Last night as you all know by now, Ireland confirmed they are taking a bailout and the Euro started the week of FX trading with a gap up, this may have been a knee jerk reaction or a lot of other things. However, the reason that the Euro headed back down is despite the bailout, the risks of contagion among other Euro Union countries did not seem to diminish. Portugal may be next as the risk of Portuguese default actually rose in the aftermath of the Irish bailout announcement. The E.U. seems ready and capable of helping Portugal, the real threat is Spain and if borrowing costs through bond yields get to a point in which the Spanish can not repay the debt or the perceived risk of default is high, then they will have to turn to some bailout mechanism and it is not clear that the E.U. can handle a bailout for a country and economy the size of Spain's. Furthermore there are ratifications to the E.U.'s governing documents that must be made to even pull off such a feat and already after two relatively minor bailouts, fractures among EZ countries are emerging. For instance, German and Austrian tax payers are not too happy to foot the bill for a lying Greek government that has not just told little fibs, but has not come clean with regard to the severity of their situation. The risk of Greek default on their bailout has grown exponentially in the last 10 days and the EU does not seem to keen on altering the terms of repayment. Fool me once shame on you, fool me twice.... Greek default on the bailout is on the table.

Remember, it was only a few short months ago that the results of the E.U. Banking system's stress tests came up fairly rosy. Why was that? Probably the same reason that US banks said they had the mortgage risks under control, until they didn't and every earnings season produced bigger and bigger write-down surprises. The fact is the banks depend on deposits and who wants to come out and tell the world that they are in a hole they can't get out of? Or more bluntly put, they lie to prevent bank runs.

Speaking of stress tests, it emerged last week that at least 19 of the largest American banking institutions are about to undergo a second round of stress tests, that number may rise past 35. Meridith Whitney who gained unprecedented international respect for her early and accurate insights in 2007 and 2008 has just come out and said that she believes that somewhere around 5000 banking branches will be shut down over the next 18 months. The reason? A lack of loan growth, which I talked about a little today from my own experience and we know that banks have raised the FICO score standards for lending beyond what is required by the backers of those loans. Not only do we have a real estate market in shambles, but we have banks that are not eager to make loans despite the money Bernanke and the government have poured into these banks so they would do exactly that. Furthermore banks face additional challenges (and I haven't heard this one before) because of earnings pressure and regulations that will leave lower income households without access to banking services, meaning less fees will be collected. Whitney blames the hastily written banking reform laws with the unintended consequences of “de-banking”-her words, not mine. Again, long term I can't see anything really positive for financial sector growth. The trend of “de-banking” she believes will contribute to 5000 branches being closed in the next year and a half and an additional 80,000 jobs lost.

Something else I found interesting (below I have a linear regression chart that may explain part of this) is that the rally that started in September was 3-4 days after Bernanke gave his Jackson Hole speech in which he let the QE2 cat out of the bag. The market previously advanced higher on POMO days, but since the QE2 regime has started, I have seen no evidence that QE2 is anything like the former operations. I'm wondering if that may be the reason we are seeing what we are seeing in the linear regression chart you will see below. At that point of the Jackson Hole announcement, bulls saw a never ending stretch of POMO days that would take the market higher each and everyone. I warned that this operation may be very different then the last setting many bulls up for a possible long fall.

Well lets start tonight with the daily SPY 3C chart.

As you an see, there was no upward r downward progress.

Every so often I check the linear regression channels for the same reason I check my Trend Channel. When a market acts a certain way long enough that it can be characterized (by fitting neatly into a channel) and then it suddenly changes its character, that generally means something is up.

One of the best setups with a linear regression channel is a trend that fits neatly (about 90%) within a channel. The setup is called a "channel buster" and they come in a few varieties that I especially like. The first is a simple breakdown from the channel and almost always we get the “Kiss the channel goodbye” bounce when the market bounces and tries to make it back into the channel and fails, then you usually see volume pick up on the failed test as the market drops. However, there's one I like even more that combines what I just described, but adds a preceding event and that is a move to the upside out of the channel, a breakout of the channel to the upside, which is what we see here. The effect is that longs get excited and sucked into the long play, price falls back into the channel, they are at a loss and then it breaks down as described above. This type of event, even occurring outside of a channel (for instance a false breakout above a resistance level) creates a snowball effect because of the losses sustained by the longs who bought the breakout. As prices move down, the longs start to sell, which creates more supply then demand, which causes prices to find the next level of demand lower, once that is extinguished, prices fall more and more longs sell, and the process repeats. Of course we can't forget the added selling pressure created by shorts who flood the market with more sell-side supply. It's a snowball effect and usually particularly dangerous for longs when combined with the breach of a trading channel.

