Thursday, August 12, 2010

Plunge Protection Team, Your Red Phone Is Ringing

The Plunge Protection Team's emergency red phone is ringing. If they fail to answer the call right now, their Prime Directive--propping up the stock market--could turn to dust.

Way back on July 19, I suggested that the Powers That Be have a lot to lose if the stock market implodes right before the November elections: Will the Stock Market Crash Before the Mid-Term Elections?

As it stands, the Democrats face a potential wipeout in November. If the stock market crashes between now and October 31, that would seal a Democratic defeat of potentially epic proportions. If I were in the Fed (or Treasury), and my compliant political lackeys were facing an electoral defeat of epic proportions, then I might conclude that a crashing stock market might be a wee bit more disruptive than would be good for the status quo.

In June, I'd made the case for a rise to the January highs, which would form a classic "head and shoulders" pattern with the April high as the head: Once More Up, Then the Big Down (June 28, 2010)

Was the recent runup just that final move before the Big Down? Perhaps. On the other hand, what's the use of having a Plunge Protection Team if they sit idly by while the market implodes?

Before we look at some charts, please read the HUGE GIANT BIG FAT DISCLAIMER below and refresh your awareness that this is merely the freely offered opinion of an amateur market observer.

OK, let's look at some charts of the S&P 500 (SPX) and Mr. VIX (VIX)>. Here is the SPX daily chart:

To a Bear, this is a chart of beauty: there is basically nothing Bullish in this chart. It's nothing but bearish crosses, busted uptrends and assorted ugliness that should send Bulls into fits of weeping: a huge break through the critical 200-day MA, massive failure at key resistance, etc.

The SPX weekly chart leaves the door open a bit for a Plunge Protection Team blitz:

The MACD is actually nudging up to the neutral line and threatening a bullish cross. The full stochastics are rising, but could be rolling over; the jury is out on that indicator.

There is precious little on the Bullish side of the ledger, but the market has absorbed a number of these panic drops and roared back a few days later to recoup the loss and drive the Bears off a cliff (yet again).

The triangle/wedge that has formed will likely be broken in a big way up or down--that is the usual course of events after price has been squeezed into the narrowing space between the 50-day moving average and the 20-day MA.

If we consider the fundamentals of the economy--declining--then by all rights the market should pause for a deep breath and then plunge off a waterfall.

But as noted above: what good is a Plunge Protection Team if it sits around playing cards while the emergency red phone is ringing with frantic urgency?

The last chart depicts Mr. VIX's sudden surge upward.

There are a number of interesting features here.

Note the big gaps that opened up as the eurozone banking crisis exploded in late April and May. But since topping out in mid-May, ensuing gap-ups have reversed in two or three days--classic panic spikes rather than the beginnings of a new trend.

Despite a staccato drumbeat of negative economic news, the VIX has been in a downtrend since mid-May. Sharp drops in the stock market have barely registered in the VIX; it's as if the panic plummets which have been occurring with great frequency the past few months no longer elicit much fear.

Either the market is numb to "negative surprises" or they have become SOP--standard operating procedure. Whatever the explanation, the VIX has been sliding even as the economic news has become increasingly unsettling.

The VIX has leaped up to the upper Bollinger Band, signifying an extreme of volatility; this might be the start ofa new trend up in the VIX (and thus a trend down in stocks).

Or the market may shake off yet another panicky decline and against a tide of sobering news, somehow manage to resume its uptrend.

That is almost impossible to imagine, but then again: the red phone is ringing, and if the PPT is truly alarmed, then the red phones will be ringing in financial capitals the world over.

The global stock markets are very vulnerable here, and the PPT and its colleagues are supremely aware of the risks of the game suddenly imploding. Can they pull off one more rescue of a weak, top-heavy market? If so, now is the moment to execute their magic. If this topples over the cliff, props, illusions, political fiefdoms and wealth galore will be wiped out.

The red phone is ringing, PPT; are you going to answer it or not?

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