The Fool, or the Fool Who Follows Him

Everywhere you turn you will hear "this is a great buying opportunity".  DON'T BE FOOLED!  The best buying opportunities occur at market bottoms and we are no where near a bottom.  How do you find a bottom you ask?  When a chart carves out a bottom, you will usually see a period of what is called accumulation.  Accumulation is a period of time where you see a period of time that price moves horizontally before a breakout and run up.

In case you were wondering, the following is a real chart example of accumulation and distribution.

Wesa people gona die?

Very very frightening times right now folks.  Check out this video by Peter Schiff which explains what is going on with currencies and credit ratings.

Where it was, Where it is, Where it's gona be

Where it was:  over the past year we have seen what is called a “head and shoulders” topping pattern develop.  This pattern usually occurs at the top of a trend hence the name topping pattern.  This pattern is one of the most telling of all market patterns.  I say that because off of this pattern you can usually expect a measured move.   A measured move is where price moves from one point to another (in this pattern this point is called the neck line) and then moves again in the same direction an equal point or percentage.  On August 4  we broke below the neckline of the larger pattern.

Where it is:  what a day, all major indices we saw dropped significantly.  The NASDAQ fell the most falling 6.9% .  If you’ll notice, we have gone well past the point where our measured move told us we were going.

Where it’s going:  What is left is speculation.  I can’t say with absolute certainty, but there are clues.  Here I will outline what I am looking at.  From here I am looking at several different price levels and sociopolitical factors.  1.) I am looking at support and resistance levels.  We broke through several and ended just above one.  We started the day by hitting a top off of the 1200 level and pushed through 1175 and 1150 respectively.  We eventually found some support at 1120 which was resistance a year ago today, and was coincidentally the point at which we saw QE2.

If it looks like a bear, sounds like a bear, and mauls you like a bear, it will rip your face off.  That’s right, we have entered a bear market.  Typically, and most bear markets aren’t typical, bear markets consist of three legs down.  Having begun the first leg, we haven’t seen any rally attempts yet.  Since we haven’t seen any rally attempts, I think one is coming soon.  the sooner the better.  The first rally attempt will likely come after our one trick pony Ben Bernanke announces QE3, which I expect he will do tomorrow.  Off of the first rally attempt we will probably go back up to one of the previous levels of support, that are now resistance.  I expect this to occur around 1200, or wherever the 200 day moveing average is when this rally occurs, before we head back down.  After that I am a little foggy.  For more in-depth analysis please visit Ron Walker and his video blog at http://www.thechartpatterntrader.com

Rates, time will tell

     this mourning I posted what you can expect from a downgrade of a country's credit rating.  durring the trading day we saw prices rise on tresuries while yields fell.  This is the opposite of what I said was going to happen.  Over all, was I wrong?  Time will tell.
     What I think happend and is going to happen is that prices rose while yields fell because of an overall rise in volume.  Once volume dries up, I expect yeilds to rise.  I cant say how high they will go, but I deffinately think that yields will rise.

Why I Agree with S&P

     One of the reasons that you will not find a single middle eastern country with a high credit rating is because of the overwhelming potential for political volatility.  Not to say that the U.S. is on the verge of major regime change, but things are so partisan that no progress can be assured.  Congress came within hours of not being willing to pay its debt just a week ago.  Its not that there was a question of whether or not the U.S. could pay its debt.  The point is that there was, and still is a question of whether or not they will be able to agree over what needs to be done and pass legislation in a timely manner. 
     Not only does it appear that some people in congress are willing to allow a default, but they promptly went on vacation after "accomplishing" an agreement to raise the debt ceiling while cutting spending in amounts that appear to only be a drop in the bucket.  That's right folks, congress gave themselves a pat on the back after coming to a deal that does nothing to solve the problem.  The deal that they agreed to merely slows the debt curve instead of making a meaningful change in direction.  That is why I agree with S&P's decision.

What happens when you get a downgraded?

     What happens when you get a downgrade of a country's credit rating?  It's quite simple.  you can expect major markets and indexes drop as people move to cash.  this happens because, with the downgrade you see increased yields on bonds and T-bills.  in other words, the country who's credit has been downgraded now must pay a higher yield as an incentive for people to invest in their bonds and T-bills.  thus, yields go up while prices go down. 
     A higher yield on T-bills (or treasury bills) also will cause the value of the country's currency to increase.  this seems counter intuitive but T-bills are essentially a bond that represents a holding of that country's currency.  With this you also see commodities that are valued in that currency eventually increase in value due to the new strength of the currency (although initially you will see a sell off in these commodities due to the initial sell off in the general markets as people try to find safety for their money).
     You can also expect a so called "flight to safety".  this means that people will move their invested money into things that appear to be safe.  what is a safe investment?  investments where prices and yields are relatively stable, like gold and other commodities (particularly precious metals).
     What does this mean for you?  Some time after the downgrade occurs, the general cost of borrowing will increase.  That is, credit card rates go up, variable or floating rate mortgages go up, and businesses increase their prices to offset the increased cost of their borrowing.  However, it isn't all that bad.  That is, the value of that country's currency is now worth more, i.e. you'll get more proverbial "bang" for your buck on imported goods.  Also, banks will loosen requirements on the loans that they give because they can now get more "bang" for their buck as well.