Tuesday, May 17, 2011

5/17 Daily Commentary

I posted previously about the Fed's extreme and increasing leverage against it's capital (5/6 Weekly Commentary).  With Fed capital of 53billion and a portfolio of 2.7trillion the leverage is over 50-1 and will be even higher at the end of QE2.  This compares with a normal max of 10-15, depending on who the chairman happens to be at the time that fiat expansion is undertaken.  When extreme leverage is employed and has been used to prop up a market the axiom is to sell unto others before they sell unto you.  Primary dealers are reducing their inventory in anticipation of QE2's ending.  The markets are setting up for a bout of deleveraging, which will affect all markets around the world.  If the Fed is left without a chair then their capital will be wiped out and they will require a bailout by the U.S. government or face extermination as a functional entity. 

I sold my short ETFs at DJI 12,421 and lower and I am waiting on a rally to go short again.  I am re-posting my 3:00 post since the basic I1 strategy has guided my trading for years.
The basic model for I1 is that a trend in the direction of I1 will hold at the DJI 5-minute, 370-unit (critical) M/A +1.35%. Within this broad band the market will also hold at SP futures 30-minute M/A +.5% on a 30-minute close.

I1 has developed a 7-8 day lead which will be eradicated at some point. If the market holds at DJI critical M/A +170 points then this will confirm that the lead has disappeared and raw I1 will track the market. Obviously, this is what I hope will happen.

Key for the intermediate-term trend is DJI overlap of the April high, which will eliminate the 5-wave up potential wave count. Going into this morning I counted this high as 12,421, but the count ending it at 12,383 was equally valid. DJI held at 12,380 and avoided the overlap.

Thus, the 5 up scenario is still a valid potential. If I1 still has a 7-8 day lead then this rally will develop into the 5 up and hit new highs. I do not believe that this is the case, but that the market counts as complete for the bull from March, 2009. I intend to sell short at DJI critical M/A.

By rallying from here the market will trap chart traders playing the obvious breakdowns from congestion overhead.

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