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It's Now Or Never


History shows us that these kinds of panics end with a tremendous large range capitulation or give-up day.


"There must be some way out of here said the joker to the thief
There's too much confusion, I can't get no relief
Businessmen, they drink my wine, plowmen dig my earth
None of them along the line know what any of it is worth..."
All Along The Watch Tower (Bob Dylan)

We experience moments absolutely free from worry. These brief respites are called panic.
Cullen Hightower

On the hundred-year storm in 1907, the NYSE effectively went bankrupt. Today, the NYSE is essentially Goldman Sachs (GS) and a cadre of other major broker-dealers such as JP Morgan (JPM) and Citigroup (C).

I bring this up because the Tell of Tells, GS, broke below the key level of 177 on Tuesday. 177 represents a full cycle, or square, of 360-degrees down from its all-time high of 234. The break projects a move of at least another 180-degrees down to 152. A look at the weekly chart of GS shows that this would take the stock back to the level where the last advance started. This is typical of Matterhorn Moves. It is typical of what occurs when a momentous advance unwinds – it goes back to square one.

Click here to enlarge.

It is notable that the 234 all-time high on GS is conjunct to the date of September 11. I don't know what is going to happen in the first two weeks of September, but it is fascinating that September 11, 2007 is also six years, or six cycles, of 360-degrees from September 11, 2001. Six squares or revolutions of 360-degrees is a complete square, as a true square is a cube of six sides. September 11, 2007 also happens to be a solar eclipse, which some say is the most powerful astronomic configuration.

September 11, 2007 is also an important 55 Fibonacci days from this year's high - just as Black Monday in 1987 was also 55 days from the high.

The tape has been totally dominated by liquidations, with funds waiting for Godot and a rally to sell into which never arrived. Consequently, funds must obliterate bids and punish their own inventory by the end of the day when the rally doesn't arrive. This is the other side of up-side momentum.

Goldman's give-up of a potential short-term double bottom at the key 177 level combined with a quasi-money market fund, Sentinel, suspending redemptions inflamed an already raw psychology on Tuesday.

The Street went to great lengths to explain that strictly speaking Sentinel is not a money market fund per se. But, strictly speaking, Sentinel was not always investing in Fed funds. Strictly speaking, I guarantee expectations at Sentinel were that of daily liquidity, and availability of funds on notice. Strictly speaking, the fine print about risk parameters is seldom read – until there's a wrinkle in the paper at risk, and a fly in the ointment. In this case, that ointment is the ballooning spread between bids and asks in certain derivative paper. This oozing ointment led to a slippery psychological slope on Tuesday as one more fund bites the bullet, explaining that it owns securities that are selling at "deep discounts to fair value".

Ah, fair value. And who, pray tell, determines what fair value is? Value is in the eye of the beholder, and in the hand of the beholder who has his grip around the throat of those who want to/have to sell.

Deep discount and fair value – yeah, that's the ticket. That's how I explain every investment loss I take to my accountant – the market just apparently didn't realize the fair value I perceived. Consequently I realized the loss.

And, that's just the point – it's all about perception. It's all about psychology, not facts. Forget the facts, just give me the psychology, ma'am.

Whatever Sentinel management is or is not, perception trumps reality. It's a big deal, a very big deal when you can't get your money back when you want it back. It says cash is not cash.

Suspension of redemption is about as close to the precipice of a run on the banks as you can get. Theoretically speaking, of course.

As Elvis sang, It's Now Or Never. If a rally doesn't develop on Wednesday, a meltdown could play out. If the S&P doesn't knife back up through last week's low immediately and quickly regain 1435, something is seriously wrong.

Click here to enlarge.

1426 is last ditch support. Why?

  • Many stop loss orders built up around last week's lows, and were hit on Tuesday's close, leaving the market in a weak position technically.

    Click here to enlarge.

    If these stops are simply being flushed out then the market needs to turn and turn quickly. Believe what you see.

  • Using the June 1 high of 1541 S&P as the orthodox high, the Square Of Nine Chart gives us the following levels: 90-degrees down is 1502. This nails a snap-back rally. 180-degrees down is 1464, which has been resistance for the last few sessions. A look at the daily chart shows that the index oscillated around 1464, which coincides with its 200 dma.

    Click here to enlarge.

    270-degrees down is 1426, or Tuesday's close. A full 360-degrees down is 1388, which coincides with the close of the low-bar day on March 14, near the Ides of March. That was the last closing swing low of the S&P and "proves" the above geometry.

Today is August 15 and the Ides of August.

William E. Donoghue, Chairman of W.E. Donoghue & Company, said:

"This is the deadline for corporations to certify the accuracy of their financial statements. To do so, they will likely write off every questionable accounting practice that they or the Press might think, or might be, suspect.

That could result in substantial earnings disappointments which could, and should, trigger a sizeable stock market correction."

Last week's outside up bar was offset at Tuesday's close. The Quarterly Swing Chart on the S&P will turn down on trade below the April 2 low of 1416.35. This was the low of the second quarter.

If the S&P accelerates on a break of 1416 it suggests a waterfall to 1388.

That's something to keep in mind if you are captivated by the notion of "fair value" in the midst of the unwinding of an extraordinary popular delusion. History shows us that typically these kinds of un-windings are punctuated by a bank or broker-dealer going belly-up.

History shows us that these kinds of panics end with a tremendous large range capitulation or give-up day. Historical patterns show us that we are in the eye of the hurricane, which has time to run.

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