A sobering wake up call to the world

Well I guess reality will be extended for a few more days/months. 
This video basically sums up the situation:




In addition, it seems there are a few people that are trying bring reality back.  Remember in Europe nations such as Greece and Ireland were forced into  austerity measures since they do not have control over their monetary policy.  IMF and European Central Bank imposed measured to raise taxes, cuts spending, and even lowering minimum wage in Ireland.

As the states are the quasi-world bank, they are in complete control of their monetary policy there is no pressure to reduce debt.  This is abundantly clear from the below bloomberg article.

debt plan rejected

“This plan will make an important first step forward in proving something, in proving our nation understands the peril of our ever increasing deficits and that our leaders are prepared to do something real,” said panel co-chairman Erskine Bowles before commission members began announcing their votes.

There is 0 political will to actually do what is required.  There will come a time where it is realized that the unpopular choice is the only choice.

Additional proof of the failure of the current path we are on is:

Unemployment Rises to 9.8% as U.S. Adds Just 39,000 Jobs

So rising unemployment as billions of dollars a DAY are pumped into the system (today 6.8 billion), should open some peoples eyes. 

I starting going long metal mining stocks again, but I am not counting out STRONG selling coming in at any point probably within the next couple weeks.  If not, I guess the extend and pretend mentality wins until the next sovereign debt issue.

Below is a current US debt holding, Something doesn't seem right that the FED is the number one debt holder
This is borrowed from ZeroHedge article here

Explosion of debt ......

Nov 30th: World markets in for a bumpy ride

As mentioned in my update to my last post, the S&P500 and other US markets at 2:30pm rallied fearlessly off.......  not really sure.  There was absolutely no reason for this action but it is expected when you have 2 POMO's in a single day.  As pointed out before, watch the volume in the SPY to see how this game is played.  Those that bought into the rally that didn't realize it is a setup will be banging their heads tomorrow when the market gaps 10-15 points down.

First thing to note is we are in a sideways to bearish trend.  We have not made a new high for weeks now.... until we do why buy?  trying to pick the bottom will be a losing game in this market.
Second thing to note is the geopolitical and macroeconomic forces at work.

Borrow some charts from this post from zerohedge

This is the AUD/JPY on a 1 minute chart.

you can see the nice rally at 2:30 when the S&P500 shot straight up, however all of that and more (currently 80.82) has been recovered by the bears.  So what happened at 10 pm ?

China spoke above interest rate hikes.  Remember since the Yuan is tied to the USD right now, any interest rate hike has the same effects if the US raised interest rates.   Which means stronger USD and since the markets are only rallied off the suppression of the USD it means lower markets.  If China is serious about a 0.50% hike before January this could have dire consequences for the markets.

Why is China raising rates?  Unlike here their economy actually is growing quite fast.  Some speculate that they have a housing bubble etc which could be true. 
Many people have been saying that the reason QE is not going to work is simple because if you make holding USD less valuable thus increase risk appetite a lot of the money will just go fund oversea companies mainly in Asia since they are growing offering higher reward for each unit of risk.  As an investor it makes logical sense, so that is why we see strong growth in nations like China, Singapore, South Korea, etc.

Anyways, I have maintained a short position which I got into a couple of days back at a top.  And since we haven't taken out a previous high I will maintain this position unless there is real reason not to.

Last note on what  I believe occurs at market tops and more specifically this potential market top. 
The market increased ruthlessly since QE2 was announced, there was never a really entry into the market unless you straight chased.  No definitive pull back that reversed on strong volume.  So this is the first time we have seen real sideways action.  Well investors that are under the believe that things are all good will buy into this market. Who is selling? major institutional investors.  They are buying when the time is right 2:30pm and they are slowly off loading their shares when time is right like today at 3:55 pm.  But Net they are holding less than they did yesterday and that is the key here.  Over this massive choppy action each day the "smart money" is getting out of this market.

We will see what tomorrow brings but I am still calling at least 10 point gap tomorrow leaving everyone that bought into the rally yesterday wondering what happened.

S&P 500 critical level, Dow trading below 11000

Today's low so far was 1173.60 which if you look back in time is approximately where the rebound after the flash crash failed.  This level also was just below the 50 MA meaning we have pierced it.  Piercing a trendline is an early warning of a trend line break.  This isn't to say we can bounce up for a week or so.  However, closes below the 50 MA should be viewed as extremely bearish as there is little support under the market.  Next stop 1140 where the 200 MA is then I would think 1040 is a likely target for a test.  If the market gets above the 20 MA and holds then maybe start looking for long positions, I stress maybe as eurozone and all of the instability with Korea is not a positive for the markets.

