Some Fantastic New Indicators

I've been fooling around with some indicators the last few days, but tonight I buckled down and really did the work and have a great new template to share with you. I've looked at the historical accuracy of the different versions and they are fantastic, combined with 3C, we not only have confirmation of what 3C has been showing us, but we have some great new tools for tactical entries, in other words, we have a much better timing apparatus at our disposal as well as a more definitive way to call ambiguous market patterns.

I'm going to take a little break as I'm exhausted mentally and otherwise, but I will share these with you tonight. The Wolf Pack has a whole new way of thinking outside the box and I think you are going to love what you see.

In the meantime, here's an amusing, but spot on video by long time and outspoken Euro-skeptic, Nigel Farage just lambasting the EU leaders. He's doing the I told you so, but he's right and its entertaining to see the top EU figure heads so openly mocked.

MF Global as the Canary in the Coal Mine-Must READ

Bounce or no bounce, while it may seem meaningful, I will tell you that whether we get a bounce today tomorrow or over the next week, what has occurred and continues to unfold, is something as I have often said, we as traders will see unbelieaveable repersucussions of the financial crisis that started or at least started to unfold in the summer of 2007. Back then I was so alarmed that I spent a weekend putting together a 5 part video series to give people and my readers some idea of just how bad this will be. There have been many surprises along the way and still more to come, but as far as my analysis back in 2007, events are now unfolding that may make my original projections of Dow 5000 by the time this is over, seem like a VERY conservative estimate and this is why I have maintained ever since, for those traders who are able and willing to adjust to the market quickly, think out of the box and see the forest rather then just the trees, we stand before unprecedented opportunity in a market that no other trader has ever seen, at least not in equities-a SECULAR BEAR MARKET. Little did I know in 2007 that events would ramp up from a US financial crisis to a complete world crisis in which we now face the prospect of not only the very simple and tame reality of "Too Big To Fail" banks actually failing, we face the very real and almost inevitable reality of the possibility of the majority on an entire continent doing something that will make TBTF seem like an after thought, sovereign nations-the ultimate "Too Big To Fail", doing exactly that.

In this simple letter offered by a business owner, which also happens to be a futures broker, we see someone who has real and true honesty and has put her money where her mouth is and in this letter, what you are about to read is maybe not the most significant event that we will witness, but is a sign of the times. I recommend that you read it in its entirety as the ramifications are one of those unintended consequences that have arisen from the MF Global bankruptcy and as I have often compared MFG to the canary in the coal mine, it looks like they may be much more then 2011's Bear Stearns, they may be the dynamite that collapsed the entire mine and by that, I mean a huge portion of the financial system.

In light of this letter, it is little wonder that gold and crude are trading the way they are and this may in fact be part of the answer as to why Crude became so disconnected. If so, we are just at the start.

Here's the letter with no further commentary by me.

BCM Has Ceased Operations (source)

Posted by Ann Barnhardt - November 17, AD 2011 10:27 AM MST

Dear Clients, Industry Colleagues and Friends of Barnhardt Capital Management,

It is with regret and unflinching moral certainty that I announce that Barnhardt Capital Management has ceased operations. After six years of operating as an independent introducing brokerage, and eight years of employment as a broker before that, I found myself, this morning, for the first time since I was 20 years old, watching the futures and options markets open not as a participant, but as a mere spectator.

The reason for my decision to pull the plug was excruciatingly simple: I could no longer tell my clients that their monies and positions were safe in the futures and options markets – because they are not. And this goes not just for my clients, but for every futures and options account in the United States. The entire system has been utterly destroyed by the MF Global collapse. Given this sad reality, I could not in good conscience take one more step as a commodity broker, soliciting trades that I knew were unsafe or holding funds that I knew to be in jeopardy.

The futures markets are very highly-leveraged and thus require an exceptionally firm base upon which to function. That base was the sacrosanct segregation of customer funds from clearing firm capital, with additional emergency financial backing provided by the exchanges themselves. Up until a few weeks ago, that base existed, and had worked flawlessly. Firms came and went, with some imploding in spectacular fashion. Whenever a firm failure happened, the customer funds were intact and the exchanges would step in to backstop everything and keep customers 100% liquid – even as their clearing firm collapsed and was quickly replaced by another firm within the system.

