Is It Time To Panic?

Massive liquidation appears to be going global.

As this post is being written, Hong Kong and Seoul Indexes are down 7% after dropping substantially the past three trading days.

Gold in the meantime continues its relentless rise even in after hours trading.

So the investor needs to ask - is it time to panic?

Probably not, in my view.

It is likely that the FOMC will come up with some type of announcement Tuesday to assuage the market's fears and protect Wall Street from their misdeeds. More bond buying is likely in the cards.

What has surprised most investors, myself included, is the strength and speed of the current downdraft.

My S&P target of 1140 as the bottom of the head and shoulders pattern was blown out of the water today.

Commodities were hammered from copper to oil to cotton.

With such a tremendous plunge, I am 60% certain of a relief rally at this stage.

When that happens I intend to sell all my bullish positions as it is my view that the big downturn is yet to arrive.

Two indicators convince me of a larger move down, possibly in the Sept to November time-frame.

First the point and figure chart for the volatility index VIX:

The preliminary bullish objective is 109!

To put this in perspective, in the liquidation sell off of 2008, VIX peaked around 85.

This combined with the point and figure chart using closing figures as detailed below could point to a very bearish result:

While I do not think this is a likely scenario, a target of 890 on the S&P is nothing to be taken lightly.

At this point, I assign a 10% probability to this outcome in the nearer term.

The latest market action sends a strong warning to those who believe the market is not overvalued.

With the amount of leverage in the system, it is difficult to know with certainty what anything is worth. If leverage were to begin to unwind in an orderly manner, it seems likely that many assets classes will suffer substantial loses as we learned from the US housing market debacle.

This is why we need to listen to what the price of gold is telling us. It is a thermometer for the entire financial system, and right now, the system is running a raging fever.

Gold just passed $1752 as I write this.


  1. BofA getting fattened up for the slaughter. The cronies at the top will need golden parachutes. Those were handed out today by their pals that infuse money into the markets.

    Get ready cause the freight train is coming into the station, and the breaks have malfunction. Gonna get messy real soon.

  2. Agreed Bill.

    I was tempted to mention Bank of America in this post, as we will likely see them coming for a handout soon. Will it trigger a second Lehman event? We shall see.
    But things in Europe may come to a head first.
    What a corrupt system we have.

  3. Looks like the FED orchestrated another stick save in the markets during the last hour. Their audacity is breathtaking.

  4. Well Anonymous at 7:53, like Inspector Gadget, the Plunge Protection Team is always on duty. It will be interesting to see how they manage if we get into a wholesale liquidation scenario.


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