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Thursday, May 8, 2008

Cracks In The Bear Wedge

Maybe, just maybe we have the first cracks in the rising Bear Wedge...

This formation occurs when the slope of price candle highs and lows join at a point forming an inclining wedge. The slope of both lines is up with the lower line being steeper than the higher one. To trade this formation, place an order on a break up and out of the wedge or a sell order on a break down and out the wedge. Rising wedges, with a prior downtrend are anticipated to break down and out, rather than up and out.

As of right now it looks like the high of 1422 was tested and held. Yesterday the S&P 500 (SPX) broke the rising trend (black trend line) of the last 10 days and accelerated downwards. The SPX also broke the 200 period moving average which has acted as support in the recent past. Volatility (VIX, grey) increased significantly as well, confirming or validating this move down.

The psychologically important 1400 area should also act as resistance now.

This chart perfectly demonstrates the effect of the Japanese Yen (XJY, grey) on S&P 500 (SPX, grey, below). A rise in XJY results in a decline in the SPX. To best demonstrate just how closely this relationship is, I've used the ProShares Ultra Short S&P 500 (SDS, candlestick) instead of the SPX. SDS is inversely related to the SPX and moves 2% for every 1% move in the SPX.

As the Yen moves up, you can clearly see SDS gain in value. Translation: As the Yen rises, risky assets such as equities fall.

On a six month chart the relationship becomes even clearer. Cheap money from Japan fueled an enormous amount of the debt creation in America and Europe directly. It was also the currency of choice for leverage. The Yen Carry Trade was and still is truly massive.

The Yen can be used as a leading indicator and as confirmation. Keep an eye on it.

Related Posts:
Dollar Smile, Global Decoupling, Oil Super Spike and Yields
Bulltrap: ABCP, and Level 3 Bombs
The Yen As A Leading Indicator
Watch The Yen, Carry Trade Unwind

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More cracks coming... AIG down 10% AH... next shoe to drop insurer? I believe they are the biggest lender for real estate mortgage?

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