the Ray Wave showed there was more downside potential with an acceptable risk of more upside.
In this case however, the context of the technicals is just as important.
The announcement of the bailout I view as a surprise event i.e. some unexpected news hits the market and a correction ensues. Usually it’s some Black Swan happening. But in this case, it was an event that ought to have been seen as bordering on inevitable - not the type of event that is likely to lead to a change in trend.
For about a year, I have been saying here and elsewhere that after the elections we can expect the FED chickens to come home to roost. Actually, we are now starting to see them straggle in - it’s just that the traders aren’t paying any attention.
Austrian economics argues that there is a direct relationship between the money supply and inflation. In mid-2006, M3 started an exponential rise that peaked at 17% from 9%. Recently M3 has dropped to 14% (I see this drop as a correction in an uptrend). This bailout has the potential for causing even more of a rise in M3.
By the way, the rise in M3 to 17% has already had an effect on the CPI.
Two months ago we had the worst rise in 6 years. Last month we had a greater rise than expected. In the meantime, the US growth figures are slowing alarmingly. Official unemployment stands at 6%; ShadowStats shows the figure to be at around 15%. A more important difference in my view is the fact that the ShadowStats figure broke above the 2003/2004 peak while the Official number has double-topped with the 2003/2004 peak - important because ShadowStats shows a confirmed breakout with a target of an unemployment rate of 18%. This translate to 8% on the official figures.
Whatever the true figure may be, what is essential to notice is that the economy is in poor shape. So what will the FED do when CPI figures start going through the roof in consecutive months? Raise rates? Whether or not they raise rates, what do you think the ES will do under those conditions?
In my book, we can expect the start of the strong directional move south - when the penny finally drops. How far can the ES drop? At the very least we’ll see the 12-month Primary Buy Zone 867 to 768.
Refer this blog post to a friend or colleague…