Also note today is the first double POMO day which apparently doesn't work the way the FED had hoped as geopolitical instability trumps bond purchases.  VIX is up past the 23 level and dollar is in a strong up trend both a negative for the overall markets.

UPDATE: close

I used the SPY here to demonstrate the volume on a 5 minute chart.
Like the past few weeks, a common volume trend is strong sell volume...

Looking at the magical rise of prices exactly as the clock hits 2:30, the volume is telling....
At the end of the day, the buyers have cashed out.  Leaving whoever chased holding the hot potato.

Like Nov 22nd, I expect a gap down to start the day.

Nov 28th, 2010: Eursula, and STL indictmento Debt burden, Wikileaks, Korea Penin

4 major geopolitical and macro-economical news items to be aware of

1 - Euro Debt Burden

ZeroHedge: Eurozone Cheat Sheet

There is a million things to say about the above statistics but I will limited my comments to the graph on the bottom right.  It shows the maturity due dates as a % of total debt for each country in the Euro Zone.
Coupled with the overall Debt to GDP ratios a stalk future awaits us.  Yes we will be able to push off this Ireland situation off for a few more years, but what happens in 3-5 years? Portugal, Italy, and even Belgium doesn't look in very good shape.  I think a lot of people are short sighted on global debt situation.

2 - WikiLeaks ~2.8 million leaked documents

WikiLeaks threat sparks massive review of diplomatic documents

Wikileaks: US warns allies on potential diplomatic leak

"Reports say Turkey, Israel, Denmark and Norway have also been warned to expect potential embarrassment from the leaks."
"State department spokesman PJ Crowley warned on Wednesday that the release could weaken trust in the US as a diplomatic partner."

It is rumored that the leak will be coming 4:30 pm Sunday 11/28/2010, but having seen mainstream acceptance of that time frame.

3 - Korea situation heating up, US and South Korea continue with joint exercises

Artillery Heard in North Korea; U.S. Carrier Enters Yellow Sea

"The echo of shots rang out this morning, said a South Korean Defense Ministry official who declined to be named, citing military policy. While residents were later allowed out of shelters, the aircraft carrier USS George Washington joined South Korean vessels for four days of drills.

U.S. Admiral Michael Mullen, chairman of the Joint Chiefs of Staff, said the U.S. is trying to prevent the tensions over North Korea’s Nov. 23 attack on the South Korean island on the disputed maritime border from escalating into a more significant confrontation."

US, South Korea Begin Military Exercises

"Earlier Saturday, China launched a flurry of diplomatic activity to ease tensions on the Korean peninsula after North Korea's shelling of the island.
China has warned it opposes any "unilateral military act" in the area without its permission, referring to the U.S.-South Korean drills.
Admiral Mike Mullen, chairman of the U.S. Joint Chiefs of Staff, told CNN (in an interview due to air Sunday) that, as North Korea's closest ally, China has as much at stake as anyone if the region is destabilized."

4 - CBC leak and upcoming indictment

This situation will cause an escalation in the region.  It will be interesting to see how the UN approaches this announcement which apparently will come Thursday Dec 2, 2010.

CBC Investigation: Who killed Lebanon's Rafik Hariri?
Phone Chart

 
STL: Saudi envoy expects a major breakthrough soon

"Ad-Diyar reported that the Lebanese Foreign Affairs Ministry received a notification from Lebanon’s Embassy in the Netherlands that the Special Tribunal for Lebanon (STL) will issue its indictment on December 2. Lebanese Ambassador to Netherlands Zaidan as-Saghir has reportedly also confirmed that the indictment will be issued on December 2"

Nov 26th, 2010 - S&P 500 lower highs

The market had a hell of a rally, however, as European situation was brought to center stage by Ireland reality has been kicking in. Ireland will be voting on austerity measures December 7th, 2010.   In attention to this Korea tensions are increases. Most relevant this weekend is the imminent release of 2 million documents from WikiLeaks.

A sample from the linked story:

"U.S. officials said the documents may contain accounts of compromising conversations with political dissidents and friendly politicians. They also could damage U.S. relations with allies around the world and result in the expulsion of U.S. diplomats from foreign postings."

Yesterday the markets were closed and today they closed at 1pm.  Obviously the volume was extremely low today, as who would say no to a 4 day weekend?  

