Exploring All the Possibilities

by Captain Hook, TreasureChests.info | March 4, 2008

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The following is an excerpt from commentary that originally appeared at Treasure Chests for the benefit of subscribers on Wednesday, February 20th, 2008.

These are definitely interesting times we live in, and the markets are also in this category from a predictive standpoint. Many are now dependent on the stock market’s performance, so the stakes are high on numerous fronts. And for this reason you not only have participants remaining invested far past what would have historically been viewed as ‘prudent’, but master planners in our society feel justified in arriving at a desired outcome no matter the means. This of course often involves market manipulation in addition to a regular priming of the pump by influencing prices in the futures markets, which extends from currencies to foreign stock markets.

As an example of this, and a topic near and dear to our hearts at the moment, it appears some ‘big money’ players, which could be officially sourced or simply overly zealous hedge funds, are very interested in maintaining a bid under Chinese shares, where I will presume the thinking is somewhere along the lines of, ‘if there’s no growth here, there’s no growth anywhere.’ And of course the latter would be true if it were not for 20-percent inflation rates in China. As with the West however, these measures will only put another finger in the dyke, which is springing leaks on an accelerating basis now, as follows:

February 15 – Financial Times (Geoff Dyer and Tom Mitchell):

 “A real estate agency closing hundreds of branches while the owner of another absconds; property developers canceling fundraisings and debt spreads widening dramatically; house prices slumping - these sound like recent tales from the US housing market. Yet these events have happened in the past three months in China, as some parts of the country's housing market have shown signs of real stress. Shares in many of China's largest listed property developers have fallen more than 50% from their highs of last year in the face of investor fears that some developers might be forced into bankruptcy.” Source: Credit Bubble Bulletin 

The logic here is growth is needed – therefore, as with the banks in the US that just went to the trough for another $50-billion, more money is created out of thin air. And we are seeing the effects of this largesse in the stock markets at present, even if what has happened so far is just priming for a rally, as Dave’s valuable Bollinger Band (BB) analysis is suggesting. What this all means when you put it together with cyclical influences not set to bottom until next month is -- ‘bottoming price action’ is in the works, with a rally into June possible, much like the 1948 pattern. All we need to confirm this possibility has morphed into a probability is for open interest put / call ratios to start ticking higher, which would provide the deadly combination that sponsored the perpetual short squeeze until July of last year. 

Here, because post expiry reporting appeared to throw off some ‘bad stats’ yesterday, you will be updated in this regard tomorrow morning. 

In the meantime however, there are some other signals we can watch for clues as to which way things should break moving forward. Certainly the move higher in precious metals and commodities yesterday was a big clue a great deal of pressure is building in the pipe. And as soon as they back off a bit don’t be surprised if the cake eaters take this as a sign ‘cheap oil’ is on the way again, and ramp stocks higher in the process. This could happen sooner than we think as well, like by month’s end never mind April. If crude were to fail here at $100 (or there abouts), again it would be seen by some as a potentially important top, which could help stocks temporarily until the current inflation dose wears off.

As outlined yesterday, a close below triangle support on the ProShares UltraShort FTSE/China 25 (FXP) ETF would raise a warning flag with respect to the potential $30 measured move (with an associated target of $57) that would be triggered, but that in knowing cyclical influences were still in our favor, such a break would likely prove false. In this regard today is a ‘biggie’ in the sense another close below triangle support would be confirmation (2-day) of the break, although this would not necessarily negate the possibility of further testing, or even a false break. (See Figure 1)

Figure 1

Further confirmation not only FXP is possibly heading lower, and that the broad stock market is heading higher, would come with a break of indicated supports in the FXP / DXD (our Dow proxy) Ratio today, which just so happens finished on support yesterday. If a break does occur, a move all the way to $57 in FXP is not assured, but it will definitely continue to lose ground until the VIX bottoms. (See Figure 2)

Figure 2

And then there’s the CBOE Volatility Index (VIX), which is currently vexing the 50-day moving average (MA), but may need to test the 200-day MA before heading higher if history is a good guide. Here, if the VIX breaks below the 50-day MA on its way towards 20, it’s not hard envisioning the SPX taking a good swipe at 1400+ as a result. (See Figure 3)

Figure 3

Not to be left out, the Canadian Dollar ($) has been lurking in the background just waiting to pick a point to attempt a rally. If technicals displayed below in conjunction with continued strength in crude, commodities, and precious metals persists, such a move could start as early as today. If this transpires, a run into the 104 area should be expected with a move to new lows for the larger move anticipated afterwards. (See Figure 4)

Figure 4

Copyright © 2008 Captain Hook
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