Friday, August 5, 2011

Wicked Oversold, but Thus Far Hasn't Mattered - Coming to Test November 2010 Lows

As I mentioned yesterday once we broke that low of the day in the afternoon, I was not very interested at another attempt until we got to 1175ish.  You can see why from the chart below.  If bulls can't make a stand there, frankly it will be amazing but we are seeing liquidation and emotional selling at this point.  Good for those of us with patience and who preserve capital but still quite awe inspiring to watch.  By standing to the side with lots of cash in times like this, you are going to (mostly) miss the glorious day we reverse but you will not have huge losses to make up.  So you really don't need to catch the bounce like all the people swimming in horrendous losses the past 3 weeks.

Just like overbought markets can remain overbought, so can oversold.  It seems more so nowadays with the dominance of the HFT crews.

Every single secondary indicator is flashing massive oversold and "reading not seen since 2008 or 2009" but those of you who lived through 2000-2002 and 2008-early 2009 know, things like that sometimes don't matter.

If 1175 breaks, I really don't see much in the way of support for a while because the QE2 rally made the market go up vertical without building any support along the way.  1125ish is the high of August 2010, and that's 50 points below 1175. 

That said, for those newbie technicians this is an excellent example of a head and shoulders formation that 'worked' once the neckline was broken.  There was a similar occurence last year but we had a strange situation where it did not work - I don't remember the exact circumstances, I just remember having to reverse course 180 degrees at the time.


Frankly I don't know of any solution to Europe aside from (a) it breaking apart and allowing the member countries to follow the U.S. and Japan solution - debase the currency or (b) the ECB turning into the Fed and taking trillions of assets on their balance sheet by turning into the U.S. or Japanese central bank or (c) some sort of crazy plan where American citizens begin taking on European debt as the Fed somehow does something crazy that supports the ECB.

Position b does not seem plausible YET in Europe but I feel will be the eventual situation.  Position c would be Armageddon type of situation, simply because asking the Fed to support another country (or continent) to that extent would seem incredible.  Position a would be messy but frankly Europe would not be in this mess if they each had their own currency to debase.  (see Iceland!)

For the past year I have been pointing out FRANCE as a suspicious character which the market has not concentrated on.  Germany and France are supposed to be the 2 strong players in the EU, but France has a quite poor debt go GDP ratio as well (as bad as Portugal!), but has for some reason been granted immunity.  While both Spain and Italy are TBTF (hence the ESFS), if the market ever focuses on France than what do you do?  Hence something to keep your eye on in the years ahead.  [Feb 5, 2010:  Sovereign Risk Chart - Where Would the U.S. Fit In?]

[click to enlarge]

Whatever the case there is really no argument for fiat currencies - at least those of the big 3 - yen, dollar, or EU - 3 ugly ducklings who have been in a race to the bottom since 2008 and from this point of view will be for much of the next decade.  Hence... gold.

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