European crisis reaches breaking point

The European crisis has arrived at center stage. If there is going to be a crisis in Europe, this is it. The charts are telling us that if it’s going to happen, now is the time. After weeks of congestion, the question I rhetorically asked anyone who was reading how could this pattern possibly rally with such an ugly looking chart? It actually reminds me of 2 infamous charts that no longer exist. One was WorldCom and the other was Enron. I no longer have those charts because they are longer in the data base but what I can tell you is in the early stages coming off the highs, both looked like a child’s scribble. I can’t even recall another one that looked remotely close on a daily time frame.

That meant congestion, wild swings, not much direction but a slightly downward bias until they started evaporating. Once the acceleration started there was no stopping it. If we have to quote a reputable methodology the Investor’s Business Daily crowd that tells us a chart that is consolidating to go higher usually has a clean base that is not WIDE AND LOOSE.

Isn’t that what the EUR-USD looks like? On Friday it took out the a very important Gann reading off the high and as of Sunday night is sitting right below a diagonal trend line. If we look to Andrews, once a move has commenced it has an 80% probability of being attracted to the next line. In this case that’s near 130. I’m not going to look any further than that but we all know if it gets there we have no guarantee that it will hold, then last year’s low will be in question. For the Greenback, it finally broke beyond resistance that has held these past few months.

All the chickens may be coming home to roost because I’m not as concerned about Europe in a direct way (although I should be) as I am about China. Of course, if Europe drops there’s the contagion problem. The Dollar climbs the wall of worry, it’s deflationary and our stock market gets hit.

But the real problem is the fact the SSE is so far below the 2640 square out line we’ve discussed since April that we can’t help but be concerned. As you know our stance is to be more bearish when the SSE is south of that line.

You can’t say we didn’t have advance warning this week. Remember Wednesday, the big day when it looked like bulls were about to take control back from the bears? Of course you do. On Thursday, the SSE did not confirm the move and I told my Australian contingent I didn’t like the action. If Europe goes, China is going to drop and so will we, maybe this time without the usual lag of a week.

To be sure, Friday dropped like a rock but the BKX held to channel support. For now it’s hugging the lower end of the range. But that doesn’t mean it will hold. Friday was the big down day and I can’t say it was a day where fear ran rampant, it didn’t. It was the most somber day I can remember simply because of all the 9/11 ceremonies. People were not in the best of moods to buy stock to begin with. But there was no super-sized fear, capitulation or anything like that. It was very orderly and matter of fact. By itself that means there should be more to go.

This is the week for several anniversaries. First of all it will be 3 years to the Lehman acceleration. Then we will be at the 10th anniversary to the 9/11 sequence which bottomed on September 21 next week. Keep in mind, the Autumnal Equinox is the 23rd and these seasonal change points come in handy for trend changes. In my Thursday night Short Term Update we studied the 9/21/2001 bottom, found the range off the January 2000 top in the Dow was 3688 points and we also learned that the start of the rally in the Dow at Gulf War II was 369 trading days down the road. So we know that the Sept 2001 bottom has significance. This year we’ll be at the 10 year anniversary which is has added significance given 1 year equates to 360 degrees in terms of time. So the big anniversary does line up with the seasonal change point. We can only hope this event does not become an acceleration point and has the potential to be a bottom. I’m very serious about this. Long time readers of this service will remember that in 08, we had a unique event where the 233 day window off the 2007 Dow top at Lehman became an acceleration point as opposed to a turn and so did the Tarp event 3 weeks later off the 07 NASDAQ top. We really don’t want history to repeat itself on this cycle point.

I’ve been asked about the various bottoms including the November 21, 2008 bottom in the NDX. This is a good time to think about it given how the chart in Europe looks and since it’s the stock market’s least favorite month of the year. How many times have you heard this is Europe’s Lehman moment? By virtue of the fact they are making the comparison it probably isn’t. Panics tend to materialize when nobody is anticipating them. If everyone says something is a bubble it probably isn’t and when nobody talks bubble it has a great chance of being one. In this case, there is no doubt the chart is in trouble but 3 years out from the big crisis we are still scarred by the experience and B waves usually look to recreate the original experience. They are certainly doing it now.

Next page: Examining the charts

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