FX Markets

Although FX markets (as I say repeatedly) can do a lot overnight, especially with the speed and depth of fundamental information that has been accelerating in the last week in both speed and importance, seemingly reaching for a translucent crescendo, I thought I'd update you on the EUR/USD pair, right now the single most important FX pair as far as market correlation goes. If you saw my second to last post, I think it's pretty hard to argue that the correlation is coincidental. However what is important is what the underlying action of that bounce is. We saw negative divergences getting more serious as the day wore on until there was a final push at the end of the day.

As you can see by the green arrows, the up trend was in effect and doing what an uptrend is defined as, making higher highs and higher lows (the green arrows show you this). After the market closed, we saw our first lower high which is an indication that the uptrend is changing. Most people take this to mean that the downtrend will resume, it may very well, but there is a third trend and that is lateral. In any case, the uptrend is running into some shearing.

EMERGING MARKETS?

One of the trades that looks very good to me and I recently mentioned is the Descending Wedge (bullish) in EDZ, the leveraged short emerging markets ETF. In my mind there are both good technical and fundamental reasons to like this trade and mass psychology as well.

Here's EDZ's hourly chart

Today we saw some late afternoon improvement on the pullback. These wedge trades with divergences are quickly becoming some of my favorite, however, they are never as simple as a breakout from the wedge=buy as most technical analysis books have taught for decades, they almost always see a lot of volatility in price after the initial breakout and for that reason I prefer to either phase into them or give them a wide stop, which means fewer shares for my risk management/position sizing rules. Here's EDZ's chart today.

EDZ 1 minute

Note the negative divergence in EDZ today and what time it started to decline and remember this is an inverse ETF or short emerging markets. So as the FX pair traded up at 1 p.m., naturally EDZ traded down. As the afternoon wore on and we saw negative divergences getting worse in the market, EDZ was showing a positive divergence that was getting better into the close.

USO

I like 3C charts like what I see in USO. While a stronger dollar may not be good for oil and controls being put in place by China may have longer term effects on oil, what I'm seeing here and now looks bullish for USO/Oil

USO 60 min showing a negative divergence at the pullback and a positive divergence now

A 30 min chart of USO showing the exact same thing

A 15 min chart showing the same thing in greater detail

 and a 5 min chart that has formed a leading positive divergence today.

USO has seen a pretty deep pullback, but the charts are now lining up and showing that there appears to be accumulation building. I don't know how long this trend will last, but I do think that it is a valid trend worth looking into. Who knows, we may be seeing some inside information leaked regarding Wednesday's Oil Inventories, but because the positive divergences have stretched to the 60 minute chart, it seems more like the pullback is overdone and ready to snap back in the opposite direction. The stock market almost always overreacts like a pendulum, swinging too far one way and then too far the other way.

As I finish this post, the Euro has confirmed my suspicions, take a look at an updated chart:

The red arrows are the definition of a downtrend, lower highs, lower lows, although the trendline drawn in red is an area of support that will have to be broken before this can be definitively called a resumption of the downtrend, until then, it is lateral.

Take a serious look at USO. There is a chance that if the USO gains are dollar related, then commodities across the board may gain in the near term. Otherwise this may just be a deeply oversold move snapping back.

You May Have Heard, But If You Didn't

The insider selling/buying information hit the wires today from Bloomberg and it is astonishing. It was only a few weeks ago the ratio was in the 3 digit zone, still a huge impact of insider sellers vs. buyers, however this week the ratio comes in at an eye popping ratio of 8280:1

For every 1 share bought, 8,280 were sold by company insiders. The actual dollar amount is equally impressive with insider buys coming in at $150,673 dollars in 5 companies versus $1,247,500, 249 dollars in 117 companies.

I don't think there's any further commentary needed on this piece of data.

