Head and Shoulders

Big sell-off yesterday in Treasuries had a lot of people puzzled about whether this is the start of more or just a one off. At the start of the year my call was for higher rates, but stressing that we would not move massively higher an instead just test the high end of the range in yield (low end of the range in futures). Here are the key levels to watch as we approach. - Nic Lenoir

As just stated, the action of the last four trading days presents a few challenges. One scenario suggests that the rescue rally runs out of steam today or tomorrow. It then could reverse sharply to the downside, retesting or penetrating Friday’s intra-day lows.

A second scenario suggests that the rally hangs on, consolidating as it again tests the 1105/1110 area. There are also a variety of chart patterns that may be forming. The S&P looks to have a budding head and shoulders showing up on the napkins. Robert McHugh sees a potentially ominous wedge topping formation in the S&P. For today, the napkins suggest resistance in the S&P sits at 1083/1088 and then 1094/1099. Support looks like 1058/1063." - Art Cashin

Markets remain rangebound, pinned near the highs, the usual gamers buying and selling assorted risk assets based on the tiniest erratic movements in EUR/USD. In the meantime, expect to hear more jawboning and pie-holing from various officials attempting to support the U.S. Dollar. Get prepared to hear some words like "brutal", "unwelcome", "unnatural", "destabilizing", etc. inserted in these statements the next few days.

"It wasn't a bow, exactly. But Mr. Clinton came close. He inclined his head and shoulders forward, he pressed his hands together. It lasted no longer than a snapshot, but the image on the South Lawn was indelible: an obsequent President, and the Emperor of Japan."

After today's action, thousands of technicians will be pulling out their slide rules in order to mull over the "double top" or "head and shoulders" pattern on the NY Composite. With millions of traders worldwide all looking at the same moving averages, the same patterns, the same 5-min. charts, all in real time, the fate of the stock market and the fate of mankind will now be determined by a few squiggly lines. Which way will it go?

Hapless short-sellers howling again over the weekend about "head and shoulders breakdowns", myriad Elliot Wave patterns pointing to a "speed crash", etc. made for some easy meat for the Goldman Prop Desk Traders. The tape was turned and suddenly all the fund managers scrambling to raise cash were suddenly buying anything and everything to make sure they were fully invested in the "right stocks" by year end.

... the 'fixed period drop-off effect,' the differences between moving average methodologies, the true nature of the term “fractal” as applied to the structural composition of trading systems, the 'four basic qualities of great technical indicators' and a practical nuance within stochastic calculus that can help you anticipate what others are about to think.

Courtesy of "sales strategists" at the real Octopussy (the one marinating in brine at One New York Plaza). As always quadruple reverse cephalopod psychology is critical to survive these salty waters

The most convoluted monthly report issued by the US Treasury, that of Treasury International Capital (TIC) flows was released on Friday, and it disclosed some troubling data points. While foreigners overall continued purchasing domestic assets, their appetite continues to decline. In particular foreigners increased their purchases of Treasuries marginally, while they continued selling off corporate bonds and agencies, while buying corporate stocks. Yet, most troublingly, the Big 3 (China, Japan and the UK) purchased the least net total of Bonds and Billsyear to date: as the Fed now dominates the market for Treasuries, traditional buyers are becoming increasingly nervous.

The financial sector's oligopoly and consolidation through acquisitions and taxpayer guarantees is choking off regional banks and their stock internals and recent options activity suggest substantial downside risk.

Recent trends indicate that the pick up in corporate finance transactions, especially in the equity capital market may be petering off. After hitting an unprecedented high in June as the market reached the head of what had previously been seen as a fake head and shoulders formation, the July afterburners in the secondary market did not translate into primary market strength. Additionally, the August run rate indicates that the primary market may well have peaked in the May-June timeframe.

Technicals are a heresy in mainstream investing--they don't really teach them in school--but everyone that comes face to face with that beast called the market sooner or later figures out what they are.