Everything changed just a few short weeks ago. A firm, led by a crony of the Obama regime, stole all of the non-margined cash held by customers of his firm. Let’s not sugar-coat this or make this crime seem “complex” and “abstract” by drowning ourselves in six-dollar words and uber-technical jargon. Jon Corzine STOLE the customer cash at MF Global. Knowing Jon Corzine, and knowing the abject lawlessness and contempt for humanity of the Marxist Obama regime and its cronies, this is not really a surprise. What was a surprise was the reaction of the exchanges and regulators. Their reaction has been to take a bad situation and make it orders of magnitude worse. Specifically, they froze customers out of their accounts WHILE THE MARKETS CONTINUED TO TRADE, refusing to even allow them to liquidate. This is unfathomable. The risk exposure precedent that has been set is completely intolerable and has destroyed the entire industry paradigm. No informed person can continue to engage these markets, and no moral person can continue to broker or facilitate customer engagement in what is now a massive game of Russian Roulette.

I have learned over the last week that MF Global is almost certainly the mere tip of the iceberg. There is massive industry-wide exposure to European sovereign junk debt. While other firms may not be as heavily leveraged as Corzine had MFG leveraged, and it is now thought that MFG’s leverage may have been in excess of 100:1, they are still suicidally leveraged and will likely stand massive, unmeetable collateral calls in the coming days and weeks as Europe inevitably collapses. I now suspect that the reason the Chicago Mercantile Exchange did not immediately step in to backstop the MFG implosion was because they knew and know that if they backstopped MFG, they would then be expected to backstop all of the other firms in the system when the failures began to cascade – and there simply isn’t that much money in the entire system. In short, the problem is a SYSTEMIC problem, not merely isolated to one firm.

Perhaps the most ominous dynamic that I have yet heard of in regards to this mess is that of the risk of potential CLAWBACK actions. For those who do not know, “clawback” is the process by which a bankruptcy trustee is legally permitted to re-seize assets that left a bankrupt entity in the time period immediately preceding the entity’s collapse. So, using the MF Global customers as an example, any funds that were withdrawn from MFG accounts in the run-up to the collapse, either because of suspicions the customer may have had about MFG from, say, watching the company’s bond yields rise sharply, or from purely organic day-to-day withdrawls, the bankruptcy trustee COULD initiate action to “clawback” those funds. As a hedge broker, this makes my blood run cold. Generally, as the markets move in favor of a hedge position and equity builds in a client’s account, that excess equity is sent back to the customer who then uses that equity to offset cash market transactions OR to pay down a revolving line of credit. Even the possibility that a customer could be penalized and additionally raped AGAIN via a clawback action after already having their customer funds stolen is simply villainous. While there has been no open indication of clawback actions being initiated by the MF Global trustee, I have been told that it is a possibility.

And so, to the very unpleasant crux of the matter. The futures and options markets are no longer viable. It is my recommendation that ALL customers withdraw from all of the markets as soon as possible so that they have the best chance of protecting themselves and their equity. The system is no longer functioning with integrity and is suicidally risk-laden. The rule of law is non-existent, instead replaced with godless, criminal political cronyism.

Remember, derivatives contracts are NOT NECESSARY in the commodities markets. The cash commodity itself is the underlying reality and is not dependent on the futures or options markets. Many people seem to have gotten that backwards over the past decades. From Abel the animal husbandman up until the year 1964, there were no cattle futures contracts at all, and no options contracts until 1984, and yet the cash cattle markets got along just fine.

Finally, I will not, under any circumstance, consider reforming and re-opening Barnhardt Capital Management, or any other iteration of a brokerage business, until Barack Obama has been removed from office AND the government of the United States has been sufficiently reformed and repopulated so as to engender my total and complete confidence in the government, its adherence to and enforcement of the rule of law, and in its competent and just regulatory oversight of any commodities markets that may reform. So long as the government remains criminal, it would serve no purpose whatsoever to attempt to rebuild the futures industry or my firm, because in a lawless environment, the same thievery and fraud would simply happen again, and the criminals would go unpunished, sheltered by the criminal oligarchy.

