What happens for the rest of this week is a big, big deal.

We are at the precipice of a cliff. Or we're simply at the lower part of a very big range. I have no idea what's going to happen next. Looking at index charts, technology looks very vulnerable. Yet the Russell 2000 looks like it could make a big push higher from these levels. Just look at the $SPX:

 

The Powers That Be have an interest in defending 1040, and they've done it again and again. If 1040 breaks, the "obvious" head and shoulders pattern we've been discussing for three months comes into play, and we're looking at a hard fall to around 860 (far below my target of 925, often cited here).

At the moment, my portfolio is up 0.52% while the S&P is down 2.67%. You can imagine how I feel about that. I have 73 short positions and 2 long positions (BP and, much larger, GLD).

Today has been profitable so far, but I'm terribly disappointed, particularly since this end-of-quarter nonsense (risk-reduction on my part) has cheated me out of some substantial profits. Of course, it could have gone the other way, so I'm trying to remind myself of that.

Simple……

+ It was up this morning, in the face of nearly 300 points off the Dow; this thing seems like it simply can't be beaten up anymore

+ It is near lifetime lows

+ Everyone on the planet seems to think it's heading for bankruptcy

This is my only long equity positions, and it's a pretty big one. I'm up about 2% so far on it.

I've been hoping somehow my primary bear scenario might play out with a
rally to 1150 before SPX made the next move down towards 870, but it is
becoming increasingly clear that it simply isn't going to happen. After
reaching an obvious point for a low on Friday morning, the bounce on
Friday afternoon was very weak and we just traded sideways yesterday.
Overnight the range support level was broken very decisively and a test
of the next main support level at 1048 ES in the near future looks
likely.

If 1048 ES breaks again, and I think that now looks more than likely,
then the way will be open for the February and May lows to be retested
in the 1033 ES area, and it that level breaks then we will be starting
what I believe will the main event of the bear action this summer, with a
fall to the very important support level at 870.

I was expecting a bit more work to be done on the right
shoulder of the huge head and shoulders pattern on SPX, but we came
close enough I think, and the other two bear patterns on the SPX daily
chart, the rising wedge and the right-angled and ascending broadening
formations, are already sufficiently complete. The target of 870, as
well as being a viable target for all three patterns, was also such a
key support/resistance area in late 2008 and early 2009 that if we get
close to it, it should exert a degree of magnetic pull for a test of
that level:

Having said all of this we may well bounce initially
today. EURUSD hit a significant support level overnight & the
RSI on the hourly chart hit a major low:

GBPUSD continues rising in a strong channel, though it might retrace a
bit today after hitting the top of the channel again yesterday:

I read an argument recently that the only major hard currencies in the world
today were gold, silver, the Canadian and Singapore Dollars and the
Swiss Franc, and I would agree with all of those and also agree that
USD, EUR and JPY are all, on current policies, on the road to ruin. GBP
was too, but the last spendthrift and incompetent socialist government
is a receding memory and the new coalition government seems determined
to steer the UK back onto a sustainable economic and fiscal course over
the next few years.

If equities plunge hard over the summer then GBPUSD may
well test long term support again in the 1.40 area. After that I'm
thinking that GBPUSD might start looking attractive as a longer term
hold, and UK gilts will start to look a considerably better bet than US
treasuries.

---

Commentary from Tim

Most mornings, if I saw the /ES was down 15 points, I'd be thrilled. Not this time.
It's not because I'm net long. I currently have 25 long positions and 46 short positions, and my only large positions are on the short side (DBA and USO).
But, let's face it, these days I'm usually totally short, and my portfolio is often more than 100% committed. Due to (a) my concerns about a small push to 1100 before a resumption of the fall and (b) end-of-the-quarter conservatism, I am only 39% invested. So even if we fall hard today, I imagine I'll profit only modestly. I don't like that one bit.
I had really been hoping these last two trading days of the quarter would be quiet. I guess not; with the news from China driving futures and the Euro down, today, at least, is going to be a mover.
I've got 190 items in my "Bear Pen", and I'm only going to deploy them individually when I think the risk/reward makes sense. The Euro, however ,can't seem to get off the mat. If it breaks below 1.2141, the prospect for a modest push higher dim considerably.
In any event, I wanted to do a brief post just to let you know where my head was at. Even I'm surprised at how pitiful the bulls have become at putting together even a small rally in the face of this ongoing selloff.
A post from TOSHI that is also time sensitive

 

When money flows out
of the domestic markets it attempts to find other places to rest.  Both bonds and precious metals (gold) have
benefited from that.  Gold has been a
swing opportunity in the last couple of weeks, primarily because the US Dollar
has now had 3 weeks of pullback (as the Euro firmed).

 
(Changing relationship of Gold to the US Dollar)

 
(The long run of gold)

 

In these charts, it
is worth noting that the relationship between Gold and the US Dollar frequently
changes.  Currently, there is an indirect
relationship between them.  The change in
this relationship is highly correlated to the Euro's direction to the US
Dollar.

 

I would also add here
that the decade long run of gold will eventually run out of steam and correct
itself.  I am in agreement with Tim
Knight on this.  Given the relationship
to the Euro, if the Euro does blow up so does gold (e.g., the current bubble
would burst).  However, until and if that
happens, it is worth noting that other commodities have benefited from the
shift in the Euro and USD.

(Notice pivot and change)

 



 

I would summarize
that:

 

– I watch these
relationships on a daily basis to monitor the money flows of the markets.

–
As money continues to flow out of equities, I look for periods when flows into
gold and bonds.

– A positive Euro
(and a declining US Dollar) remains good for gold longs here.

– Commodities are
benefiting from the rotation out of equities and the weakening US Dollar.

---

(Editor's note:  This post was submitted over the weekend…here is FIC's comments in the comment section:  just a comment about this post …. I wrote it on Saturday before the
Euro pulled back …

today it looks like gold will take a hit
because the Euro has weakened again … )