Now It's About the Bond Market

***UPDATE*** As I was writing this, the Irish accepted the EU/IMF bailout package in which details are still emerging.

The Irish/EU loan in last minute talks, is now said to be contemplating a total restructuring of Irish banks.

It also seems that the German government (among others-Austria was first to voice opposition last week) is not in the mood to restructure the Greek bailout-payback timetable, which has been thrown into disarray because of bad bookkeeping (or more probably outright lies) and deficit budgets much higher then they are supposed to be at this point before the next payment is issued. The Greek government absolutely needs to extend the deadline for the emergency funding it has received, but Germany opposes any changes that would extend the mechanism beyond the spring of 2013 which has led to public outbursts by the Greek Prime Minister.

The Greek government just submitted their 2011 budget, which calls for among other things, 30% pension and public servant wage cuts. The trend in Greece regarding completing budget plans, even without such deep austerity measures, has not been a good one. They have failed to stick to a budget plan for 30 consecutive years. Not that the US has a much better record, but the terms are absolute if they want to continue receiving bailout funds. Contemplate for a moment a Greek default on a bailout.

The “Haircut” controversy introduced by Angela Merkel of Germany is still very much on European minds, but its meaning is such that any government who has fiscal deficits or budgetary problems or the bond holders who have lent to it, starting this year and as late as 2012 will have to share in the cost of a bailout. This message seems to be intended for other governments who have not yet received EU/IMF bailouts but are at risk of contagion, that might include Portugal, certainly Italy and Spain. The bottom line is all bonds that have been issued up until now are protected by the Eurozone, but any new ones going forward will share in the risk-this was what Merkel meant and it may have dramatic consequences on these countries' ability to raise money through bonds as the interest rates could prohibit them from going to the bonds markets to borrow. Furthermore consider that the bailout of Greece, Portugal and Ireland combined would be less then a third of the costs associated with bailing out Italy and Spain.

So this weekend is a deadline of sorts for the Irish government to accept a bailout deal. The Irish have enough money to keep themselves afloat until mid 2011, but a deal seems to be near and has been widely expected to be wrapped up by Sunday night. Tuesday the Irish government is expected to uncover their 4 year budget aimed at tackling deficits and debt. There is likely going to be fierce opposition from Labor Unions. Ireland has one of the most outdated and generous pay and perks systems for public servants. For example, holidays are extended because in the distant past it took Irish a lot longer to travel from Dublin to their home districts before transportation was modernized, yet the extra holiday-days remain. All retired Prime Ministers receive a pension commensurate with what the current Prime Minister is paid; in addition all have 24 hour car service, even when not on official business. Civil servants are given time off to cash paychecks even though they are nearly all direct deposit now. Public servants are also given paid time off to attend local races or art festivals. Public servants were also given a paid day off to attend a sailing regatta on the River Shannon, and they retain that day off even though the regatta has been discontinued.

In addition to a loss or perks that Unions have long fought for, the expected budget may cut as many as 6% of public servant's jobs and slash pensions under the watch of the EU/IMF. All of the above is not to say that there haven't already been cuts due to three previous budget austerity measures that have reduced public servant payrolls by 15%, it's just now the losses and cuts are expected to run much deeper. Whether Ireland will see violent protests such as those seen in Greece in unknown, but over the last 20 years Ireland has been one of the fastest growing developed economies with their low corporate tax rates which have brought major companies such as Pfizer and Microsoft to Ireland. The days of the Celtic Tiger are clearly over. What replaces them and what effect this has on Europe and the rest of the world is unknown. What is known is the deal calls for raising taxes on the vast majority of Ireland's population and early leaks have prompted warnings from Trade union officials, one has already warned of “civil unrest on a scale not seen in decades.” Another warning coming from Ireland's Technical Engineering and Electrical Union said, "I think there is going to be huge civil unrest. When the draconian measures being proposed are heaped on top of cuts already implemented, life in Ireland will be unbearable.”

In being a market participant well over a decade, it's always that which you didn't think conceivable that erupts into major events. What if the Union is not brought down by fiscal irresponsibility, but outright public revolution?

