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October 4, 2008

Taxpayer Theft in da House

The bulls got a 3% head start on Friday and still couldn't hold their game together. The pre-weekend fear selling kicked into high gear after the House vote, and the S&P 500 fell almost 5% from its high point into the close. For the week, the index was down a whopping 9.4%! It seems clear that the market gods don't appreciate the taxpayer theft bill any more than do the taxpayers. In fact, there is overwhelming evidence that Paulson's $700 billion will do little for taxpayers and a lot for his friends. Of course, Paulson wasn't the only one getting his nugget. If you think House members changed votes to "yea" simply because the new bill included more help for Main Street, think again. The version passed by the house Friday included a load of pork barrel spending.

Let's look at some charts. First, we'll zoom in on the bear market's weekly view.

index chart

As mentioned in recent posts, wave 3-of-3 seems to be about over. The target for this wave has been 1080, so we are a quick Monday morning drop away from hitting it. The SPX is also extremely stretched below its 75WMA. Some kind of consolidation is presently due. Wave 4-of-3 should unfold as a labored 3-5 week rally and, as dictated by Elliott Wave theory, should not overlap wave 1-of-3. This rule gives us an upper bound for the consolidation at 1200.

Of course, if the Fed does something stupid like slash rates, wave four could be compressed down to just a few days, but I don't think the Fed will make such a move. Given the massive fund injections they've been undertaking and the fact that they are really not in control of the Fed Funds rate in this environment, a cut would only be a political jesture. The next meeting that has any political significance will occur at the end of January... just after we inaugurate a new clown. I believe rates will be cut at that meeting as a way for Berskanke to "go down" on the new Prez.

As postulated in Thursday's post, a big question remains whether wave 5-of-3 will form a double bottom with wave 3-of-3 similar to the way big Wave 1 ended, or whether stocks get trounced to new lows. I plan to keep an eye on the put/call ratio. As can be seen below, each bearish leg in a primary wave ends with increasing levels of panic. Once it is apparent wave 5-of-3 is underway, I intend to stay short until the CPC 10DMA enters panic territory.

indicator chart

The Advance-Decline Volume reading can be used as a concurrent indicator:

indicator chart

Despite the coming $700,000,000,000 gift, the banking index remain below the pivotal 75 level and on a MACD sell signal:

index chart

Turning to commodities, we see that the CRB did not break its downtrend line after teasing us with a trendline crawl in late September.

index chart

Gold surprised the bulls by breaking lower out of its recent trading range.

gold chart

Oil looks like it will now complete its journey to $85 and probably eventually reach lower.

oil chart

Am I the only one who will be voting against every incumbent this November?


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