The Poo Hits the Fan

I was asked my opinion of the potential of a 2000 point rally in the DOW. I think it’s possible, and here’s why

First, I asked some financial people who are lots smarter than me. They explained the liquidity provisions put into place by the central banks. This liquidity puts the US in some short-term jeopardy, but likely removes a significant amount of long-term harm. Basically, no one wants Euros now. One person told me that in Israel, they are trading Euros for pennies on the dollar, and no one is sure what value it will have. In the short term, therefore, the Euro has no value.

You can’t get yourself out of debt if you have no value. Also if you’re in recession because you have no value, you can’t exit that either. And Eurozone recession does definitely spill over to the US. Like it or not.

So the swaps that are arranged allow the Euro to have some basic value, defined by the swap dollar price. This lets banks trade valueless euros for valued dollars, and lets them continue to finance the Eurozone debt. Short term, we hold valueless Euros, and have exposure should the Euro get dissolved.

The Euro won’t get dissolved. Germany and France won’t let it. Germany and France will permit some really troubled countries to exit the Euro so they can inflate and pay off their debt. They won’t be allowed to exit the Euro until they put austerity measures in place. Once they have their locusts under control they will be permitted to exit.

Long term, the Euro will get its value back. The Euros we hold after the swaps with the Fed will have some value. IMHO the value will be less than the swap price, but the Fed intends to continue to devalue the dollar, so the effect may not be too large.

So if you’ve read Peter’s post from Thanksgiving, you could expect to see a significant price drop in the market. That’s if all things are held constant. The liquidity injection threw poo at the fan, and from this chart, you can see the pattern has been violated to the upside:



Basically, this week’s close is above the MA, or if you want to draw the regression channel, it violates the latest downward channel.

Here’s my chart on the short-term fibo levels. I expect to see a pullback to around 122.50 before we start to move up again. I doubt you’ll see a 120.10, but of course, Rock’s been wrong before..



I’m sorry the colors aren’t so vivid, but I think it’s clear enough so you get the idea. We’ve violated the upchannel today (price broke below the moving average). So short term, Rock’s bearish, but long term, I’m full of bull. The only question in my mind is how long it’s going to take for the increase in liquidity in Eurozone to have an effect. That will determine how much of a retracement we will see.

Just for fun, I took the 60 minute chart and removed all the overnight pops. See if you can guess where the support line falls for a pullback on this chart:



So now we have a feeling of several aspects of the market: The PM’s won’t allow the Euro to fail (structurals), the economy is getting better and we’ve taken steps to stop the recession in Europe (psychologicals), earnings have never been better and the SPY is trading around 12/1, well below it’s historical average (fundamentals), so that leaves only the technicals. Well, here’s the chart. Read it carefully.



First note the relatively equally spaced vertical lines. Notice the last one is around June/July 2012. Notice that each relatively evenly spaced line defines an upcycle or a downcycle. Isn’t it interesting that they are so evenly spaced?

Second, notice the regression channel. Note the upper line on the channel comes back to the highest volume point in 2008.

Third notice the red line, where it crosses the center of the regression channel. To make a 2000 point run, we need to get only slightly higher than the center of that regression channel. Target time: June/July 2012.

Yes, I feel we could see a 2000 point run.

Depending on what Timmy and the boys cook up, as you can see by the channel it could go higher. I’m sure they’ll try to move that last black vertical line to the right, say to November 9 or so……

So it comes as no surprise that Timmy will attend the Eurozone conference next week. China’s not coming. Interesting.

All charts are courtesy of TDAmeritrade's StrategyDesk.