SIMILAR TO LAST WEEK

Last week we saw a number of 3C divergences that did not turn the market, however they seemed to cumulatively build nonetheless. The reason they didn't turn the market is because the correlation between the markets and the dollar are what is and has been moving the markets for some time. My interpretation is that these negative divergences did most probably show distribution into a rising market, rising because of the bounce in the Euro. Here's the FX chart.

To the left you can see where the Euro gapped up on the news of the Ireland deal, it ran for a bit and then gave up all of it's gains. The second arrow shows the Euro bouncing within the downtrend at 1 p.m. today and you can see where it closed.

 Looking at the charts of any of the major averages, they also bounced at the exact same time and closed similarly.

The negative divergences seen suggest to me that this bounce opportunity was being used to distribute positions into higher prices as the market's move now with the FX market. We saw this last week as well, although each divergence that didn't turn the market seemed to cumulate in longer charts.

There has been suggestions that the NY Fed didn't want a red close, if that is the case, then I'd think any manipulation was done through the FX markets and not the equities market, but more likely in my opinion is the FX markets saw a simple, regular bounce and the US market's being so highly correlated to them, simply followed.

If the FX markets were down during the same period, from 1 p.m. through the close, then I would be more inclined to believe that the NY Fed was manipulating the markets as they had done before QE2 POMO started.

As of now, I believe the steady and fast flowing fundamental news from across the world that is coming in at breakneck speed will have the most influence over the FX and equities market.

Update

It loks like the Euro bounce ( a normal bounce within a downtrend) may be reversing now. The 1 min charts of SPY, DIA and QQQQ have all deteriorated since the last update. The 5 min DIA is showing a negative divergence that is approaching a possible leading negative divergence so it's not looking god there. The SPY 5 min is still a little ahead of confirmation, I'd expect we may see that continue as the index is heavily loaded with financials and the last XLF update was looking short term bullish. The 5 min QQQQ is better then in line ( a little more bullish, but it is starting to chatter sideways).

There is one very recent and so far short term negative turn down in XLF's 1 min chart, the 5 min looks the same. If that 1 min chart were to start to trend down lower, then the 5 min positive chart may be in trouble. Thus far FAZ is in confirmation with the bullish outlook I posted in the last update of XLF.

There's not much change in GLD, but SLV is continuing to deteriorate in the short term 1-5 min charts.

Chart Request HUM

While only the hourly chart was requested, these other charts give a better feel for HUM.

 Here's the 5 min chart showing a very positive divergence this a.m./Friday later afternoon. The white box shows a small leading positive divergence which is excellent as 3C is already confirming the price trend, it shows the possibility of additional accumulation even into a decent price move and ups the chances of seeing a follow through move tomorrow as long as HUM has a strong close today, the more volume the better.

 The HUM 15 min chart shows a negative divergence that will be visible on the hourly chart, it also shows two positive divergences into the move up.

 HUM 60-min chart, you can see the first positive divergence leading to a move up, that was sold into at the highs. The small white arrow is the recent move. It takes some time for an hourly positive divergence to develop so the fact it is even present this early is good.

The longer term view shows a trading range, note MACD going from negative to less negative to positive and it is now rising making higher highs, this is what a strong price trend should act like. The heavy red volume often signals the end of a short term pullback.

Update

The Euro is on a slight bounce within today's downtrend.

 DIA 1 min loosing momentum?

 DIA 5 min negative divergence

 GLD 1 min showing a negative divergence, possible pullback

 QQQQ just a slight positive divergence 1 min

 5 min closeup showing a ositive divergence, but zoom out...

 and the 5 min QQQQ is still negative

 SLV 5 min chart going negative-possible pullback here.

 SPY 1 min looking negative
 5 min SPY is just in line-no positive divergences

 XLF showing initial signs of a possible positive divergence

XLF 5 min positive divergence, bounce in financials?

GM Update

Now that smart money has stepped in to keep GM from breaking the IPO pricing of $33, is it now once again being left to trade on it's own two feet?

Market Update

 As I thought, the pressure on the 1 min chart has led to a loss of the 5 min positive divergence in the SPY (below) which is now just confirmation. Short term there's a positive leading divergence in the SPY right now.

 The DIA 1 min has the same 1 min leading positive divergence suggesting an intraday bounce to continue.

 However, the 5 min chart has a negative divergence in effect now,
 Here's the QQQQ 1 min with a slight positive leading divergence.

