I'm long 4% SSO. SPX and XMI are forming what looks to develop as a triangle to challenge the old highs. DJI was turned back at 12,444 for it's first test of the highs. In the XMI there is a clear 5 up and a triangle in progress with 3 of 5 complete within it.
What is on the other side of the I1 peak? I believe that the top will come on the completion of a 5 up into next week coinciding with I1, topping and a decline into 5/6, then a rally to a lower peak 5/13 or 5/16, favoring the 16th. This will be the I1 sell signal and indicate more severe decline ahead. Before the evidence of foreign central bank tightening I believed the top would arrive 5/16. However, QE2 in the face of worldwide commodity inflation, combined with the trend toward higher rates both as central bank policy and as a natural consequence of declining long bond prices, guarantees that world stock markets will react severely when the punch bowl is completely removed. Stock markets react to rates of change, not absolute levels. Asian markets are already reacting to slow tightening moves by their central bankers. The entire world knows that Ben has burned his bridges behind him. With 0% chance of fresh asset purchases ahead Mr. Markets around the world will see:
a) the cost squeeze on corporate margins and profit estimates scaled back on a monthly basis
b) the lack of a white knight to buy garbage
c) fiscal and monetary boom turned to restraint
It will be a severe decline into the end of July and probably into mid-August.
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