To my clients, who literally TO THE MAN agreed with my assessment of the situation, and were relieved to be exiting the markets, and many whom I now suspect stayed in the markets as long as they did only out of personal loyalty to me, I can only say thank you for the honor and pleasure of serving you over these last years, with some of my clients having been with me for over twelve years. I will continue to blog at Barnhardt.biz, which will be subtly re-skinned soon, and will continue my cattle marketing consultation business. I will still be here in the office, answering my phones, with the same phone numbers. Alas, my retirement came a few years earlier than I had anticipated, but there was no possible way to continue given the inevitability of the collapse of the global financial markets, the overthrow of our government, and the resulting collapse in the rule of law.

As for me, I can only echo the words of David:

“This is the Lord’s doing; and it is wonderful in our eyes.”

With Best Regards-
Ann Barnhardt

Credit may provide a hint

As you know the longer term or bigger picture still shows the market trading rich to credit, but on a short term basis, this may be a hint of a market bounce.

Short term 1 min chart shows credit a little higher then the SPY, this would be reason or a hint toward the market bouncing from these levels.

Market Update

Bounce /consolidation or a soon to be overwhelmed divergence?

 DIA 5 min positive divergence, not huge, but it is 5 min.

 ES 1 min positive divergence

SPY 5 min positive divergence.


The TICK chart is lateral like the market so it is not shedding any light, but after a 1 day 1.5 to 2.5% sell-off, it would not be unusual to see an oversold bounce and considering the recent break, as you know, we often see prices linger and test the broken trendline, plus we have op-ex tomorrow.

$USD Dollar Liquidity Totally Frozen

In the news shortly we should be hearing about a new $USD swap line as the global $USD liquidity has totally and completely frozen. This level of distress has not been seen since the Lehman Brother collapse, IT IS ALWAYS SHORT TERM LIQUIDITY THAT GOES FIRST.

It is probably rightfully assumed that this freeze in the global market has led banks to sell the one asset that can raise $USD in a hurry...

 GLD down 2.5% today

GLD going from a positive divergence to a massive sell-off in 3C

It would not surprise me if USO which as you know, crude trades in $USD, is also being sold for the same exact reason.

News of Italy being locked out of the EFSF

I still can't find the Reuters story that supposedly sent the market tumbling today, however I did find something very similar, the problem is this is from November 9th.

2011

Euro zone has no plans to rescue Italy: officials

BRUSSELS (Reuters) – The euro zone has no plans for a financial rescue of Italy, even though borrowing costs of the euro zone’s third biggest economy have risen sharply to levels that economists see as unsustainable, euro zone officials said on Wednesday.

“Financial assistance is not in the cards,” one euro zone official said, adding the euro zone was not even considering extending a precautionary credit line to Rome.

The euro zone bailout fund, the European Financial Stability Facility (EFSF) will be able to extend such a precautionary credit line to countries which may be cut off from markets, once euro zone finance ministers agree on technical and legal details of the operation by the end of November.

The EFSF will also then be able to buy bonds on the primary and secondary markets, using various insurance schemes that would boost four to five-fold its currently free funds of around 250 billion euros.

Yields of 10-year Italian bonds surged well above seven percent on Wednesday — a level that many economists see as unsustainable.

Ireland and Portugal in the past were forced to seek euro zone and IMF emergency loans once their borrowing costs rose to such levels.

But the size of the potential bailout for Italy, which needs to repay 326 billion euros in maturing debt only in the next 12 months, is too big to handle for the EFSF.

And in this story is nothing new as it was understood when leveraging the EFSF first came out as a 7 page plan hastily thrown together as the G20 pressured the EU to find a resolution before the next (already passed) G20 summit. It has been clear since day 1 that Italy was never considered in the size of the EFSF and this is exactly why forward thinking people have said that the EFSF realistically needs to be closer to $4 trillion dollars to contain the crisis. However, to date, the EFSF has been unable to raise even $3 bb dollars in a credible manner (originally supposed to be a $10 bb euro auction).

