Is The Second Shoe about to Drop?

The first shoe dropped to the floor in September 2008. With heroic obtuseness regarding the causes, the world's central bankers flooded the financial markets with liquidity. Arguably, all that this achieved was a type of Indian summer. It seems that we are about to experience the consequences of that misguided behaviour. There is no such thing as a free lunch. One cannot create wealth out of thin air by printing money.

The four charts below seem to be pointing to an important inflexion point. The financial markets appear to be on the verge of panic.

Chart 1 is of the S&P 1200 global industrial index. It is just peeping below its 40 week MA and its rising trendline.

S&P 1200 Global Industrial Index

US SPX. It broke down today. The Israeli attack on Hamas was probably the catalyst - but the direction of the break was informative. Clearly, the markets are predisposed to be bearish.

Standard & Poor 500 Industrial Index

Gold Price with Fibonacci support and resistance levels

If the gold price is to break up it will likely scream up. However, based on the "three strike" principle, it has already tried three times to break up. There are also three points of contact on the lower channel line. The only sensible technical clues are:

• The predisposition towards bearishness is not a harbinger of inflation.
• The P&F chart of the gold price shows that the fall of the gold price in September 2011 was the beginning of a downside move that has not yet resolved itself.

Yield on 30-Year US Treasury Bonds shows something very significant:

Have a look at the position of the PMO. It seems to be so far oversold that this is not "normal" market reaction. The Fed has more than likely been forcing rates down in anticipation of the election. To my way of thinking, this has set the stage for a vicious up move in yields should the markets start to panic.

Together, these four charts do not have a good feel to them. It's like the deer caught in the car headlights. The next move will likely be sudden and violent and painful.

Brian Bloom

Author, Beyond Neanderthal and The Last Finesse

www.beyondneanderthal.com

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