Clearly though, Europe is not the only concern facing the market. China raising interest rates and putting in place more measures as it did last week, as well as the “Developing Economies” could do serious damage to demand, especially as it relates to commodities in general.

EDZ (Emerging Market 3X leveraged Bear Fund) seem to be taking a longer term stance betting against these emerging markets. As I noted last week, some of the most powerful and meaningful changes in trend have been accompanied by wedges and daily divergences (in this case a falling or descending bullish wedge and a daily positive divergence)

**While I've been researching and writing this article, the UK TeleGraph has just confirmed that Ireland in last minute talks has accepted an IMF/EU bailout thought to be worth $77 Billion Euros. The exact language implies Ireland, “after a humiliating week of denying it needed help” has been “Forced” to take the deal in an effort to “Save the Euro”.

Apparently Ireland and other Euro zone governments are nervously watching the market Monday after Greece said that “The EU's debt crisis is not finished yet” with the finance minister adding, ”Even if Ireland is helped, it cannot prevent the debt crisis from continuing,” he said “[It] will focus on other countries: Spain, Portugal.” Portugal has already said that they are at “high risk” of needing economic help. The German Finance Minister said, “We are not just defending a member state, but our common currency”, echoing last week's comments by the EU president that the EU was in a , “Survival Crisis” with these actions not only needed to defend the Euro, but the whole of the European Union.

So what will the Euro countries like France and Germany be nervously watching this week? First if the Portuguese bond markets will settle allowing Portugal to borrow at sustainable rates or whether Portugal will be the next country in need of a bailout. Secondly whether a permanent crisis resolution mechanism for bailing out EU countries in trouble can be ratified by the entire E.U. Body as it is a departure from E.U. Governing treaties.

Last week speculation was floated that Ireland needed between $50-$60 Billion dollars just to shore up their banks. It has emerged that England has over $140 Billion euros already tied up in Irish banks. If the Irish estimates follow the Greek deceptions in any shape or manner, the effects could be profound for all of Europe. I can't help but think Europe is near a double dip recession as everything being done there is defensively oriented and more or less set up to put these governments on a survivable footing within the next 3-4 years. Expansion and demand seems to be two words that are going to be years off.

As I have also stated, since the Stimulus Bill which brought a downwardly revised 2009 Q3 GDP growth of 5%, the trend in the US has been down for 2009 Q4, 2010 Q1 and 2010 Q2. I don't see

anything the Fed has done lead to better economic conditions in the US, if anything it sends the money meant to encourage lending here in the US, to just been sent out of the country while lending standards have increased beyond what institutions like Freddie Mac require. I don't see Quantitative Easing as having lent at all to US growth and a trend is like a body in motion, which raises the possibility of a double dip recession in the US within the next two quarters if the current trend can be our guide, especially in light of Europe being out of the so called woodwork just a month earlier as the head of the E.U.'s Financial Stabilization Fund said just on October 26 , “The worst of the crisis in Europe is behind us”

With China making moves to cool off it's growth as well as the emerging markets that have been the recipient of US QE dollars, where exactly the engine of growth will come from seems illusive at best.Certainly the Fed's ridiculously termed “wealth effect” and push to increase inflation at a time when Americans can not afford the simple necessities such as food, seems to indicate that they are either the most foolish central bank that has ever existed or that their efforts are meant to create wealth for a very select few. I've argued for years that the so called “Economic cycle” is nothing more then a Federal Reserve manipulated policy tool meant to transfer funds from the hands of the many to the hands of the few. Just as the Bush weak dollar, rising oil price trend that lasted for most of his presidency did nothing to help average Americans, but did lead to record profits for the oil companies in which he and Dick Cheney were so closely connected to.Next time you hear $”X” billion or trillions of dollars has evaporated from the market or the populace, ask yourself, “where did it go?” Into a furnace? Of course not. It wasn't destroyed, it was transferred.