How they expect the EFSF to be leveraged (which they still do) when such uncertainties as Italy and Spain have become EU threatening problems in the short time since the leveraged EFSF was devised, is beyond me. It's like throwing away money to rescue Greece and Ireland while Italy, Spain and potentially France put the final nail in the coffin of the monetary union.

Op-EX

Options Expiration for November is tomorrow, here's how it looks.

 At first glance of the alls, it "seems" that there were some fairly bullish option buyers as the $124-$130 level has more open interest relatively. In the money calls have very light open interest.

When looking at the PUTS, it is obvious there was a lot more action there with many puts having high open interest almost 10 points lower, they should all be wiped out, as to the open interest in the money from $122 to $125, there's pretty heavy open interest there, but $120 seems to be where the most contracts are to be found. If I had to guess, I would say a pin would probably be right around the $120+ area, however, we never know who bought the puts. Typically the professionals write and retail buys, but there's no way to say for sure whether the pros actually bought this month. If the call open interest was higher I'd be more inclined to lean in that direction.

As always, it's a best guess and my best guess would be somewhere around >$120-$122+, a bit wider then past guesses, but there is a quarter of a million in open interest at $122.

If any of our options players want to email me with any guesses with your reason, I'd be glad to post a revision.

USO breaks?

Last night I covered USO's possibility of an evening star reversal formation and today as being an important confirmation day.

Yesterday I covered the technical outlook.

So far today, we have some very important developments in USO, the close will largely determine whether the initial developments we have seen will stick, if so, then USO is set for what could be a very dramatic sell-off.

 USO should trade with the Euro like it did in the green area on this daily chart, because of the inverse correlation between oil and the $USD. When the euro rises, the dollar falls and crude must rise to make up for it, however that correlation that is as old as oil trading, was severely broken recently and we still don't know why. What we do know is that it formed a bearish ascending wedge which can be seen above and yesterday formed a candlestick pattern called an evening star reversal, the wedge, the false breakout from the wedge and the evening star candlestick pattern all implied a bearish resolution to USO's unexplainable climb.

 This daily chart shows yesterday's evening star doji in red and thus far today, the exact daily candle that would confirm a downside reversal, which should at minimum, retrace the wedge's base around $34

This 60 min chart shows two levels of potential support, the first being broken, but we want to see that stay broken through the close, that is the apex of the ascending wedge and the second is the $36.50 level which I have talked about as critical to a real reversal that would potentially move much further below $34.

 Here's a 15 min chart comparing USO with FXE/Euro, it should trade almost exactly the same, but in the white box USO diverges badly, which makes no sense, as I said yesterday, either someone knows something geo-politially that we don't or this is one of the biggest head fakes in oil I have ever seen.

 On a 3C short term chart, the breakdown is confirmed and leading negative.

 The same for a 5 min chart which started to fall apart badly yesterday.

 The original negative divergence can be seen to the left, this is the same time that the ascending wedge started to form and USO traded with the dollar instead of against it. The red box shows the extent of the downside leading negative 3C divergence for today alone.

On a 30 min chart, which has bigger and longer lasting trend implications, USO not only went divergent near the top of the wedge and yesterday, but has gone leading negative with most of the divergence put in today. So far if you are short crude using DTO or SCO which many of you are, this is a very good development.

Market Update

I'm having trouble finding the Reuters story, but apparently someone has said that there are no plans to aid Italy through the use of the EFSF, which doesn't seem to really matter as the EFSF remains a bailout mechanism which thus far is akin to an empty box of promises.

As noted in my last post, the market tends to retrace or linger after a major area of support has been broken and this 5 min 3C chart of the SPY shows a relative positive divergence, which could turn in to a bounce or simply the consolidation  that it has formed thus far.

As for the OWS movement on Wall Street, as predicted, the move toward the NYSE was bound to cause lashes with riot police-this is from today.

