Default threat could push into overtime for stocks

Fibonacci Forecaster

We are almost a week into the biggest poker game on the planet. I explained this to you in recent weeks. I am not a Tea Party guy, but if I were I’d be doing the exact same thing they are. They’ve set themselves on a course where they’ve burned their bridges and have no other recourse. If you were elected on one platform, which is repealing Obamacare, and tried with no luck or success 40 times and magically on the 41st try you actually have leverage, would you push that hand to the limit? They have nothing to lose because they’ve already lost everything anyway.

The President controls most of the cards except one. He can’t have a default on his watch. The Tea Party knows this. These are only Congressmen; this is not exactly the Black Sox we are talking about. If they lose in two years, they’ll find other fantastic gainful employment. Eddie Cicotte and Joe Jackson disappeared from the face of the earth. But how many Presidents have there been? I can guarantee Barack Obama does not want to be known as the only President in the history of the republic who was in charge when the United States of America defaulted on its loans. So the likelihood is high we won’t have a deal this week. The history of this group suggests they take it at least to the bottom of the ninth inning -- and perhaps creative accounting allows it to go into overtime.

So where does that leave the market?

This looks like an ending wedge. It looks like it’s one spike short of a blow off top. We have two weeks to go to Oct. 17. These things can go one of two ways. Either we start experiencing the crisis now and finally bottom out when they sell the rumor and buy the news, or people stay in denial and when the event finally happens everyone panics in what turns out to be a black swan event.

The chances of a black swan this time are much smaller than they were two years ago because at that time the smartest people in the room could not conceive a default could happen when the government could pay the bills. Now after examining the character of the players involved, most the Tea Party nobody is under any false illusions. These people are willing and ready to crash and burn. It’s unfortunate but they are like the drunken spouse who has tried to reform a hundred times but there are always 101. Personally, I just don’t see how they recover from this unless they extract some concession. When you think about it, how bad would it really be if the President put the fines on hold for an extra year? The reality of the situation is that is what is likely holding up a deal right now. The President doesn’t want to give an inch because he’s afraid next time the Tea Party will demand a mile. He wants to break them now. In doing so he risks being the first President to preside over a default.

Getting to the market, we have a tale of 2 markets. Tech still looks pretty good overall while it’s the Dow that is validating our September time window. The Dow is well off the high and leading to the downside. Last week Shanghai was closed for the most part but prior to their break they were leading to the downside. I suspect that will continue here and there’s usually a week lag and what we need to see is a turn in Europe to really get China going south.

We have some serious Andrews’s action/reaction on the YM but finally came to an area where it should bounce because it’s truly extended to the downside. So if you seriously look at this chart and a bounce materializes even as I know there’s a gap down on Sunday night, the wedge in the NDX has a chance to blow off. It might have already done so on Friday but because of the shut down we were a jobs number free Friday. What these news events do is quicken the action. What may take several days actually materializes in several hours. So the government shutdown likely postponed the market playing its true hand. Looking at some of these vital sectors housing could be better but also worse. The BKX is in trouble as it hugs the bottom of the range. The SOX is still okay, biotech is holding a triple low for now. Oil is about as good as the BTK and I suspect waiting on what the SSE might do. The Transports must bounce now as it holds a key Fibonacci relationship. So the transports might turn out to be the key, if they drop here the handwriting is on the wall as the market won’t survive this type of bearish divergence.

The US Dollar has finally achieved our patience of a saint trade. We’ve projected levels below 80 for several months already but had to endure a couple of rallies to see these most bearish aggressive views achieved. Here’s the next salient point. Do you think the Dollar can rally if the government comes close to default? It can bounce but the chances of it sustaining are small. Over the past few years the Dollar and equities experienced an inverse relationship much of the time. Most important is the fact that when the Dollar has been down, equities were up. Both are higher relatively speaking since May 2011. What we haven’t seen is equities decline in tandem with the Greenback. My concern is we could see such a decline for the first time. The monthly chart of the Dollar resembles a triangle where the coil has been tightening. It’s not going to stay in a range forever. I’ve been looking for one final break to the downside in the long bear market we’ve had in the 21st century. I can’t rule out that materializing in the next few weeks.

October has been known as the graveyard to bear markets. We don’t have a bear market. But we do have a situation. We also have a market that is notoriously overbought. We enter month 163 off the Internet bubble peak. What I’m trying to tell you is conditions are ripe for a 1987 style event. It may or may not happen but it’s a long month, we are due but at the end of the day I think the new secular bull market stays intact. What that means is an event that seriously shakes the trees with the nuts and coconuts falling out. We have plenty of time to get a bottom this month and we really haven’t finished the topping process yet, get my drift?

About the Author
Jeff Greenblatt

Jeff Greenblatt is the author of Breakthrough Strategies For Predicting Any Market, editor of the Fibonacci Forecaster, director of Lucas Wave International, LLC. and a private trader for the past eight years.

Lucas Wave International (https://www.lucaswaveinternational.com) provides forecasts of financial markets via the Fibonacci Forecaster and other reports. The company provides coaching/seminars to teach traders around the world about this cutting edge methodology.

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