Looking ahead for this week, the FX markets just opened with the Euro gaining on the Irish Bailout deal, although they've only been open for a little over 30 minutes as of now. If the trend keeps up overnight we'll see a gap up in the morning for US markets, but as I always say about the FX markets, a lot can happen overnight and the single most important thing to watch this week going forward with regard to Europe is whether Portuguese bonds come down to affordable borrowing rates, if not Portugal will be next and the risk of European contagion will be alive and well and most likely drive the Euro down, the dollar up and American markets down. It's a little hard to believe that this deal was not already priced into the market by the close on Friday so a sell the news effect is possible within the next few days as well. While the Irish certainly did resist, it was obviously to cut a better deal that allows them to keep their 12.5% corporate tax rate and some semblance of Irish sovereignty, or more appropriately, being allowed to save face.

On the POMO front, I believe we have operation on Monday and Tuesday. From what we have seen at least last week, I did not see any definitive signs that the QE2 operations are anything like the last POMO regime and as of now, unless we are seeing a surprise setup, these operations seems to have no effect on the market as of yet, at least not the effect we saw before QE2 POMO started.

Not surprisingly China and the Financials (XLF) finished lower on Friday. The financials face a lot of stability questions on a number of fronts and China's recent moves to set in place price controls leads many to wonder whether or not they'll soon hike interest rates which will have a dramatic impact on commodities (ex precious metals). Everything I have seen in the last several weeks, and just about every post I've written on PM's has leaned toward more strength in silver then gold.

As I mentioned last Tuesday, the market looked primed for a bounce, whether this is a dead cat bounce or not, the environment was primed for a bounce. 3C was showing many intraday periods of accumulation that were being held down by a falling Euro, but I believe they were accumulation nonetheless. Since then, the Euro bounced and the market was certainly short term oversold providing perfect conditions for a bounce off an important support level stretching back to May. So this week, thus far the Euro has started off primed to continue this bounce. Again as I mentioned when first talking about a bounce Tuesday, the underlying action will be a huge tip off as to whether this is a dead cat bounce or something else. Right now the nature and the frequency of the fundamental data coming in from around the world, moves in the US and toward the US regarding QE2 and Europe especially creates a lot of uncertainty.

As I said last week though, one of the most reliable technical patterns as of late are these large ascending/descending wedges with their divergences. While they take time and are quite volatile right after a breakout, I can not think of one off hand that did not move as they are supposed to. The wedges that are large and critically important now include bearish outlooks on emerging markets, bullish trends regarding the dollar, bearish regarding the Euro (although that one is smaller).

Here area few trades that look interesting.

HRS (long) This is a large ascending triangle. When they are this big they are not consolidation patterns, but usually base patterns (considering the bullish implication of the pattern).

As you can see the daily chart of HRS is showing a positive leading 3C divergence to the upside. The breakout level would be >$47.35 on a closing basis and >$47.45 on an intraday basis. The implied target is $54.50 which is roughly in line with an area of resistance. This does not mean it can't move through that resistance. In my view, an appropriate stop would be in the area of $44.95 for most traders, but for those who believe in the trade as a longer term position and are adept with risk management/ position sizing, then a wider stop of $43.88 would allow more room for the trade to initially work in a volatile market.

TICC (long) has also been on a nearly year long uptrend. It has seen some recent volatility which may be consolidation or may imply a top taking place, but the risk:reward ratio for such a nice looking trend seems to be appropriate.

As you can see, the two day Trend Channel has held this trend for nearly a year for over a 100% gain.

My moving average trade screen also shows it as a current long. As it is an older trend, it is typical for pullbacks to reach the 22 day m.a. or the red VWAP. RSI , the price moving averages and the custom indicator/average crossover are all still holding up. TICC has pulled back and looks to be pulling away once again. With the stop under the VWAP by a few percent, it is not a bad risk:reward ratio with proper position sizing/risk management.

The 5 min. 3C chart shows the pullback, a positive divergence that has it moving up and now a positive leading divergence suggesting it will move higher.

Finally, ADBE (short) looks like a fairly serious bearflag

Looking at the hourly 3C, there doesn't seem to be much god news there either.

3C hourly seems to have caught every move in this flag, from the negative divergence leading to the deep drop, to the positive divergence leading to the quick upside gain and then deteriorating 3C trend inside the flag leading to a negative leading divergence.

The flag looks like it's already broken, although there may be some black-box pattern recognition that creates a few false moves, I'd prefer to phase into this one or allow some room on the upside for a wider stop.

As I finish writing this post, the Euro is trading near its opening crating a short term range.