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A Generational Credit Crunch


Liquidity may soothe the current issues and stem the tide for a time, but this is an unwinding and a process that has its own internal agenda.


Listen to the engine, listen to the bell
As the last fire truck from hell goes rolling by,
All good people are praying, it's the last temptation, it's the last account.
The last time you might hear the sermon on the mount, the last radio is playing.
Seen a shooting star tonight
Slip away.
-Shooting Star (Bob Dylan)

The fault, Dear Brutus, is not in our stars, but in ourselves, that we are underlings.

How do you say "bear" in French? Paribas?

It was Bank Paribas that announced on Thursday they aren't allowing any repatriation of money in three funds infected with a case of U.S. Slime.

It was the proverbial boy shouting fire in the theater for the markets as it defines a point of recognition that containment is in fact contamination. The virus is a worldwide phenomenon.

When there is chaos in the Street, the only way we can gauge and get any handle on where the markets might be going is to look at other times when crowd behavior has market participants scrambling for chairs when there is no music.

Try as they might, central banks flooding the markets with more liquidity is like asking someone to take a sip of water from a fire hose. Moreover, liquidity is a moot point when borrowers won't borrow and lenders won't lend. Liquidity may soothe the current issues and stem the tide for a time, but this is an unwinding and a process that has its own internal agenda. It is unfortunately a process that is exacerbated by the powers that be who have attempted to repeal natural cycles, the ebb and flow of the business cycle.

So let's look at the technicals to see what we can derive.

The hourly chart of the S&P shows that last ditch support is/was just below 1460 S&P as the market declined yesterday. The S&P accelerated lower into the close to end right on this trendline at its 200 day moving average.

Click here to enlarge.

This is the Maginot line. This is the point of recognition where the S&P will definitively diverge from the pattern of the February/March shakedown. This is not a shakedown. Yes, there are many out there who have remained convinced that this is just another market adjustment.

Click here to enlarge.

This is a generational credit crunch. It is not 1998, or 1997. It is more like the 1907 Rich Man's Panic. Few care as rich investment bankers who rolled the dice lose money. But at the center of this storm is Main Street and the housing market.

Despite the fact that financials and basic materials have been screaming that this time is different, that this is not a little shake out, I understand that many large fund managers have done little and that they are paralyzed and staring at their screens.

Someone is certainly selling. Someone is destroying bids on their own inventory. Either because they have no choice and are being forced to or because they know something or think they know something.

Either way, the price action is the price action. They are acting and it's our job to follow the path of the big money, 'the smart money'.

Technically, a cascade comes into play if the weekly S&P turns back down. Remember, so far this week we have an outside up week. However, we may get a very bearish three plot week. This will occur if Monday's lows are violated on trade below 1427.40.

This will trigger a Reversal of a Reversal pattern, a slingshot sell signal which many times triggers fast moves.

Below 1427.40 is 1416.35, which is the Quarterly Swing Chart low. If the S&P accelerates on trade below 1416.35 (instead of the usual knee jerk reflex snapper) it will be in waterfall mode.

A break below Monday's low that sticks also will break a three point rising trendline on the weekly chart that I showed yesterday. That also suggests an acceleration to the downside.

I understand that few believe in cycles and that history repeats itself. However, once again a look at the charts of 1957 and 1987 shows what happens when a trend line broke. In the middle of a panic, value is a meaningless term.

Click here to enlarge.

Click here to enlarge.

If there is anything to recognize, it is to never underestimate the market's ability to go to excess on both the upside and downside.

That is the lesson some longs learned in 1987 and some shorts learned in 1999. Let the process play out. There's a gorilla ringing the doorbell.

Editor's Note: Want more of Jeff's insight and trading ideas delivered to your inbox daily? Minyanville is proud to announce that we will soon be launching Jeff Cooper's Daily Market Report, complete with Jeff's day trading and swing trading setups. Email Josh Sander to be notified when it launches so you don't miss one report.

No positions in stocks mentioned.

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