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Nadeem Walayat Financial Markets Analysiis and Trend Forecasts

Stock Market Short Squeezes Do Not Change Bear Trends

Stock-Markets / Stock Markets 2012 Jul 01, 2012 - 02:10 AM GMT

By: Anthony_Cherniawski

Stock-Markets

Diamond Rated - Best Financial Markets Analysis Article-- VIX retested its wave [2] low, but did not break below it.  This action may be interpreted as a smaller wave (2).  The Master Cycle low on June 21 still stands.  The effort to suppress the VIX has not changed either the Elliott Wave action or the Cycle pattern.
SPX has a window dressing moment.


-- Although SPX made a spirited end of day surge, it did not overtake its previous high made on June 19.  The end-of-quarter window dressing was not quite enough to break the downtrend, even at the retracement level.  The possible reason may be that the short-covering rally ran out of steam.

Short interest in SPY reached 14.7 billion shares as of June 15, the highest since October 2011. This is also tied for the 3rd highest short interest since July of 2009. Does the chart below (see article) mean that the only technical item that matters is Short Interest (as well as short interest in the highly levered and beta-rally inducing EUR), and every time this number rises above a given threshold the various Wall Street repo desks will merely engage in forced buy-ins and cause epic short squeeze like the one today?

NDX  rally fails to take out June 19 high. 

-- NDX appears to have made yet another retracement that failed the June 19 high.  This puts it in the position for a very nasty fall on Monday and possibly more declines for the rest of the week.  This decline has the potential to take NDX to its Cycle Bottom at 1753.60 over the next two weeks. 

(ZeroHedge) Stocks opened around 2% gap higher this morning after the late-night headlines from Europe made many think that the tooth-fairy and Santa are real once again. S&P 500 e-mini futures saw some selling into the open but then stabilized amid a very narrow range for much of the rest of the day - leaking higher on low volume-driven short-covering. The news from Germany of ESM ratification was greeted with absolutely no price movement as an indication of just how insane things are but the need to drive stocks up in the last few minutes was crazy. Into the close, volume exploded as ES rose 10pts in minutes from absolutely nowhere.

The (short-squeezed) Euro retests its neckline, fails.

            -- The Euro bounced again to retest the neckline of its Head & Shoulders formation at 126.70.  The retest of the neckline may also have failed, leaving a potential 5-week decline in front of it.  The Liquidity Cycle that my subscribers have been following suggests a solid decline through August to parity or below.

Today's 4-sigma short-squeeze ramp in EURUSD (up over 220pips from pre-Summit-statement) is very reminiscent of the 10/26/11 reaction to the Greek debt deal. EURUSD rallied magnificently, squeezing a dominating short-crowd over 400 pips higher that time. But it is the impulse reaction that we note - within two days the entire rally had faded and indeed went on to sell off for a few more months as reality struck.

The US Dollar is primed for a breakout.

-- The US Dollar retested the lip of a new Cup with Handle formation and 10-week moving average at 81.31.  This formation now has an 80% probability of meeting or exceeding its (Cup with Handle) target.  This is not as impressive as the inverted Head & Shoulders’ 93% success rate, but having the two together is reassuring for the uptrend.

(ZeroHedge)  When the US current account deficit starts closing, the dwindling supply of dollars eventually leads to a panicked rush for dollars. Non-US companies that binged on dollars when the money was cheap and the dollar was forever going down, now find themselves caught out. Every entity with a negative cash flow in dollars scrambles for dollars — even through selling local assets and converting the proceeds — depressing risk assets everywhere.

Gold is still trapped in a sideways consolidation.

-- Gold closed just above its Head & Shoulders neckline at 1570.00 after failing two attempts to rally above the higher neckline at 1640.  It also stopped short of its 10-week moving average at 1606.24.  The next goal is to break the massive neckline and begin a three week decline that may find a low near gold’s Cycle Bottom at 1180.52.  Gold will be a “screaming buy” down the road, but still has some unwinding to do beforehand.
The reasons to hold gold and silver, and I mean physical gold and silver, are pretty straightforward. So let’s begin with the primary reasons to own gold.

  1. To protect against monetary recklessness
  2. As insulation against fiscal foolishness
  3. As insurance against the possibility of a major calamity in the banking/financial system
  4. For the embedded 'option value' that will pay out if and when gold is remonetized  

U.S. Bonds signal further decline ahead.

