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The World At Large
Week beginning September 21, 2008
by Randall Ashbourne

Astrological conditions affecting stock markets combined with technical analysis


Click here for the full version of this report including technical charts in PDF format

The Bear is dead! Yes, that is a gross exaggeration. However, it is now distinctly possible that the Bear is playing possum and that his reappearance as a growling grizzly has been delayed significantly.

Finally, we have some resolution to the weird and contradictory signals and are beginning to get a clearer picture of where things are now likely to go.

You, dear reader, have probably been as frustrated as I’ve been over the past two months as we tried to make sense of the jumbled omens, portents and entrails thrown up by both the astrology and our technical charts.

In the end, something weird was happening … and, in many ways, I am astounded at how our purely technical charts pointed to a resolution of a crisis which threatened to collapse the global financial system.

Week-by-week we have gone through charts where positive divergence continued building below the surface in spite of a daily diet of news disasters; where the long-term monthly charts were telling us the potential for a huge rally was developing, even though we knew the final, sudden downleg of the current Bear posed a huge threat.

Doubtless you have been as tired of reading, as I was of writing, that the weakness of the “rally” out of the July Lows was almost too weak to be believed and that it was pointing to something seriously out-of-kilter with “normal” market movements.

A few weeks ago, while warning the July Lows would be retested, I made these remarks:

“When the markets hit bottom in July on massive volume and with a record number of new Lows, the spike in what is commonly referred to as the “fear index” did not reach nearly as high as August, 2007, or the January and March bottoms of 2008.

Many commentators dismissed the VIX as being no longer relevant. However, given the other strange contradictions between markets which started emerging simultaneously, I disagreed and it seemed to me to be just another part of the odd pattern which was developing.

Those contradictions have not gone away and, at this stage, I still believe they’re occurring because of the chance a massive rally could get underway after the next severe plunge.”

VIX Monthly[chart] click to view this chart and download the entire PDF file.

This is the latest monthly chart of the VIX – the “fear index” – and we now see that the VIX was not “broken”, it had not become irrelevant.

July’s spike did not hit the former levels needed for a Low in stock indices … because a Low was not reached! The level of fear did not reach high enough because the markets had not finished capitulating down.

This opens up a couple of interesting possibilities we’ll go through in a moment. But first, while this latest spike may have produced a multi-week tradeable Low, it is not certain that the Bear is dead.

If we check 1998 and 2002, we see the VIX maintained a very high level of volatility for three, or four, months.

Back in July, I remarked I’m not a big fan of the “it’s different this time” crowd, because it very rarely is different.

However, this VIX reading, taken in conjunction with the unprecedented action from the White House and Wall Street in the past few days, opens two interesting possibilities.

Scenario One:

As we all know, I’ve been blathering on for weeks about the weakness of the rally from the July bottom, while warning it would be subjected to a retest because of the record number of stocks which hit new Lows at that time.

This was particularly so because of the unusual strength of the downtrend from the May High, which barely paused for even a mild consolidation.

It now looks as if that entire period from mid-May to last week was part of the same downleg … and that instead of being an inexplicably weak Wave 4 countertrend upwards, the mid-July/mid-September sideways range was the consolidation which didn’t occur during the plunge from May to July.

If that is the case, Wave 4 is now getting underway and should make a 50% retracement of the May-September downleg … just as the countertrend rallies out of January and March recovered 50% of the drops.

Scenario Two:

The second possibility is that the Bear has been forced into artificial hibernation early … and that what we’ve just seen is a truncated Wave 5 down that was cut off at the knees by massive global intervention.

I repeat … things very rarely are different and we should consider that as a possibility, rather than a probability, if for no other reason than that the weight of historical evidence dictates that the final downleg of Bear trends is very sharp and very fast and
lasts, on average, 42 to 54 calendar days.

If the rally which now appears likely gathers legs and can continue its momentum past a normal second degree countertrend timeframe, which is 7 to 12 days, we are looking at something more cyclical – a minimum of 30 days, and potentially running out to 45, 60, or even 90 days.

The Alternatives

The first of these is that we’ve just witnessed a massive blip going into options expiration and that the rally is a first degree countertrend (1 to 4 days) which will fail by Tuesday and the markets will resume their freefall.

The second is that we’ve started a second degree countertrend (7 to 12) which will fail sometime next week as we run into the New Moon and a major Fibonacci cluster of market turn dates … and the markets will resume their freefall.

One thing is different

And that “thing” is the massive intervention by Governments and Central Banks – but, more specifically, the steps taken to ban the practice of short selling on stocks viewed as being strategically important from an overall economic viewpoint.