The OWS movement is noteworthy and unlike the Tea party that was easily diluted by adding a few hardcore right wingers to its rank, the OWS movement is much broader and less likely to be rendered meaningless as it is not comprised of political ideology that can be diluted, in fact there seems to be no leadership of any kind which at first would seem to be a weakness in the movement, but in fact it is a strength and I would not discount this movement, it may have real political and financial ramifications in the US and all of the other countries it has spread to. This is the start of our "Arab Spring", sometimes we are simply too close to accurately view the importance of such a movement.

It may not be a daily sugar rush market moving event, but it may very well shape much larger, broader reforms that are hard to see as they are not acute.

Timing Irony

Again, this week's analysis starting with Sunday as to, "What to look for in the coming week/s" and "What is important and what is just a sugar rush" and culminating in my last post in which Is showed the current dislocation between the markets and FX/Credit has just manifested itself in to downside risk and that Friday short is now really making some money.

As far as I know, there hasn't been any news, at least yet, which means the market would be aggressively de-leveraging and heading toward the 2008 crash scenario that I have said over the last 2 weeks, "We seem to be in that phase".

Here's the SPY/S&P and why what just happened is important and what s likely to happen next.

 First I want to point out a simple indicator everyone can use, it's the lost art of "Volume Analysis". Quite simply put, there was a heavy volume spike around 10:40 a.m., the corresponding price candle had a very small body which meant price didn't move much on very heavy volume, in fact the total move for that 1 minute candle was only -.03%, which is nearly flat. Being volume was so heavy, this would lead me to believe that there was a churning event at that moment, which is when strong hands, usually institutional money, pass off their shares to weak hands, retail traders who saw an early morning bounce and chased it-THIS IS EXACTLY WHY IT IS OFTEN SAFER TO GO AGAINST THE MARKET TREND THEN CHASING IT, especially if you have good reason to. In the near future I will concentrate more on bringing you more information on volume analysis. With thousands of exotic indicators, each claiming to be the next "Holy Grail", simple volume analysis is the most useful and most underused tool technical traders have. In addition, MACD, which I use a very long version of (26/52/3-which reduces noise and uncovers trends) was in confirmation of the trend losing momentum.
As for stops, I always say, "Don't put them at obvious levels and try to keep them mental so Wall Street can't see them". The huge uptick in volume as morning support was broken was largely due to stops being hit as well as short sellers jumping in the market, they would have been much better off selling short at higher levels with much less risk.

 As you can see, the triangle that EVERYONE is talking about, is breaking to the downside, I talked at some length about this last night and encourage you to revisit my comments when you have time.

 Here's the daily S&P-500 as of the capture time and as I mentioned last night, a closing candle (the way price is represented on the chart-Japanese Candlesticks) that has no lower wick is often a candle which will see follow through selling the next day, I also talked about that last night.

This raises the stakes that this top may be about to be broken and put us that much closer to a 2008 sell-off, however, be aware that significant technical breaks often see price test the former support level that was broken and there is often a lot of volatility around these areas as price lingers near them. How the market closes will tell us a lot more about where we are in the process.

 The 5 min 3C chart continues to confirm the price action after breaking lower on a negative divergence yesterday.

Ultimately, no matter what the market does, even if it makes a substantial run higher over a day or several days, this long term 3C chart of the SPY shows the underlying condition of the market, much like credit as I showed you before, except this is Institutional money and what it has been doing, which is fleeing this market on the long side and likely putting on very large short positions. This is a negative leading divergence in 3C which is the worst kind and tends to pull price to it, so the longer term (meaning anywhere from right now to the next few weeks) is very, VERY negative for the market.

If you are a longer term trader or even a swing trader, the tactical entry is not great here from a risk perspective, but from a longer term view, we have a lot of potential downside and we are really not that far off the highs yet, so when you look at the forest, no one has missed the bus.