-- USB appears to have completed a 48.2% retracement of the decline from its top at 152.56.  A fall below the 10-week support line is likely to bring on a flood of selling.  One more “safe haven” bites the dust.
(ZeroHedge)  With Operation Twist being extended for another 6 months, forcing Primary Dealers to buy up all the short-end bonds from the Fed, the last thing the Dealer community needed at today's 2 Year bond auction was to be stuck holding the bag. Which is precisely what happened: the Treasury sold $35 billion in fresh 2 year paper as the first auction of this week's trio of bond issuance, at a yield of 0.313%, the highest since March even if in line with the When Issued, and a Bid To Cover of 3.62, the lowest since February. But the key internal indicator was the distribution between the Primary Dealer take down and everyone else: at 60.4% of the entire offering, or $21 billion, going to Dealers.

Crude holders cover shorts.

-- West Texas Crude bounced back through throught its Head & Shoulders neckline at 80.00 this week, due primarily to end-of-quarter window dressing and short covering.  This trap door is open for a fall as far as Cycle Bottom support at 69.29 and possibly a massive crash in the coming Master Cycle low due in early August.  The wave [2] consolidation is easy to miss, especially in the weekly chart.  This decline may be similar, if not more intense than the 2008 decline. 
(ZeroHedge) …crude oil prices range a fair bit according to the quality of the crude and the challenge of moving it from wellhead to refinery. Those factors are currently wreaking havoc on oil prices in North America: a range of oil qualities and a raft of infrastructure issues are creating record price differentials. And with no solution in sight, we think those differentials are here to stay.

China stocks lose ground as false data is revealed.

--The decline in the Shanghai index is picking up speed.  The next level of support is the Cycle Bottom support at 2137.66, which would give way to the Head & Shoulders neckline at 2120.00.  This may lead to a cascade of epic proportions as the Shanghai indes is about to lose over 50% of its value in a wave (iii) decline.
(ZeroHedge) In what may come as a shocking surprise to exactly nobody, the next great discovery as more and more layers of the global ponzi onion are exposed, is that China was, in fact, lying about everything. Yes, we know, stunning.
Bloomberg News may be the most read news source in the world, but as of today, it is no longer available in China. Why? According to Bloomberg TV News Editor Denise Pellegrini, all it takes is for some investigative reporting exposing the dirty laundry, or in this case the even dirtier assets of one Xi Jinping - "the man in line to be China’s next president."

The India Nifty completes a 60% retracement.

The India Nifty retracement briefly probed above weekly mid-Cycle resistance at 5194.58 in an effort to window-dress the quarter end.  It becomes bearish again once it declines below its 10-week support at 5049.22.  The next objective is a test of the Head & Shoulders neckline and may bring downside acceleration to the India 50 index.  The Cycles Model suggests that the decline in the CNX Nifty Index may resume through early August.

The Bank Index completes a reversal pattern.

-- BKX attempted to better its retracement high this week, but failed, creating a reversal pattern.  A decline beneath its 10-week moving average at 45.07 puts BKX back on a sell signal and a probable decline to its smaller Head & Shoulders target at 31.03 in the next month.  The lesser Head & Shoulders pattern may meet its target by early August.  I expect to see the decline speed up considerably starting next week. 
Two stories this week prove once again that the big banks are literally criminal enterprises.
Initially, all of the big banks have engaged in Mafia-style “bid-rigging” of municipal bonds, to bilk money from every city in the nation … to the collective tune of tens billions of dollars.
And Barclays and other large banks – including Citigroup, HSBC, J.P. Morgan Chase, Lloyds, UBS, Royal Bank of Scotland – manipulated the world’s primary interest rate (Libor) which virtually every adjustable-rate investment globally is pegged to.
…Not to mention front-running and market manipulation.  What next?

Good luck and good trading!

Tony

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As a State Registered Investment Advisor, The Practical Investor (TPI) manages private client investment portfolios using a proprietary investment strategy created by Chief Investment Officer Tony Cherniawski. Throughout 2000-01, when many investors felt the pain of double digit market losses, TPI successfully navigated the choppy investment waters, creating a profit for our private investment clients. With a focus on preserving assets and capitalizing on opportunities, TPI clients benefited greatly from the TPI strategies, allowing them to stay on track with their life goals

Disclaimer: The content in this article is written for educational and informational purposes only.  There is no offer or recommendation to buy or sell any security and no information contained here should be interpreted or construed as investment advice. Do you own due diligence as the information in this article is the opinion of Anthony M. Cherniawski and subject to change without notice.

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