Here's the 5 min, it also shows a slight positive leading divergence at the white arrow. These positive divergences do not seem to be related to the FX pair trade, they may be just an oversold intraday bounce. We'll have to see what develops out of them and how long they last.

Here's an Article Worth Your Time

Have you ever wondered why BAC, as I've showed you using my Trend channel has been in a 7 month downtrend versus a bank like Suntrust (STI) which has been in a lateral trend during the same period.

Bounces notwithstanding due to short term victories and Congress' attempts to mitigate the fallout from round 2 of the housing bubble, the proverbial "second shoe" seems to have been priced in the last 6 months or so?

Read this article from ZH when you have some time to consider its implications.

As you may know, I live in Florida, the apparent ground zero of all kinds of controversies from hanging chads to real estate collapses. As you may know, when I bought a house in 2003 I was well aware we were in the midst of a housing bubble as I spent every Saturday and Sunday looking in a neighborhood we really liked for over a year. We had seen every house in the roughly 30 block territory and had made at least 5 offers. We went on vacation for 3 weeks to Europe and returned to see the same houses that had been for sale for over 6 months, now selling for 30% more. It escalated every couple of weeks from there and we decided we need to buy something, even if it wasn't exactly what we wanted as this was a bubble. The proof it was a bubble came from every corner of our social circle as housewives became real estate speculators and every party we went to, the conversation was always the same-Real Estate.

We decided to buy as knowing it's a bubble and being left without a home for several years were our choices. We settled on something less then what we wanted as homes that we looked at 6 months earlier went from $150k to $300+k. The final confirmation of the bubble came from my study of bubbles over the last 400 years. The statement, "This time it is different" is always a dead giveaway of a bubble. The explanations included, "They've built as far west as they can in Florida before you hit the Everglades", "Property never goes down" Arizona was proof positive that it does. In any case, our house gained about 250% in value over the next year and a half. Friends of mine were flipping ginger-bread houses, a few got caught with inventory as the market collapsed and they still hold them, but that didn't stop the building.  As you drove through Miami, the new state bird was obviously the "Silver Crane". Condominiums were the biggest speculative bubble in Florida and even as property values plummeted, they kept building. In fact an entire condominium had been built with only 1 occupant, 1 family living in an entire building.

Since we have been looking for a home to buy, since all of the robo-signing talk cropped up, we became very picky. Realtors, which swamped us, probably over 20 contacted us every week with possible homes-I just got a text from one right now, show just how dire their situation is becoming. We've been told over and over that 80% of first time bidders on short sales walk away as the process takes 4-5 months. We decided to stay away. After that Bank REOs were the next bit of available inventory, but because of the putback scenario that is developing and lawsuits in the future, we decided to say away from those as well. True, title insurance will refund us our buying price but not the cost of any upgrades we spend on in case a former foreclosed owner bring suit over robo-signing and wins. This left us with what is amazingly an almost non-existent supply of homes, regular arms reach transactions. If we saw 100 homes, maybe 1 would be an arm's length transaction and usually way overpriced as people paid double what their property is currently worth and they just can not accept that. I feel that these properties, which we had been outbid on one which was an estate sale, even though we offered full asking price, will be few and far in-between and those that are prices reasonably will be quickly snapped up as this trouble in the banking/real estate sector continues to grow and most likely will force real estate prices lower. Although I feel the arm's length transactions will be in high demand as Americans start to take notice of what's going on.

In any case, this article does a good job of explaining what the financial industry faces. I've been talking about a second shoe dropping for a long time, I didn't quite expect that it would come from the same place where the problems originated, although in a different form.

America seems to have a rough future ahead of it and the write downs that we saw over a year ago every earnings season, look like it may once again be a defining theme of future earnings seasons, as well as bank failures and bailouts,

The Euro

Has taken out the lows from Friday's trade as it trends lower today. Obviously there's not a lot of confidence in the E.Z. going forward.

SLV vs GLD

As I've been showing for several weeks, whether on short intraday charts or longer mid term charts, SLV seems to consistently look better then GLD.

Here are the daily charts.

 GLD in a leading negative daily divergence. A Lateral trend seems to be unfolding here.

