Best of the Week
Most Popular
1.Canada Real Estate Bubble - Harry_Dent
2.UK House Prices ‘On Brink’ Of Massive 40% Collapse - GoldCore
3.Best Cash ISA for Soaring Inflation, Kent Reliance Illustrates the Great ISA Rip Off - Nadeem_Walayat
4.Understanding true money, Pound Sterling must make another historic low, Euro and Gold outlook! - Marc_Horn
5.5 Maps That Explain The Modern Middle East - GEORGE FRIEDMAN
6.Gold Back With A Vengeance As Bitcoin Bubble Bursts - OilPrice_Com
7.Gold Summer Doldrums - Zeal_LLC
8.Crude Oil Trade & Nasdaq QQQ Update - Plunger
9.Gold And Silver – Why No Rally? Lies, Lies, And More Lies - Michael_Noonan
10.UK Election 2017 Disaster, Fake BrExit Chaos, Forecasting Lessons for Next Time - Nadeem_Walayat
Last 7 days
Saving Illinois: Getting More Bang for Its Bucks - 24th Jul 17
3 Stocks Sectors That Will Win in The Fed’s Great Balance-Sheet Unwind - 24th Jul 17
Activist Investors Are Taking Over Wall Street, Procter and Gamble Might Never Remain the Same - 24th Jul 17
Stock Market Still on Track - 24th Jul 17
Last Chance For US Dollar To Rally - 24th Jul 17
UK House Prices Momentum Crash Warns of 2017 Bear Market - Video - 22nd Jul 17
Crude Oil, Gold, ETFs & more: Pro-grade Market Forecasts - 22nd Jul 17
Warning: The Fed Is Preparing to Crash the Financial System Again - 21st Jul 17
Gold / Silver Shorts Extreme - 21st Jul 17
GBP/USD Bearish Factors - 21st Jul 17
Gold Hedges Against Currency Devaluation and Cost Of Fuel, Food, Beer and Housing - 21st Jul 17
Is It Worth Investing in Palladium? - 21st Jul 17
UK House Prices Momentum Crash Threatens Mini Bear Market 2017 - 21st Jul 17
The Fed May Show Trump No Love - 20th Jul 17
The 3 Best Asset Classes To Brace Your Portfolio For The Next Financial Crisis - 20th Jul 17
Gold Stocks and Bonds - Preparing for THE Bottom - 20th Jul 17
Millennials Can Punt On Bitcoin, Own Safe Haven Gold For Long Term - 20th Jul 17
Trump Has Found A Loophole To Rewrite Trade Agreements Without Anyone’s Permission - 20th Jul 17
Basic Materials and Commodities Analysis and Trend Forecasts - 20th Jul 17
Bitcoin PullBack Is Over (For Now): Cryptocurrencies Gain Nearly A 50% In Last 48 Hours - 19th Jul 17
AAPL's 6% June slide - When Prices Are Falling, TWO Numbers Matter Most - 19th Jul 17
Discover Why A Major American Revolution Is Brewing - 19th Jul 17
iGaming – Stock Prices - 19th Jul 17
The Socionomic Theory of Finance By Robert Prechter - Book Review - 18th Jul 17
Ethereum Versus Bitcoin – Which Cryptocurrency Will Win The War? - 18th Jul 17
Accepting a Society of Government Tyranny - 18th Jul 17
Gold Cheaper Than Buying Greek Villas in 2012 - 18th Jul 17
Why & How to Hedge the Growing Risks of Holding Stocks - 18th Jul 17
Relocation: Everything You Need to do for a Smooth Transition Abroad - 17th Jul 17
A Former Lehman Brothers Trader: It’s Time To Buy Brick And Mortar Retailers - 17th Jul 17
Bank Of England Warns “Bigger Systemic Risk” Now Than 2008 - 17th Jul 17
Bitcoin Price “Deja Vu” Corrective Sequence - 17th Jul 17
Charting New Low in Speculation in Gold and Silver Markets - 17th Jul 17
Bitcoin Crash - Is This The End of Cryptocurrencies? - 17th Jul 17
The Fed's Inflation Nightmare Scenario - 17th Jul 17
Billionaire Investors Backing A Marijuana Boom In 2017 - 17th Jul 17
Perfect Storm - This Fourth Turning has Over a Decade of Continuous Storms to Come - 17th Jul 17
Gold and Silver Biggest Opportunity Since Late 2015, Last Chance at These Prices - 17th Jul 17
Stock Market More to Go - 17th Jul 17
Emerging Markets & Basic Materials Stocks Breaking Out Together - 16th Jul 17
Stock Market SPX Uptrending Again After Microscopic Correction - 15th Jul 17

