Tulip Bubble Nears Legislative Mandate to Irreversibly Implode ~ The Risk Averse Alert

Friday, June 25, 2010

Tulip Bubble Nears Legislative Mandate to Irreversibly Implode

My previous sense about the financial regulatory reform bill that today passed the U.S. House-Senate conference committee appears confirmed. The big shall eat the little ... or at least it is hoped anyway.

One thing refined in my thinking surrounding this effort, though, centers around the conclusion that, FinReg principally attempts to raise confidence in those "too big to fail" behemoths that, in truth already are gone. Given this, you might liken the spirit of what is being called "the most sweeping reform of the financial industry since the Great Depression" to a dare issued with an exasperated pound of the table in a last gasp effort to prop up a confidence game. You might call this exercise "Alan Schwartz goes to Washington."

FinReg reminds me of the Gary Larson Far Side cartoon captioned, "Cattle Humor" picturing a couple cowboys driving cattle, and on the back of one cowboy, unbeknownst to him, is a sign that reads "Trample me." With FinReg, though, the cowboy is daring the cattle as he rides the once mighty steed named Uncle Sam.

FinReg is a hollow shell venturing to appear surrounding a viable, living thing. Trouble is the thing is dead and no legislative effort to close the barn door after the horses have bolted will change this. If the legislation were being called, "the most sweeping transformation since Jesus raised Lazarus from the dead," I still would not change my position. This would infer "too big to fail" institutions finally had become resigned to confessing their true, moribund state, and so agreeable to shedding all that is burying them — a tune that only more quickly would make "Shake, Rattle and Roll" the anthem of the global financial system.


Given yesterday's Elliott wave count refinement suggesting that, more or less sideways trading in the range established since late-May bottom might develop over weeks ahead, there appears some better sense to be gained about what lies ahead revealed by coincident MACD behavior.

Highlighted above is MACD performance coinciding with waves 1 and 2 of wave (1) down from late-April top. Noteworthy is its already deteriorating state at the start of wave 1 (marked by MACD divergence when the S&P 500 reached its late-April peak), and its clearly negative trend coinciding with the formation of wave 2, as well as during waves i and ii (not labeled) of wave 3.

We probably will see something similar to this developing during upcoming formation of waves 1 and 2 of wave (3) down. In the meantime, though, as wave (2) proceeds to unfold over weeks ahead, we might rather anticipate MACD continuing its recent improvement (if only marginally).

Inasmuch as coincident MACD registered on Monday at the conclusion of wave (a) of (2) bettered MACD registered at a higher S&P 500 peak set during formation of wave 4 of (1), we might expect much the same coincident MACD behavior when wave (c) of (2) completes sometime over the next several weeks. Indeed, anticipating this one might expect the S&P 500's wave (c) of (2) peak failing to best its wave (a) of (2) peak reached on Monday.

The point is this. Any apparent momentum improvement coinciding with a lower S&P 500 peak ultimately reached in the formation of wave (c) of (2) is likely to produce the same result as we saw over the course of this week's trading. Most fitting, then, would be momentum's marginal improvement leading up to the precipice from which the market subsequently collapses. The measure of obliviousness to the market's grave risk would be seen adequately registered as such.

Now, as you can see above, MACD has made quite a recovery off late-May bottom. Not to be ignored, however, is the fact the measure still remains decidedly on the sell-side of its balance. Indeed, its only slight deterioration in the face of this week's S&P 500 decline (giving back about half its gains since late-May bottom) provides some sense about just how ugly things could get once MACD is on course to take out its late-May low (which in due time I expect will occur during formation of wave (3) down).

Similarly, that MACD still remains on the sell-side of its balance despite its recent improvement raises the probability that, the S&P 500 projection drawn above indeed could develop over the next several weeks. Wave (b) of (2) in fact could bring the S&P 500 to a new low, post-April peak, while MACD simultaneously diverges once again, just like occurred at the conclusion of wave b of (a) of (2) earlier this month.

Still, the fact MACD remains positively trending even in the midst of this week's giveback suggests much of the coming week's trading prior to the Fourth of July holiday here in the U.S. might result in formation of wave b of (b) of (2). This, of course, is assuming wave a of (b) of (2) — unfolding over the course of this week's trading following Monday's "Yuan a be a sucker" peak — is in fact completed. It might not be.

Bottom line, I believe a few more days are being afforded those of you who are on the fence, unsure whether a stake in my $50 Mega Score really is worth the prospect of a multi-thousands percent return delivering you a 5-6 figure sum, conservatively, on the chance wave (3) down, challenging March '09 lows, unfolds sometime over the next few months.

If you are someone with little or no options trading experience, don't worry because I have you covered. You still can easily take part doing two simple things. Write me (SUBJECT: $50 Mega Score) and I will tell you what these are.

Fast Money
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