How Do You Spell Relief? C.R.E.D.I.T.P.A.N.I.C
Finally; after a frustrating tangle with market bubbleheads, sellers have firmly taken control in the midst of deepening concerns over the depth and scope of the subprime meltdown currently thrashing through the financial sector.
Sticking to my plan, I held onto my QID when the Nasdaq 100 successfully, although just barely, punched to a lower low on November 1st, 2007 — concluding the streak of consecutive higher lows at five.
In fact in another venue, just after yesterday’s open, I called for a mini-crash and went on to further clarify my prognostication by redefining it as a non-trivial drop in prices over a relatively short period of time. With the NDX today tacking on another 2.9% of losses to yesterday’s 2.5% drop, I would feel comfortable calling my prediction incredibly accurate.
Switching gears for a moment, I think the decision by the FOMC to cut another 25 basis points will be viewed as a tremendous mistake. Monetary Policy should not be geared toward sustaining or supporting asset bubbles. Its only focus should be maintaining a balance between price stability and economic growth. I think GoldBug Bernanke, with his decision to lower another 25 basis points, capitulated to the cries of hedge funds and other pools of money, begging for some reprieve to the near daily destruction of the value of their Asset Backed debt. You either bail them out completely with more robust cuts or you sit on your hands. What you do not do is offer conciliatory rate cuts to appease and placate — particularly in a period where inflationary pressures are gathering momentum.
I want to offer a chart of the NDX, while pointing out some technical developments.
(click the thumbnail for a larger image)
Note: this chart was created before the day’s close and as such the totality of the damage is not properly reflected.
Yesterday’s gap open lower happened to also gap below the upward sloping trend line on the NDX. Gaps below trendlines, in my experience, increase the odds of the “victimized” trend to be permanently violated. That is to say, the probability of trend termination in the case a trend that is breached with a gap — opposed to simply trading through it — is very high.
Also of note is the open gap, which was closed today.
Finally, in the euphoric rally off the July-August liquidity fear crash the market punched through the previous highs and never looked back. My experience tells me that most areas of key support and resistance, like gaps, are more often than not retested at some point in time. As such, the July highs are a obvious target for the current decline. They also correspond to the measured target of a topping pattern on the NDX — one which calls for a 150% retracement of said pattern.
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