Let’s make a deal! Not! For all practical purposes, it looked like Thursday was going to be the day. I should’ve known better. They don’t need to make a deal until the deadline, and if they are true to form, the real deadline is Friday morning. Why? Because custom with these parties is to go into overtime, just when it looks like they are truly going over the cliff. If you listen to people like Ron Paul, you come to the conclusion the deadline is really a made up date and they’ve already gone over deadline weeks or months ago.
I think he misses the point. Somebody in the CBO came up with Oct. 17 and because all parties, including financial markets, seem to respect that date, it's good enough for me. So here we are heading into the third week of this crisis and quite frankly the stock market looks a lot better than even a bull like me would have thought. By Thursday, equities were looking for an excuse to buy because they had the proper calculations to do it.
This is what the intraday looked like at the low. What you see is a sequence of Fibonacci leg relationships fitting neatly into a jigsaw puzzle. From the high on down each leg has some form of a 161 or 261 relationship to each other. That’s what created the low and parabolic bounce. This low has excellent relationships. In fact, it might even be good enough to get to new highs in certain instances. We already have a new high in the CAC. The bigger picture has charts like the DAX, SPX and others with a 2 legged wedge. It’s quite possible to get a decline with a 2 legged wedge like on the chart you see below but real tops usually need that 3 legged variety. This leg up affords financial markets the opportunity to get that 3rd leg. The only problem with that view is US markets have excellent Gann square of 9 readings at the highs already established.
The top of the NASDAQ hit our target exactly as the peak came in with a square root of 61.80 while the NDX has a range of 4525dg which is very close to a 4500 degree move and the Dow has a factor (difference between the square root of the top and bottom) of 44.90. So at the end of the day this is a battle of decent Gann readings at the peak which is fortified by a Dow that topped in the seasonal change point and a very decent near term low. Then you have the battle in Washington, D.C.
The usual relationships are driving these markets and by that I mean the technical Fibonacci/Gann readings plus the psychology/sentiment work we follow so closely. To be perfectly honest with you, I didn’t think the fear levels rose high enough for a sustainable, lasting bottom. I don’t care the VIX rose to the highest levels since June. True fear in the markets was not there. We never had that feeling markets were going down forever nor did anyone really have that sentiment there was absolutely going to be a default. In fact, the sentiment concerning a default on Thursday was exactly the opposite. Now in retrospect it appears to have been mistaken complacency as I heard 9 in 10 pundits proclaim a deal would happen by the weekend and certainly before the deadline.
Briefly, one has to understand the leverage of the parties in order to have any kind of chance at handicapping the outcome. Our take has always been the Tea Party had to do this. If you try to do something 39 times and come up empty but magically the 40th time actually gives you leverage and it’s your last best chance, what would you do?
If you are the President, your situation is a little dicier. The President must protect the mantle of his office. You never want to be in a position where one faction of the legislative branch gets to hold up the whole government because they don’t like some political aspect. You can’t run a democratic style government that way. Mr. Obama rightly is looking out for his interests as well as future Presidents by not negotiating with a gun to his head. However, since he is the leader of the country, when this negotiation finally does get to the end of its rope, he’ll is going to be the one who is responsible. I don’t think he wants to be remembered as the President who suffered a default on his watch. Not only would it be extremely damaging to his brand, but the Democratic Party and I do believe it would be damaging to either Hillary Clinton or Joe Biden.
What about the GOP? They are already most of the blame. The Tea Party has nothing to lose and everything to gain. Now you can begin to appreciate how complex this negotiation really is. I was surprised the Tea Party appeared to crack last Thursday but I believe the President is going to have to be the bigger person in the end because that’s what Presidents do. Someone is going to have to emerge as a leader and look out for the United States of America. If you look at it from that perspective, who do you think will emerge as the adult? Will it be President Obama or the Tea Party? So the Tea Party might extract some small concession but I think people have had it with this whole drama and the Tea Party is likely to pay for this no matter what.
Next page: Behind gold's dip
Elsewhere, Friday’s dip in the Gold market is being blamed on one trade. All I can tell you is the precious metals have once again reached the point where they are at aggressive support levels based on wave relationships. But so is the US Dollar. Precious metals have reached the point where they are almost the red headed stepchild. Almost nobody believes in their ability to rally anymore. That’s what makes them interesting. The longer term Dollar likely has another leg down in its long bear market. When that happens is hard to say but in the event of a default, now would be a good time for the technical situation to line up with psychology because if the Dollar does fall, the technical situation supports it so we won’t be able to say a drop because of default was the news event leading the technicals. The technicals are ripe and a sell off in case of default would end up being a case of people looking for an excuse to finally dump Greenbacks. As I write this various banks are cutting their Dollar forecasts so you can also see bearishness building and all it would take is an event like this to finally finish off the very long bear market. The problem is that a default could be catastrophic. If the Greenback were to break down from the bottom of its long term range it might not stop until it gets to the universal support area near 61.
I’ve told you in this space for the last four years that as long as the Greenback maintains the stability of its trading range the economy would continue to recover even if it did so at a glacier’s pace. We’ve seen that materialize. But it isn’t staying in a trading range forever. I think it eventually breaks down whether now or in the next two years.