The major aspect of this chart is the lower highs since beginning of November.  A previous high has never been taken out, and the 1200 level is proving to be strong resistance.  Since breaking this level, the price action has stayed below.  The Nov 19th high was 1999.97

If the 1200 level breaks, it will be a good intraday play to the upside.  However, until price gets back over 1215 this market in the short term is bearish.

 

S&P 500 - 1200 proving hard to break

This is a daily chart from the flash crash until now.
This chart can be accessed here.

Technical indicators

Volume - One of the most important things to note today is the low volume.  Much lower then the average.  What should be noted also is that low volume usually means markets flat to slightly bullish.
MACD - Momentum is down on the histogram.  The histogram is the measure of the distance between the macd line (blue) and the signal line (white).  However, macd line is higher then the 0 level, which is bullish.
Slow Stoch, has dropped dramatically, failed a bounce and is now at 35.   Which means the market is not overbought or oversold.

ADX line - This is interesting,  the bearish crossover occurred however the yellow trend strength line is lower than 25 which means the trend isn't strong.  Usually a cross over with strong trend should be taken as a buy / sell signal.  So this is bearish but not strongly bearish yet (trend may pick up if a continue of the downside happens short term).

Trend lines:

Purple:  Recent low, appears to be a level the may flash crash rally occurred.

White: The bottom white line is the 1200 level.  I think this is more of a psychological level that is acting as heavy resistance.  The hourly is below with more details.

Cyan:   A line was drawn from the low point to the breaking point of the may flash crash.  That like was then copied and placed at the low point of the current rally.  Result was a battle being fought at the predicted level and time period.

From this I believe that 1200 is the level to watch, lets see if the bulls can get back up and over 1200.

From what I see, there is not much of a catalyst to the upside.  QE2 was the catalyst for the current rally, hope/expectation of  an improving economic picture is also driving the upside.  Downside catalysts are :

• Situation with the euro zone: Greece, Ireland, Spain, Portugal, Italy.  
• Potential war in Korea
• Heated up tensions in the middle east with: Iran, Iraq, Afghanistan, Lebanon, Israel, West Bank, Qatar 
• China need to cool inflation but continuing to raise interest rates
• China and Japanese tensions 

I think the most important economic story is Irelands proposal for austerity measures.  This package has to pass parliament on December 7th, 2010. The opposite are going to be faced by a situation where politically all they need to do is fight for the people and reject the proposal.  However, economically the only thing that can be done is this package.  And this is the going to be the the hard part for all countries around the world, mainly in the west. The system is not sustainable. Yes we can continue this for 5 years. But what about 15 years? I doubt it.
Lets see what happens when the economy picks up.  Inflation raises.  Lets say at the 2% target.  Anything above this interest rates needs to rise to bring it down.  What happens to all the mortgages ?  The debt that people, countries, corporations will rise.  The increase on interest payments are going to be what cripples the economy. 

So austerity measures are the only alternative to inflating our way out of this.  This would mean that the borrower is who is rewarded. This means that if interest rates do not adjust, it would be much easier to pay off your loan.  Since the government is racking up huge debt levels, they too will be able to pay off the debts faster.

This becomes a special case when a country has world reserve currency.
The Triffin Dilemma is :

The Triffin dilemma (less commonly the Triffin paradox) is the observation that when a national currency also serves as an international reserve currency (as the US dollar does today), there are fundamental conflicts of interest between short-term domestic and long-term international economic objectives.

In addition to this, everyone in the world holds US dollars.  This means that inflation / devaluing the currency. is making every country poorer.  However, there has been a strong trend of countries increasing their gold holdings.  Iran has recently purchased a sizable quantity of gold along with Bangladesh (mainly mid east and South East Asia).

15 minute chart.
1200 level is Cyan.  Purple lines are the range I think that is relevant and watch for a break out of either.

4th Attempt at 1200, and the attempts have been trending lower... This confirms the momentum oscillators being bearish.

GM update: 5 min chart Bearish Divergence

An update on GM IPO.  Friday morning came close to the issue price of $33.  However a nice bounce back occurred.  While looking at the chart I noticed on the 5 Minute chart that a bearish Divergence occurred.  This Divergence is also confirmed on the MACD.  As this is a short term chart, I don't predict any massive move down, but to see GM next week trade at some point between $33.50 and $34.00 is not a stretch. 


The overall market however may find a boost as Ireland will announce a bailout before Monday, which will involve IMF and ECB.  The markets reaction to the confirmation that Europe's financial situation is on the rocks is quite funny.  This also proves that the "stress tests" that were done were not stringent effort to be of any value. 

Portugal should be on the radar next along with Spain.