We Have 2 NEW POWERFUL INDICATORS

I hope this demonstrates the reliability of these indicators as both are based on longstanding facts about the market, but I guarantee that few other traders are looking at these, "To make money in the market, you must see what the crowd missed"


I hope these become even more useful and tie in to our already very unique 3C analysis and I hope this demonstration helps you to trust in these indicators because what it all boils down to is you have to be willing to go short even when the market looks strong and go long even when the market looks weak, waiting for the market to confirm is just loosing profits and likely putting you in a trade that is about to fail. You have to be comfortable doing the opposite of the herd of sheep if you want to break free from the herd.

I will continue to create and develop these indicators, but you must be able to trust and trade them.

The first is based on the longstanding arbitrage between the dollar and the market (they have an inverse relationship and the Euro is 50% of the Dollar Index, so it makes an ideal study) which has stood the test of time except when there are large policy interventions, but we are aware of those as they happen and know when to use the indicator and when to back off. This, unlike the credit indicator that I started creating and featured last night, is the basis for the indicator I will create, but even like this, the information is able to be used to trade from and tells us something about the market now.

 On a 5 min chart, FXE-the Euro Index ETF is in red and compared to the SPY in green. These should trade together like they do at the left side of the chart, when the SPY trades higher then FXE, we know there's a dislocation in the market and the highest probability is that the SPY will revert to the mean or fall to move in line with the FXE/Euro's trade. In white you can see 2 such dislocations when the SPY traded above the Euro, the next day the SPY fell in the first example, the second example the SPY fell a lot and "appears" to have reverted to the mean.

However, looking at a longer term 60 min chart, we can see the SPY is still very rich to the Euro and is due for a fall to revert to the mean. Clearly the SPY has traded sideways in the white box while the Euro has traded down. A reversion or a drop in the SPY seems to be a very high probability -once again, to the left you can see when they traded nearly in lockstep with each other. This has bearish implications for the market.

 As professional institutional traders say, "Credit leads, equities follow". Well luckily, an ETF, HYG was recently created allowing us to track credit, this is what  the indicator you saw last night is based on. Once again on a 5 min short term chart, the dislocation between the SPY in green and HYG/credit in red, is clear in the white boxes and to the left you can see how they "usually" trade in near perfect unison. The result of the first dislocation, a drop in the SPY overnight. The result of the second, a major drop yesterday and they seem to be back in lockstep, that is until we look at the bigger picture again.

Here's an hourly chart, in yellow credit is leading the SPY and the SPY makes a gap move higher within a few days, then the SPY in white to the left is dislocated and trading higher then credit, the result, several days of nasty drops in the SPY.  In the middle white box, again the SPY is rich to credit, the next few days it drops. Now, even though we have seen several days of trending down, the SPY is still rich to credit, implying we will see more downside.

Like I said, I started the rough outline of the credit indicator yesterday and you saw it in last night's post, I will continue to refine and test it and I will create the FX indicator as well. However, for the time being, when I show you these dislocations, such as Friday when I said, "Use this strength in the market to go short", it is up to you to trust what you see, even when it is hard to trade against the market, remember the market is there to deceive you.

Since Friday, you could have made 10% in SPXU.

Market Update

In our first early update, there's a bit of a contradiction...

 The ES 3C 1min chart, which is weighted much more then the corresponding SPY 3C 1 min chart, we can see an overnight positive divergence at the lows that sent ES higher, a negative divergence in premarket sending ES lower and a current leading negative divergence which has bearish implications.

 The SPY 1 min 3C chart has been in line all morning and has posted a very minor leading positive divergence recently.

 The same is visible on the 2 min chart, suggesting some upside intraday.

The 5 min chart is perfectly in line, thus so far capping the extent of the positive divergence to a bounce, but still the ES chart disagrees.

So far credit is largely in line with the markets, it has sold off so there's no major divergence there yet, although credit is lagging the SPY by a little.

A good sign for Germany

Riots/protests against Greece's new government 

The slogan?

EU, IMF out!


It seems to be a day of unrest across the Western Democracies and likely a welcomed development from Germany's perspective.


What's that Chinese curse? "May you live in interesting times"

All HECK BREAKING LOOSE or JUST the START of a SIGN OF THE TIMES?