As I write, the proposal on Wall Street is to maintain the ban until October 2, with the option of extending it another 30 days.

We need to weigh the potential impact of this ban very carefully … and especially since a 30-day extension would run us out to the possible 45-day rally period I mentioned above.

It means this … the weight of forces now favour a substantial rally, simply because much of the downside risk has been compelled to change direction.

Something significant has taken place in the past few weeks and it’s this … Governments have ganged up to bash the hedge funds into submission.

Russia has shown a willingness simply to shut down its markets.

The sovereign wealth funds – the very, very big operations run by the Arab Gulf States,by Singapore and the mainland Chinese – forced a collapse in commodities, including oil and gold, by shifting their focus to the US dollar and support of the world financial
system.

And the reason is simple … they all own massive amounts of that system. Dubai and Singapore have been forced to watch as hedge funds played with the stocks they’d poured billions into just a few months ago.

The Arab States have been converting their petrodollars into financial assets for decades and have been involved in gearing up the Emirates zone as a world financial centre.

China, in particular, has watched its stock markets collapse as commodities price rises attacked its competitive manufacturing position while dragging down the value of its enormous greenback reserves.

The hedge funds got too greedy and too arrogant. They have been forcing down the price of shares in some stocks to the point they know will trigger a massive flood of margin calls on directors, executives and other stock holders.

And Governments worldwide have decided it’s time to break their back. Who would now dare to short Russian stocks, knowing that Prime Minister Putin would simply lock the doors and not re-open them until he was sure every short would get burned into
oblivion?

Ditto for the City and Wall Street. Will anyone dare to short anything on the New York Stock Exchange after seeing the lengths to which Bush, Bernanke and Paulson are prepared to go?

What it all means is that now the only downward pressure can come from institutions selling shares they actually own.

And the massive, massive volume all through last week would suggest there may be very, very few sellers left in the market until it goes significantly higher than it was at Friday’s close.

Too, the hedge funds can now enter the markets only on the long side … their impetus has been forced to change from shorting, to short-covering and, now, to playing the long side – if not of industrial and financial stocks, then back to commodities, oil and gold.

Remember, though, that China, Singapore and the Arab sovereign wealth funds do not want to see a resurgence in those areas until the security and the stability of the world financial system has been locked down.

An overview

We cannot yet be certain the Bear has been isolated and forced into early hibernation.

But that is, also, a possibility we cannot rule out!

Remember, there is now no traditional Bradley Model turn date until December 14, following the one which occurred yesterday.

We have a Fibonacci turn cluster and a New Moon centred around the start of next week.

But we need to be careful that these do not mark only a temporary High – or Low.

Traditionally, October is a bad month for American markets, although it also usually brings a recovery which starts off the almost-annual Santa Claus rally.

And there are some short-term and longer-term cycles which are not due to bottom until mid-October.

And one further complication … the enormous political pressure on the Republican side of US politics to fix the economy before November.

Add all those political imperatives together – from Singapore to Dubai, from Moscow to the Potomac – and there are some very heavy players with some very big money with some very vested interests in shooting this Bear, and not just with a temporary
tranquiliser.

On top of those considerations, we still have the contradictions. Year-to-date, the Russell 2000 is down a piffling 1.6%, and rose last Friday with volume running at 177% of its 10-day moving average.

Look, I’ve heard every explanation under the sun for this apparent “quirk” and I am as disbelieving of all of them as I was of the notion the VIX was “broken” and “irrelevant”.

All of the “explanations” boil down to one thing – Russell 2000 investors are morons who can’t recognise a Bear on the rampage.

If the broader American economy were truly in dire straits, why on earth would Pissant Publishing and Whacko Widgets continue to outperform Boeing and Caterpillar? It just doesn’t make sense. It’s not logical.

And it’s not just the Russell; it’s the S&P Midcap 400 (down 6.2% YTD) and the Dow Transports (up 11.6% YTD).

Let’s look at some technical charts …

AUSTRALIA
ASX 200 Big Picture[chart]

We’re starting this week with a look at the ASX 200 because there’s something I want to illustrate with the use of trend lines.[charts and comments follow...CLICK HERE to view the charts and download the FULL version of this report with all technical charts and further comments. (PDF format)


The World At Large
is delivered in advance to Astrological Investing Premium Member subscribers.  Randall Ashbourne is a former journalist and political strategist residing in Australia. *QHT Technical Charts created using Quick Harmonic Trader Software, by P.A.S. Astro-Soft, Inc. makers of Galactic Investor Astrology software.

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