Thursday, July 28, 2011

MadScientist's hypothesis for 3Q 2011

Today is 28 July 2011 and the US government is still in deadlocks about the debt ceiling of 14.3 trillion due next week Tuesday 1 August 2011. They are supposed to be having a meeting today (Thursday) and come to some conclusion.

Here is my hypothesis of what is likely to unfold based on news and developments in the USA as well as all over the world.

The US debt ceiling WILL be raised… but late. It is not likely to be in time for August 2, 2011, however, may kick in later in August. The date is likely to be missed, and markets will react badly albeit briefly and this is followed by the US government official getting together over a weekend and thrash things and sorts it out. Again, only temporarily.

Sometime in September, it will start with one of the rating agencies downgrading the US debt status. About that time, perhaps into October, European contagion will spread and thrash the markets. This should coincide with the Kress Cycle peaking out in October 2011.

Given such a scenario, IF it plays out as hypothesized, the USD (equity and bond markets along with the USD) should be falling until the government acts together, and then followed by European contagion which should propel the USD further.

Technically, there is a bullish divergence in the USD and there needs to be a trigger to start the equilibration.

One thing is clear, the Japanese Yen will be the haven, as will Gold. Gold is likely to go parabolic and correct that parabolia.
Checking the VIX, VXO and VXX (Implied volatility indexes and ETF), there is a bullish divergence that looks to have started the first bullish phase.

As of yesterday, the S&P500 has reversed and the fear indexes gave Buy signals. The Head & Shoulders pattern top appears to be completing with this down move. Many sectors including financials, oil, utilities, etc. have also given Sell signals. Yesterday is a turning point, at least for this short term. It remains to be seen if it will go further, and confirm this down leg move.

More later as I develop the technical picture and hypothesis with details.

The MadScientist

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