Events are so fluid that before I can finish this post, something major is likely to have happened, but it is important that you UNDERSTAND the backdrops that underpin the market right now or else technical or any other analysis will be useless. Basic understanding of the issues is all I'm trying to convey, not a live commentary on world breaking news. My post from Sunday, laid out many of the main events to watch for and what is just what I call the "sugar high news of the hour". Understanding the difference between what is important and what is a sugar high gives you the ability to enter shorts as I had recommended on Friday's strength and at which you would already be at a nice profit on. So here's what has happened overnight as 3 a.m. EDT in the US, is when the European markets open and all hell breaks loose.

Overnight:

On the overnight (in the US) European opening, all bonds of just about every nation moved to worse levels, the higher the yield, the more interest a country has to pay to borrow money and at some point it becomes impossible to sustain those high interest rates, that is when a country is "Locked out of the capital markets" and is forced to seek a bailout like Greece, Ireland and Portugal. Italy, which is 6 times bigger then Greece and the third largest economy in Europe seems to be the country that could cause it all to come crashing down and then the EU is beyond redemption, but Spain is very large too and for weeks, maybe months, has been out of the spotlight as if all was well there. I warned on Sunday that this would change VERY soon, I didn't realize that it would change Monday morning and today it is nearly overtaking Italy as a sign of major market trouble for the EU and by extension, the rest of the world including and maybe much worse then we realize, China as the EU is China's main trading partner.

So overnight on the European opening, France (this is a sign of what was once termed contagion of the PIIGS -Portugal, Ireland, Italy, Greece and Spain- causing trouble that would possibly hit the core, France, Germany and most of the northern EU countries) saw the spread (this is a measure of how a country's bonds are performing against a benchmark which is German bonds) hit a new all time high, meaning that the one country that the European Central Bank (ECB) cannot support in the secondary bond markets, is the one under attack as investors look to accurately asses risk, which can't be done with Italy or Spain as the ECB buys their bonds in the secondary market to support them, this gives a false value and price discovery is irrelevant, so bearishness is being expressed via French bonds and in doing so, is causing that which has been most feared "Contagion of the Core EU countries".

As a result of both Spanish and French 10 year notes hitting all time record wides vs Germany's, the EFSF bailout mechanism (Bonds) themselves have also come under attack from bond traders and are also hitting new all time record wides vs the German benchmark. The bottom line, things are going from bad to worse.

Italy which hit record yields for the country just a week or so ago, above the 7% level, which is widely seen as the point of no return because Portugal, Ireland and Greece (all 3 countries who have received bailouts) all asked for bailouts within a week or two of their bonds hitting this unsustainable level of debt interest, started moving higher today toward the all time record. For the countries mentioned above,  effectively it became too expensive for them to borrow on the open market, the same way we do in the US by selling treasuries. The interest rates where too high and they couldn't repay them, which eventually would lead to the dreaded default, the point at which they can no longer make those payments to the holders of their debt, which is the ultimate bad ending. That is what is happening in Italy, Spain and starting to happen in France.

Today the Spanish tried to auction off $4 bb in 10 year debt notes (like out treasuries), they were only able to sell 3.56 bb so the auction was deemed a failure. When there are more bidders for the debt then there is debt available, the yields the country has to pay drop, but when they can't even sell what was planned, they sky rocket and as an example, the same Spanish bonds were sold a mere 3 weeks ago for 5.433%, today they went for 6.975% which is just shy of the 7% point of no return. So Spain has reemerged very quickly as a point of big trouble.

Furthermore, the Spanish spread vs the benchmark German bunds hit an all time record of 499 basis points. You should be reminded that LCH hiked the margin requirements to trade Italian bonds when their spread hit 500 basis points, when that happens, bond traders must put up more money or sell positions and what tends to happen is there is a lot of selling which in turn causes bond yields to rise even further creating more pressure on Spain, Italy, France and others as well as the EFSF bonds.

As mentioned, French Bund Spreads vs German were at 175 basis points earlier in the week, they are now at 202 which is a new record.

