Stock Market Warning: Part II

So did you heed my market warning from last week?

We’re only half way through the week and the stock market has fallen 3.5% from Friday’s close. This is exactly the set-up I discussed in my recent presentation. You can check it out here.

But as I said last week:

‘There comes a time in trading when you need to back yourself and stand firm in a view.

‘That moment has arrived for me.

‘After what has seemed like an eternity the ASX 200 has now done the work necessary and set itself up beautifully to catch many investors and traders with their pants down.

‘The long overdue correction in prices is very close.’

It’s still early days of course and we’ll still see buying pressure from the market in the short term. But the fact is the price action we saw early this week in the stock market is exactly what I needed to see to increase my conviction levels that the correction is on the way.

The catalyst for this was the news in Cyprus that the man in the street is now on the hook for the mistakes made by their banking overlords. There has been a mountain of commentary about this issue over the last few days and not much of it has been good. My favourite comment has been that Europe has ‘bazooka’d itself in the foot’.

If they’re pilfering money from people’s bank accounts to cover their losses it shows that their back really is against the wall.

Governments Trampling All Over The Property Rights

Personal property is the very cornerstone of a free society. It appears that we’re entering a new age where personal property is no longer respected by governments when it gets in the way of their plans.

John Adams stated it this way in the Massachusetts Declaration of Rights:

‘All men are born free and independent, and have certain natural, essential, and unalienable rights, among which may be reckoned the right of enjoying and defending their lives and liberties; that of acquiring, possessing, and protecting property; in fine, that of seeking and obtaining their safety and happiness.’

And as Thomas Jefferson said:

‘I believe…that a right to property is founded in our natural wants, in the means with which we are endowed to satisfy these wants, and the right to what we acquire by those means without violating the similar rights of other sensible beings; that no one has a right to obstruct another exercising his faculties innocently for the relief of sensibilities made a part of his nature…’

Outright theft of another’s private property in this way by a government is turning hundreds of years of progress of our civilisation on its head. That may sound like a big claim but I stand by it. This news is a huge game changer.

If I was observing this situation from Spain or Italy I would start to seriously consider my options going forward. We now know that the ‘deposit guarantee’ is no longer sacrosanct. The rule of law is no longer respected and the ‘troika’ (The EU, IMF and ECB) can’t be trusted.

Initial reports were that up to 40% of the savings of depositors was demanded. My God. Imagine waking up in Spain one morning and finding out that 40% of your life savings had been stolen to cover the losses of the banks. Now imagine it happening after you had already been warned by the events in Cyprus.

It will be very interesting watching what happens once the banks reopen in Cyprus. Apparently nearby countries were on alert to send across Euros if necessary. The ECB has said it will back the banking system with liquidity. You had better hope so because there will be a lot of angry Russian oligarchs filling out withdrawal slips for billions of Euros. What a farce.

Now to the Australian Stock Market…

The Cyprus issue is not the only thing that has got the market spooked. BHP and RIO plunged yesterday morning with news out of the Hong Kong Credit Suisse Asian Investors conference that things in China aren’t that rosy. Chinese steel companies have rising inventories and the iron ore price has plummeted over the past few weeks with further downside expected.

RIO has fallen more than 20% in a little over a month. BHP is down about 15% in that time and Fortescue has plummeted 32%. I’m actually amazed the ASX 200 is still so high in the face of these figures. The banks are like Atlas carrying the world on its shoulders. If Atlas shrugs the stock market will fall hard and fast.

It’s interesting to note that the worst performing sectors over the past few days have been the Financial, IT and Health sectors. They are the three strongest performing sectors over the last few months so it looks like we’re starting to see some profit taking and long liquidation. We’re still in the very early stages of that process.

So, what next?

The very short term could see some buying pressure emerge once again because we’ve sold off below my initial target of 4975 that I told you about last week.

ASX 200 Intra-Day Chart

ASX 200 Intra-Day Chart
Click here to enlarge

You can see from the above chart that the intra-day price action in the ASX 200 is creating a distribution between 4975 and 5106 (the solid blue lines) with a Point of Control around 5040.

A false break of the lows at 4975 should see some buying return but my guess would be that there will be some stiff resistance at the point of control at 5040.

If the Australian Stock Market can’t make it back to the Point of Control and instead cracks beneath the lows made yesterday of 4937 then we may be about to witness a fall of hundreds of points in a matter of days. I explain more about that here

Murray Dawes
Editor, Slipstream Trader

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From the Port Phillip Publishing Library

Special Report: Australia’s Energy Stock BLOWOUT

Markets and Money: The Mining Shuffle

Money Morning: Just Like Cyprus: How the Australian Government Turned on its Citizens

Pursuit of Happiness: The Bright Side of the Cypriot Banking Crisis

From the Archives…

Can This Indicator Predict The Dow Jones Next Move?
16-03-2013 – Kris Sayce

Seven Situations to Watch in the Pacific Currency War
15-03-2013 – Dan Denning

Stock Market Warning: Next Week Could be a Blood Bath
14-03-2013 – Murray Dawes

REVEALED: One Opportunity to Escape Your Mortgage
13-03-2013 – Nick Hubble

UK Property: How You Can Buy a House For Less Than 250 Grand
12-03-2013 – Dr. Alex Cowie

Murray Dawes is the Editor of Pivot Trader and contributing Editor at Money Morning. He was one of five, from 5,000 applicants, chosen for a graduate position with the Swiss Banking Corporation — now part of banking giant UBS. The bosses quickly cottoned on to his potential and pushed him up the ranks as a futures broker on the floors of the Sydney Futures Exchange. Murray later broke out on his own and developed custom trading systems to trade leveraged financial instruments like futures. Due to his success, Murray became the ‘hired gun’ trader for Australia’s rich and famous. Today, Murray runs a trading service through Fat Tail Investment Research to help everyday Aussie investors use his advanced trading methods.

Money Morning Australia