SLV by contrast has maintained confirmation and does not show the probability of a lateral trend developing, just a pullback that seems to be over at this point. SLV continues to outperform GLD on a % basis today at +.67% vs. +.11% at the time of this post.

Market Update

Friday we ended the session with 1 min negative divergences in all of the averages and mostly 5 min negative divergences except in the SPY. Last night I wrote that the Irish government accepting a deal over the weekend was most likely already priced into Friday's close, it seem that may have been the case. Here's the SPY 1 min chart.

As you can see the red arrow (Friday's negative divergence) opened today with a gap down. There was a slight positive divergence this a.m. that led to an attempt to fill the gap. Currently the 1 min is inline, but as I added Friday, if the negative 1 min charts keep up, they should bleed into the 5 min chart.

Here's the DIA 1 min

First the Friday negative divergence leading to the gap down this morning. There was no positive divergence this morning, but there was a second negative divergence that occurred this morning, making the DIA look worse then the SPY. Currently it is confirming the price action.

The QQQQ 1 min

On Friday we saw the QQQQ negative divergence react toward the end of the day, it continued this morning. there was a second negative divergence as the Q's tried to fill the gap at the highs this a.m. Currently the QQQQ is in worse condition then confirmation. The 5 min chart looks very bad. The DIA and SPY may end up looking like this if they keep on their course as the Q's responded earlier.

QQQQ 5 min

A very bad negative divergence on Friday that has grown worse at this morning's highs.

It's Amazing How Fast Things Change

Or it may be we are just seeing an acceleration that you'd expect to see as the wheels fall off the global economic trolley car.

In the past week or two and as recent as last night, the fundamental commentary that I've been offering (which is not my normal routine, but I feel is essential right now to understanding the unpredictability and what causes certain effects to take place) has been eerily close to events taking place. The really scary part is how quickly these events are developing.

Just last night we saw the EUR/USD FX pair gap up, I gave my usual warning about FX markets at night, "A lot can happen overnight" and it did.

Here's the 5 min chart.

You can see where the Euro gapped up last night on news of a deal with Ireland leaking out, you can also see where overnight action has led us. As I explained last night (this is the Euro-when the Euro weakens the dollar gains), a weak Euro means a stronger dollar, which means a weaker stock market.

We are in the midst of a POMO operation right now scheduled to end at 11 a.m., but many other things have happened overnight, some tied directly to QE2, some not.

First up, as always, the markets hate uncertainty. The deal last night seemed to give a sense of certainty with regard to Ireland, but we are now hearing that details regarding the bailout may not emerge for 2-5 weeks. In addition, when I first started writing about Ireland, I mentioned that the Fianna Fail government is highly fractured and this deal could put an end to the scarce majority there. Overnight the Green Party quit the government setting up probable elections sometime in January. I also mentioned the possibility of Greek-like violence in the streets of Ireland. Protesters are out in force right now and trying to break into government buildings.

The Sinn Fein contingent wasted no time in making their feelings known unequivocally with this poster below.

Markets are looking at this already as a "Failed Bailout". As I warned last night, we want to watch the cost of borrowing for Portugal to see f they'll be the next to need a bailout, CDS spreads are already wider then they were on Friday, not a good sign for Portugal being able to go this without help from the E.U./IMF/whatever contraption they are trying to set up.

China was mentioned as another problem as they have already set out on a number of price controls leading to fear that a rise in interest rates will be next. Whether they do or not, the PBOC has intimated they may start selling treasuries in direct response to the Fed's QE2 regime-consequences! China has also ordered banks to increase their reserves requirements to fight inflation. Also in Hong Kong, the weekend to weekend sales data shows this weekend down 83% over last weekend! This is due to increased costs in docs to buy a home. They are obviously moving to slow their housing market and everything else as well.

Elsewhere in Asia, Thailand (emerging market) saw its Q3 GDP grow at the slowest pace in 3 quarters.

In the U.S., apparently the Fed is set to slash estimates for  growth forecasts and will predict HIGHER UNEMPLOYMENT when it releases it's updated economic projections this week.

In addition, last week I mentioned 19 of the US financial institutions are to undergo another stress test, today news is out that there may be at least 35 institutions at risk. Again last night, financials we're on my bearish list. Even in Europe today they started as the best performing group and have turned later in the morning to the worst performing group.

Market Update coming next...