One point I think was not made forcefully enough if at all is how unaware all the Wall Street firms (including supposedly supernaturally aware Goldman) were of their dire predicament. Cognitive impairment of the highest order.

As always, one of the best analyses out there comes from those "crazy liberals" over at the New Yorker (best weekly mag bar none in my opinion). James Surowiecki notes that "Considering that Wall Street firms spend all day dealing with the market, they have been slow to understand just how vulnerable they were to it. Companies like Lehman and, earlier, Bear Stearns saw going public as an excuse to take on more risk and act more recklessly, when in fact becoming a public company makes caution more important, since the margin for error is smaller, and the punishment for failure swifter."

I remember fairly well the whole debate in the late 90s about Goldman going public. Resistance from the older partners and particularly the retired ones was fierce and while most of it might have had some not so noble motives (fear of change, fear of losing control and influence, etc...), some of it was spurred by the old timers' well-founded fear that just what happened the past few months would happen.

The Ban

It seems to me banning short-selling would only delay the bottoming process if not derail it altogether. One bottoming scenario I can think of is the kind where we stay in a range for a while with false breakouts and false breakdowns and people playing the range. Enough shorts get trapped that a final attempt forces them to cover and spurs a rally that completes the bottoming process. That kind of scenario can't happen if there are no shorts.

Gold

So many historical things are happening this week that gold's historical move yesterday was not given proper attention. This monster one-day 11% rise in GLD, the gold ETF, on 5 times the average daily volume speaks to the pure panic gripping the financial markets right now.

On a very much related note, this is Barney Frank sharing a conversation he'd apparently just had with Ben Bernanke:

“I asked the chairman if he had $85 billion to bestow in this way. He said ‘I have $800 billion.’ ”
“No one in a democracy unelected should have $800 billion to dispense as he sees fit,” Mr. Frank said. (New York Times Online 09/18/2008)

This boast by Bernanke makes me (and apparently all those gold buyers) a little nervous.

Now That's Engulfing!

As I've probably mentioned in a previous post, the engulfing pattern is one of the most powerful candlestick patterns.

What we have here is a massive bullish engulfing pattern on XLF, the financial ETF. It happened on extremely high volume and we're still comfortably above the low (16.77) established in July so this could be what I would call a tradable bottom for now. Show we break last week's intermediate high just below 24 and the 200-day moving average (now at 24.83), we could start calling it something else.

Miners Anyone?

This is one ugly-looking chart (for longs, that is).
GDX, the gold miners ETF, has been destroyed 52% from an intraday high of 56.87 reached on 03/14/2008 to an intraday low of 27.35 witnessed yesterday. Obviously, trying to call a bottom here would be akin to catching the proverbial falling knife (or falling safe depending on which version you prefer).

However, the adventurous soul could do much worse than start building a long-term position, add to one or simply go for a quick rebound at these price levels. Why? Well, just because, as incredible as it may seem and as wrong as I might be proven, I am seeing a few bullish signs in this chart.

First, GDX has seen some monster relative volume the past few days, potentially indicating some type of capitulation.

Second, we have a classic RSI bullish divergence, i.e. a new low in the stock that does not lead to a new low in the 14-day RSI.

Third, and purists could fault me for mixing my Technical Analysis schools as one mixes their metaphors, from an Elliott Wave viewpoint, it looks to me like we've completed wave 5 of an ABC correction.

An English Central Banker's Opinion of Ben et al.

Refreshing blunt criticism of the Bernanke Fed by a former member of the Bank of England's monetary policy committee, Willem Buiter. After conceding that the BOE hasn't exactly been brilliant dealing with the crisis, he has a few choice things to say about Ben and his acolytes (emphasis mine):

"Throughout the 12 months of the crisis, it is difficult to avoid the impression that the Fed is too close to the financial markets and leading financial institutions, and too responsive to their special pleadings, to make the right decisions for the economy as a whole."

"Cognitive regulatory capture of the Fed by Wall Street resulted in excess sensitivity of the Fed not just to asset prices (the 'Greenspan-Bernanke put') but also to the concerns and fears of Wall Street more generally."

"Between the TAF, TSLF, the PDCF, the rescue of Bear Stearns and the opening of the discount window to (Fannie Mae and Freddie Mac), the Fed and the US tax payer have effectively underwritten directly all of the 'household name' U.S. banking system...and probably also, indirectly, most of the other large highly leveraged institutions."

"Although the Bernanke Fed has but a short track record, its too often rather panicky and exaggerated reactions and actions since August 2007 suggest that it also may have a distorted and exaggerated view of the importance of the financial sector for macroeconomic stability."

He also sees a "remarkable collection of analytic flaws" in general in the FOMC members and senior staff. This is as close to calling the FOMC a bunch of idiots as a central banker will ever come. Like a said, refreshing.

No Gold Medals for the Chinese Stock Market

While all eyes are on China, the Beijing Olympic Games and their seemingly superhuman heroes (Michael Phelps and Usain Bolt to name the two main demi-gods so far), not many people are noticing the Chinese Stock Market which, despite all the rosy predictions, has been in self-implosion mode since the end of 2007. The amazing thing is that you would think some kind of Olympic truce would have been observed by the sellers but no such thing happened and the selling has been fast and furious the last couple of weeks.

But as one can see in the weekly chart of FXI (click to enlarge), the main Chinese Stock Market ETF, we are approaching a significant support zone and some nibbling here would make sense. FXI is now trading at 39.63, near the March 2008 low of 39.44, the August 2007 low of 36.60 and the May 2007 high of 38.85, all potential supports. The 14-week RSI is at 35.63, near its level when FXI strongly rebounded last March. Getting long here would entail putting a mental stop a bit below 35 and keeping a close eye on FXI's behavior especially right after the Games are over.

I am not by nature a bottom-picker but nurture should take precedence over nature when a well-defined profit opportunity presents itself. While no sign of a bottom has been forthcoming, I like the notion of getting long at this level in small size (making the risk of being a little early bearable) with a plan to buy more if and when strong clues to a bottom start materializing.

Stay tuned.

Definitions of Technical Analysis

Courtesy of the Google MarketsList, here are a few definitions of Technical Analysis that I found at the same time particularly accurate and elegant:

- The study of market action (price , volume, open interest), primarily through the use of charts, for the purpose of identifying future price trends

- The art of inferring Expected Value of market price given data generated by the process of trading

- The analysis of available market data to unbalance the trading odds in your favor

And finally, maybe the most accurate...

- The subjective analysis of the markets dressed up in a lab coat