Market Oracle FREE Newsletter

Crude Oil, Gold, ETFs & more: Pro-grade Market Forecasts

Stock Market Heading for Black Monday Crash?

Stock-Markets / Financial Crash Jan 24, 2010 - 12:26 PM GMT

By: Clive_Maund

Stock-Markets

Diamond Rated - Best Financial Markets Analysis ArticleOn Friday Goldman Sachs and J P Morgan broke down decisively from their Head-and-Shoulders tops, a development that we predicted before the open based in large part on the huge downside volume in these stocks on Thursday. The Put options that we bought in the early trade in GS and JPM soared, some contracts rising by about 50% by the close. This bearish development caused shockwaves to spread through the market which accelerated to the downside late in the day. After 2 days of heavy losses the Precious Metals stocks indices stopped for a breather just above their 200-day moving averages, and closed virtually unchanged on the day.


The big question now of course is whether the broad stockmarket will accelerate into a severe decline or even a crash, which would of course take resource stocks with it. Before attempting to answer this question, we will step back and make some general observations about the "bullmarket" of the past year.

The first point we need to make about the broad US stockmarket rally of the past year is that it has been ABNORMAL and still only ranks as a bearmarket rally, rather like those that occurred in the early 30's. It certainly has not been been due to a return to anything like normal business conditions. For the most part it has simply been a bounceback relief rally from the oversold extremes resulting from the state of crisis that prevailed early last year, made possible by massive infusions of manufactured money and bailouts. The vaunted return to profitability, which was largely due to aggressive cost cutting measures rather than any broad-based recovery in demand, masks a continued state of debt-wracked atrophy across the economy. The rally has also been encouraged by a prolonged zero interest rate environment, which has discouraged saving and genuine investment and instead fuelled a massive dollar carry trade and a renewed speculative binge in commodities and stocks.

Because the United States is drowning in debt, at all levels - Federal, State, corporate and personal, rising interest rates are unthinkable and would cause immediate economic implosion. Policymakers are thus in a classic catch 22 situation, backed completely into a corner - raise interest rates to support the dollar and face economic implosion - or keep interest rates low and watch the currency and Treasury market collapse. Faced with this horrendous dilemma they are taking the only option open to them, which is to buy time. Thus they are engaged in widespread accounting fraud and obfuscation to whitewash the awful reality of the situation, and in sheer desperation are propping up the Treasury market by means of large scale monetization - and hoping that foreigners don't put 2 and 2 together. This monetisation requires the creation of money on a large scale out of nowhere and is thus highly inflationary, and represents a reckless attempt to keep the powerful deflationary forces that have been building for many years from doing their grim but necessary work of purging the economy of excesses.

The wild card in this situation is that at some point they are going to lose control - to a large extent they have lost it already and are merely reacting to events. They are taking the inflationary / hyperinflationary route because that buys them the most time and enables them to keep interest rates at zero for as long as possible - but if they lose control of the ball and the market decides that IT is going to set real world interest rates, and set them considerably higher, then the jig is up. The moment the stockmarket, which has risen in large part because of the zero interest rate environment, gets the scent of higher interest rates, it will cave in, and we may have actually arrived at the point where policymakers WANT the commodity and stockmarkets to cave in, in order that they can sluice the outpouring of funds back into the dollar and the Treasury market.

