Thursday, April 16, 2009

Goldman Sachs, Copper, S&P And Semiconductor Five Wave Counts

This is a follow up to Tuesday's post on the Shanghai Composite. You will need to read that post to understand the relevance of this post.

Do you see anything similar in the post of the Shanghai Composite and that of Goldman Sachs, copper, the Philadelphia Semiconductor Index and the S&P 500 below? I didn't fill in wave counts for anything other than the S&P but you can visually attempt to do so. The waves are clearly there and are incredibly similar to the Shanghai Composite. The only difference is the Fibonacci ratio counts - an esoteric issue you don't need to worry about while simply identifying the patterns.

First off Goldman Sachs' rise from $47 to $130 a share is simply a sign of liquidity returning to the markets and trader's games. I would argue there is no logic or fundamental rationale for a $130 stock price. I don't know exactly what a logical stock price is for Goldman but then neither does anyone else because of the lack of transparency. So this move almost certainly has a high correlation to traders gaming the market. I consider Goldman's move higher to be positive for the bears. Given they also cut their dividend, the higher price simply means they may have a better entrance price to short Goldman at some point in the future and to pay less dividends doing so. Remember, law-abiding short sellers (ie not naked short sellers) did not run the financial system into the ground or cause stock prices to collapse. In fact, it's pretty obvious the ban on short selling last year at least partially caused the collapse in banking stocks. Something the SEC now admits. So, if Goldman's stock ends up cratering again, and I believe there is a good chance it is going substantially lower at some point, it won't be because any legal short-selling. It will be because Goldman doesn't have a sustainable business model or has made more mistakes than are evident today. Something I wrote of when the world was fawning over Goldman's perceived brilliance and I believe still holds true. Mergers & acquisitions and proprietary trading or speculating in financial markets using cheap taxpayer bailout money doesn't exactly have a bright future in my estimation. Neither does cheap money from the Federal Reserve for the same activities. In fact, it wouldn't have any future if the government would simply enforce the Sherman Act and re-regulate financial markets. Regardless, I have a sneaking suspicion the market will take care of all of these issues regardless of what the government does and when. It's actually more than a sneaking suspicion but at this point, I'm tired of being tired writing about the government's lack of will power to address these growing crises. When the market takes care of issues because government won't, you will see the end result. We already see that very reason as a foundation for the high joblessness, unsound financial systems, the global economic implosion and a collapse in asset prices.

The rise in copper over the last few months has been cited recently as a return to health of the global economy. In fact, at least one thing it is pointing to is what we have written of as it pertains to this rally - financial firms front-running credit coupled with no demand for capital, a point we have highlighted repeatedly for years.

If rational regulation and transparency were restored to the commodity futures markets around the globe, we could be much more confident commodity moves represented underlying economic demand. Short of that, many of these moves simply represent an expansion of credit whether it is in the US or elsewhere. Eventually I expect copper could easily drop 75% from current prices by the time this cycle ends. That is on top of the 50% drop to date. (70% drop to date but taken into account its rally since December, 50% from current prices.) Prices at these levels won't last forever for a variety of reasons. Not the least of which is true underlying demand. In other words, I don't share the enthusiasm for copper being blabbered by the same financial idiots who told us how great the global economy was while we were writing the exact opposite. Remember, their hyena calls were followed the largest commodity bust in history. It's not over. And it can't be stopped.

That the first two stocks have jumped outside of their patterns is not a concern at this point. It is simply the fifth and final exhaustion wave taking form at an appropriate price ratio. That is, if these patterns are indeed going to resolve themselves as I would expect. We shall see if a re-evaluation is necessary in the future.

And, now the Philadelphia semiconductor index.

Finally, let's look at the S&P 500 - the mother of all global indices. Its five wave count is substantially more difficult to recognize. In fact, upon an initial look, it may appear as nothing more than chop. Yet, the pattern is clearly evident if I draw it. The movements in October were false lows not confirmed by some of my other data so the pattern starts off of the November low. This pattern is substantially weaker than the Shanghai Composite or any of the other patterns and I consider this an anecdotally ominous sign for the global economy. Of course, I can say this because much of the other data I actually rely on is ominous. In other words, I am not using a chart pattern to guide my rationale. 860-ish is one possible completion point on the S&P pattern. We hit 860 on Tuesday. Let's watch as the future unfolds.

In closing, I don't place trades based on patterns but I definitely watch my trading models for confirmation when I see them.

Charts were pulled on Tuesday so they are a few days old. That's really irrelevant. Charts courtesy of the wonderful
posted by TimingLogic at 8:57 AM