We're Soooooooo Close!!!

By Graham Summers    Oct 8 2009 10:03AM

I’ve shown the below chart several times before. It depicts the S&P 500’s performance since its March 2009 bottom. As you can see, the market has been carving out a near perfect rising bearish wedge: a rally in which the trading range becomes tighter and tighter the higher the market rallies.

This is a classic topping pattern in the sense that it typically precedes a large move to the downside. All you need is for the market to break below the pattern to the downside. And as you can see, we’re sooo close to seeing this breakdown. When you consider that this pattern is completing on rapidly dwindling volume, you have the makings of a VERY serious collapse.

It’s also interesting to note that a near identical pattern has formed from the July lows (when the latest leg up of this current rally began). Looking from this perspective, it appears the market has some additional upside to it before the pattern is broken.

However, I want to draw your attention to the absolute collapse in volume in the last few weeks. This tells us that we do indeed have the makings of a Crash here. This chart is literally screaming “no one is participating in this rally any longer” (remember 70%+ of volume is high frequency programs trading blocks of shares back and forth, NOT real buyers like you and me).

Remember, technical analysis is an art, not a science. And depending on how you slice a chart, the projections may differ. This is why I am comparing the rising bearish wedges from both the March and the July lows.

However, the fact that both charts depict a near identical pattern (with the only difference being in terms of WHEN the breakdown occurs) lends greater weight to my belief that when the formation does breakdown, the move will be severe.

Throw in the accelerated drop in volume and you’ve got a VERY, VERY ugly breakdown coming within the next month or so (I’ve said numerous times the Crash will be between September and December).

Watch the next few days closely. Stocks are showing serious signs of a major breakdown ahead.

On that note…

Kiss the “New Bull Market” Theory Good-bye

I’ve also been tracking the S&P 500 in relation to its 88-weekly moving average: THE definitive metric for what establishes a bull vs. bear market. As I said in the last two issues, if the S&P 500 breaks ABOVE the 88-weekly moving average and stays there, then YES, we’re in a new bull market. However, if it’s turned away and falls below the 88-weekly moving average… THEN LOOK OUT BELOW.

As you can see, the S&P 500 was rejected at the 88-weekly moving average. If you’re having trouble seeing this, the below chart shows the recent action more clearly.

It is now literally “do or die” time for the stock market. Either stocks consolidate here and then push above the 88-weekly moving average OR they “kiss” the line one more time and then roll over and collapse.

As I’ve stated time and again, I fully expect the collapse to occur this fall. As the above charts show, it will be sooner rather than later. However, the bearish rising wedge patterns starting in both March 2009 and July 2009 both leave room for a little more potential upside. This is why you should keep all of your current positions small (I’ve recommended establishing only 10% of your full-intended short position, e.g. $100 out of an intended $1,000 position).

This is also why it’s not yet time to go “all in” shorting this market. Time and again, the market has been manipulated higher on weaker and weaker volume courtesy of the Fed’s loose monetary policy. It’s never a good idea to bet heavily against the Fed. And our current Fed Chairman, Ben Bernanke, is a bubble-blower extraordinaire (seriously, he’s managed to create yet another mini-bubble in stocks during the worst financial crisis in 80+ years). So you don’t want to go stepping out in front of this bubble-making machine with much capital.

However, blowing bubbles is not an economic policy. It is a road to ruin. And we are now headed there at an accelerated pace.

To date, the US government (I include the Federal Reserve) has spent some $11 trillion+ trying to re-inflate the US economy and stock market, They have failed miserably. Consider:

1. 27 states in the US now have unemployment rates above 8.5%
2. 60% of Americans don’t have enough money saved to retire
3. 2,690 employers performed mass layoffs (firing of 50 or more employees at once) in August (up from 533 in July)
4. REAL incomes continue to collapse: at an annualized rate of 5% for the three weeks of August 28-September 23
5. REAL weekly unemployment claims have topped 500,000 since January
6. US bank loans have been falling at an annual pace of almost 14% since the early summer
7. Shipments in capital goods fell 1.9% in August, similarly, rail shipments which slowed their rate of decline the last few months, have begun to accelerate downward again
8. Industrial production has dropped 11%
9. Fannie Mae’s August data shows a surge in delinquencies from $4.2 billion to $70 billion.

And those are merely the data points I can quickly recall from recent releases. Elsewhere in the world (remember the Stimulus efforts were global) things aren’t any better. The Telegraph recently noted that, “China's exports were down 23pc in August; Japan's were down 36pc; industrial production has dropped by 23pc in Japan, 18pc in Italy, 17pc in Germany, 13pc in France and Russia…”

When you consider just how little “bang for your buck” we got out of the unbelievable amount of Stimulus spent… you have to wonder what the heck the point of it was. Remember, the bailouts were sold to us as a massive effort to help Joe America keep his job, his house, and his ability to spend.

How’s that working out?

However, while things are still in “sit tight” mode for stocks, something wholly different is going on in the gold market.

The Flight From Paper

As I noted in an essay several weeks ago:

… gold has formed a long-term inverse head and shoulders formation (two smaller collapses book-ending a major collapse). Typically a head and shoulders predicts a massive collapse. However, when the head and shoulders is inverse, as is the case for gold today, this typically predicts a MAJOR leg up.

Indeed, any move above the “neckline” of 1,000 would forecast a MAJOR move up to $1,300 or so…

Well, gold has broken the “neckline”:

This indicates that the next leg up in the gold bull market has begun. The reason here is simple: investors have begun to realize that every central bank on the planet is hell bent on devaluing their currencies.

Everyone and their mother believes the Fed’s actions are hurting the US dollar. But few people have taken noticed that the Europeans don’t want a strong euro, just as the Japanese don’t want a strong yen, just as the Swiss don’t want a strong franc.

Why?

None of these guys want their currencies to appreciate too far against the dollar because most if not ALL of them export to the US. Having a strong currency against a weak dollar means increased production costs against a sales lower price. This means LOWER profitability.

To combat this, countries are either aggressively printing money to stimulate their economies (China, Europe, the UK) or openly manipulating their currencies (Switzerland) in an effort to devalue their money against the dollar. Case in point, this latest breakout in gold happened WITHOUT the dollar falling to a new low:

As you can see, gold broke out dramatically this week. But the dollar failed to fall to a new low. This tells us that investors are fleeing paper money in general, NOT just the dollar. This means that gold mania is now going global as investors flee paper money and pile into the one currency that CANNOT be devalued:

GOLD.

Good Investing!

Graham Summers

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