Later in the morning the ECB (European Central Bank) did intervene in the secondary bond market and bought debt from every country trying to lower the yields, they especially focussed on Spain and Italy, but as we have seen time and time again, they spend billions to support these bonds and an hour later it is as if they did nothing as yields move higher, this leaves the ECB with a ton of toxic paper on their balance sheet and they have a limited amount to work with, around $400 bb euros, of which they have already spent more then half.

To make matters worse, this morning the rating's agency Fitch said,

FITCH SAYS ITALY RATING MAY BE CUT IF IT LOSES MARKET ACCESS

FITCH SAYS ITALY RATING COULD BE CUT TO LOW INVESTMENT GRADE

FITCH SAYS ITALY IS PROBABLY ALREADY IN RECESSION

Also as per Reuters

ECB could lend to IMF for euro zone rescue -officials

As I pointed out in an interview with a German ECB member in an interview on Sunday, he was asked directly about the ECB lending to the IMF and let the IMF buy the debt of these countries as the ECB is prohibited by treaties and law to do so, he responded that that can not happen.

However the pressure on the EB from all over the world to at as lender of last resort is immense, the problem, it breaks their laws and Germany is strictly against it.

Peter Tchir of TF Market Advisors says the following about this development,

The ECB may be considering using the IMF because the IMF can demand collateral or better terms on its loans than the ECB?  The IMF does try and become a senior lender.  If that is the case, than this can actually be really bad for existing debt holders.  Especially if it is coming as a realization that SMP's have been totally useless in sustaining the crisis and have done nothing but stuff the ECB's balance sheet full to the gills with weak assets and helped some quick traders make a nice profit.

Be very careful with this rumor.  As with so many other half baked "plans" (found on a discarded cocktail napkin after a 3 martini lunch) , the likelihood of this occurring seems low, and I highly doubt it will have the impact people want or hope.

Here's a look at this morning's record debt in the EU (whether you understand the European consequences of their bonds or not, you should have little trouble understanding the importance through these harts-all bearish, all today):

 The bailout mechanism, the EFSF bond spread vs benchmark German Bunds, you can see the trend is up and rather quickly, this means the yields to hold this bailout paper are rising. As a reminder, they need to raise nearly a trillion Euros and have had trouble with their only auction of raising a simple $3 bb Euros.

 Here is the French Bund Spread vs the German, in little less then a month, it has nearly doubled, contagion has hit the core.

Here are the Spanish spreads vs the German benchmark, from 380 to 499 in 12 days-MAJOR PROBLEMS

In some other ominous news, if MF Global is the Bear Stearns of 2011, Jefferies which was in trouble and subsequently managed to talk themselves out for a short period, is back in trouble and may become 2011's Lehman Brothers.

In red to the left was the first period of market trouble for the very same reason as MF Global, exposure to European debt. They managed to talk themselves out of it briefly although the stock was halted in trading several times in a day as circuit breakers kicked in. The white is when they though they had convinced the market they were okay, it didn't last long and now they are at new lows as they are seen as the next MF Global or Lehman Brothers.

As for the Technical government in Italy led by Monti, which rallied the market earlier this week... As much as Berlusconi was despised, it seems Monti is already is big trouble, which may pave the way for the worst outcome for Italy, elections scheduled for next spring of 2012.

Milan students protest against "bankers' government"

In Turin, clashes broke out between police and thousands of demonstrators including anarchists trying to approach the local headquarters of the Bank of Italy.

Police said several people had been injured, including a policeman. Some of the protesters chanted: "Smell of austerity" and "Monti will all make us beggars."

A collapse of market confidence has pushed Italy to the brink of financial disaster and driven up its borrowing costs to unsustainable levels.

Monti's cabinet is made up of a mix of academic specialists and experienced administrators and includes Corrado Passera, the chief executive of Italy's biggest retail bank, Intesa Sanpaolo, as industry minister.

And here at home, the OWS movement is converging on the NYSE, setting up likely violence with riot police, here's the live feed:

Chart and market updates are on the way next.