A reader wrote me that this story about Obama moving to restrict the banks was all just a bluff designed to spook the markets and shake a lot of people out of their positions ahead of another bullmarket run, and that big money would coming storming in and drive GS and JPM stock prices back up on equally impressive volume. However, this interpretation is thought to attribute too much power and control to these people. Being wealthy and having tremendous power does not necessarily make you infallible, even if everyone laughs at your terrible jokes - look at how Bill Gates and Warren Buffett lost a huge slice of their fortunes in the financial crisis - which they most certainly would have avoided if they could have gotten their hands on Biff Tannen's almanac. While anything is possible and everything may reverse to the upside and carry on happily higher as before, it certainly doesn't look like it on the charts shown below. The breakdowns in Goldman Sachs and J P Morgan are not just some 2-day wonder that came out of nowhere - they are major breakdowns from clear top patterns that have been forming from last July - August, a period of 5 to 6 months, and thus have seriously bearish implications.

The charts for Goldman Sachs and J P Morgan are remarkably similar - so similar in fact that we can save ourselves time and effort as what is written for one of them applies equally to both - so much for the fundamentals! They have both completed Head-and-Shoulders top reversals that have taken 5 to 6 months to form, and both broke down from these patterns last week on huge volume on the news of impending restrictions on banks' activities, which has major bearish implications not just for these individual stocks but for the market as whole. This is because Goldman Sachs and J P Morgan are the elite cornerstones of Wall St. They are to Wall St what the Bismarck and Prinz Eugen were to the German navy during World War 2. If they go down they will take Wall St with them and their charts are saying that this is exactly what is going to happen.

The only question now is a minor one of timing - they are both short-term oversold and close to rising 200-day moving averages and so we MAY see a feeble bounce near-term to alleviate this, which should of course be sold, or a sideways holding pattern. On the other hand with support having just failed and the entire market having accelerated to the downside during the final hour or two of trading on Friday, there is plenty for investors and traders to worry about this weekend which could easily lead to a severe decline as we go into next week, and we could conceivably witness a classic Black Monday.

Anyone wondering what effect this might have on the resource sector only has to refer to the charts for last year, which quickly reveal that when the broad market collapses it takes the resource sector with it. Precious Metals stocks broke down from their year-long uptrend last week, and are thus clearly acutely vulnerable, even if they already look oversold. We saw this coming on the site and took evasive action on Tuesday before the steep drop and breakdown occurred.

By Clive Maund
CliveMaund.com

For billing & subscription questions: subscriptions@clivemaund.com

© 2010 Clive Maund - The above represents the opinion and analysis of Mr. Maund, based on data available to him, at the time of writing. Mr. Maunds opinions are his own, and are not a recommendation or an offer to buy or sell securities. No responsibility can be accepted for losses that may result as a consequence of trading on the basis of this analysis.

Mr. Maund is an independent analyst who receives no compensation of any kind from any groups, individuals or corporations mentioned in his reports. As trading and investing in any financial markets may involve serious risk of loss, Mr. Maund recommends that you consult with a qualified investment advisor, one licensed by appropriate regulatory agencies in your legal jurisdiction and do your own due diligence and research when making any kind of a transaction with financial ramifications.

Clive Maund Archive

© 2005-2017 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Comments

Liam
25 Jan 10, 15:32
Black Monday Crash

Clive Maund, wrong as usual, just do the opposite.


Geoffrey
26 Jan 10, 01:34
Up, Down or Sideways

So he predicted that the market will go Up, Down or Sideways:

"we MAY see a feeble bounce near-term to alleviate this... or a sideways holding pattern. On the other hand ...could easily lead to a severe decline as we go into next week,"


Post Comment

Only logged in users are allowed to post comments. Register/ Log in

Catching a Falling Financial Knife