What was predicted for China has started to happen with the dramatic failure of its parabolic uptrend just over a week ago leading to a plunge. The update China Crash was posted when all indicators were at “nosebleed” levels late in April, right after which the third steepest fanline shown on our 1-year chart for the Shanghai Composite Index below was breached. Somewhat amazingly, that overbought peak late in April was not the final top – it rose even higher into early-mid June, but after that, just over a week ago, it finally broke below the parabola and started to cave in.

While low grade Chinese speculators who are leveraged to the hilt and up to their eyeballs in margin debt may have been unnerved by what has just transpired and are probably starting to break out in a sweat, it is considered unlikely that they appreciate the full gravity of the situation – many of them think that this is just a correction, albeit a larger fiercer one. So they are likely to buy this dip, some of them appreciative of the opportunity to get more stock at better prices. They have no idea what is really going on, but we do. 

Here is what is going on – the market has just dropped back from the peak of the Head of a Head-and-Shoulders top shown on our chart

and if this interpretation is correct it should now rally from the vicinity of the low of the Left Shoulder trough of the pattern, that occurred early in May, where there is support. The expected Right Shoulder, projected to form as shown on the chart in red, will be the final trap. Once it descends from the peak of the expected Right Shoulder, after a little hesitation at support at the “neckline” of the pattern, where we might see a minor bounce, it should breach this support and then crash – not drop – crash – because the low grade highly leveraged speculators who currently populate this market will be forced to flee in panic.

Recent action is shown in more detail on the 6-month chart below with expected pattern development shown in red…

Action in the Chinese action has some implications for other Western markets, since a crash in the Chinese market is likely to have a knock-on effect on bloated markets elsewhere. If the Head-and-Shoulders top in the Chinese market completes in a symmetrical manner, then we have about 3 weeks until neckline failure and a crash, and, perhaps, 3 weeks to prepare for Western markets to follow suit. 

End of update.

Greece intends to default tomorrow. Ryan Irvine notes that “the last time the market ran for cover in the face of Greek default was actually an excellent time to buy some quality companies. Ryan suggest 5 quality companies below – Money Talks Ed. 

Greece Back in the Spotlight as Debt Default Looms Once Again

by Ryan Irvine

For being a relatively small country (population of less than 11 million), Greece has taken its share of the spotlight in the global financial crisis. In Europe, it has been at the epicenter. News centers were firmly focused on the struggling nation back in 2010 and 2011 when the European Union (EU) and International Monetary Fund (IMF) negotiated two separate bailout packages for a total value of €240 billion. Since then, news of Greece’s financial woes has (at least in North American) fallen somewhat into the background…until now.

For anybody wondering why the TSX Composite index is down more than 300 points today (with similar declines throughout North America and globally), look no further than Greece’s return to the foreground. The country is expected to default on a €1.55 billion (about US$1.73 billion) loan to the IMF on Tuesday. Missing this payment to the IMF means that Greece will technically lose access to the flow of bailout money it has been receiving. If the situation is left unresolved then much larger defaults will occur from Greece later in July.

To provide a short history lesson on the subject…Greece is a member of the European Union (EU) and adopted the Euro in 2001. In October 2009, one year after the global financial crash, the Greek government fessed up that it had artificially understated its budget deficit in order to meet EU standards for adoption of the Euro. What was once officially quoted as a budget deficit of 6% of gross domestic product (GDP) was restated several times over the following year to over 15%.

How did this happen? New and complex financial products allowed the country (this was of course not limited to Greece) to increase indebtedness without technically having to report new debt. This reminds me of Warren Buffett’s quote, “everyone floats when the tide is in, but when the tide goes out you see who has been swimming naked.” It was easy for the world to play financial alchemy when the economy appears to be on solid footing and investors are bliss but it is when the outlook dims and investors want to access their capital that financial melting pots start to explode. As was the case with Greece and much of rest of the world.

At the time, Greece was so firmly woven in the EU financial system that many feared a full debt default would be catastrophic for Europe and would send ripple effects throughout the global economy. The result was that the EU and IMF agreed to bail Greece out…but this came with a price…AUSTERITY. Greece had to agree to pull itself up by its financial bootstraps, reining in government spending, clawing back social programs, and cracking down on what was some of the most rampant tax evasion known to the Western world.

The concept of “financial austerity” is extremely sound. You can’t (or shouldn’t) spend more money than you have. This is what Greece was doing. Of course, this is what essentially the entire Western world has been and continues to do. But in the case of Greece, the gap was much wider than average. The problem now is that the cut backs in spending mean that Greece’s economy is stuck in a rut with over 25% official unemployment. This is a depression, not a recession and it makes things difficult for a country that wants to get back into the “black.”

Tough times in Greece have led to a disenfranchised population, many of whom believe that the rest of the EU, particularly Germany, are actually benefitting from the misfortunes of their country. This led recently to the election of a left wing government on the promise that it would end austerity measures. A referendum on the subject is currently scheduled for July 5thwhereby the Greek people will accept or reject the terms of the country’s creditors. If Greece does not come to an arrangement with the rest of the EU and the IMF then all bailout money will cease to flow and Greece will default on its scheduled debt payments.

What this means for investors around the world is debatable. If Greece doesn’t eventually come to terms with its creditors then it is hard to imagine a scenario whereby they stay in the EU and continue to use the Euro. The general consensus is that the global impact of this would not be as extreme as it would have been a few years ago given that Europe has had more time to prepare for the ramifications. The US economy also appears to be on much better footing which should provide some extra support for the global economy.

We would certainly expect to see a stiff short-term kick to global financial markets if the situation deteriorates. However, we will also note that the last time the market ran for cover in the face of Greek default was actually an excellent time to buy some quality companies that were “thrown out with the bathwater.” In the short term, these kinds of events tend to result in waves of fear that impact companies which are not directly affected by the underlying issue. Such events should be considered opportunities. Recent history has demonstrated that it is the investors that made “knee jerk” and emotional reactions to these events that lost money. While the investors that haven taken a calm, rational, and long-term approach to the matter are the ones to have benefited. 

KeyStone’s Latest Reports Section

6/19/2015
SPECIALTY PHARMACEUTICAL POSTS SOLID Q1 2015, INVESTMENT IN RECENT ACQUISITIONS PROVIDE DRAG ON EARNINGS NEAR-TERM, LONG-TERM POSITIVE – ADJUST RATING NEAR-TERM

6/5/2015
ROYALTY POOLS – DIVERSIFIED INDUSTRIES COMPANY GROWS ROYALTY PORTFOLIO 40% SINCE START OF THE YEAR AND PROGRESSES – INVESTMENT POTENTIAL ON 1 TO 3 YEAR TIME HORIZON LOOKS SOLID AS COMPANY PROGRESSES TO NEXT STAGE OF DEVELOPMENT

6/3/2015
UNIQUE IP COMPANY REPORTS PATENT PORTFOLIO ACQUISITION AND SUBSEQUENT LICENSING DEAL WITH SAMSUNG – MAINTAIN RATING

5/29/2015
UNDERVALUED SPECIALTY PHARMA MAKES SOLID PRODUCT ACQUISITIONS, MORE-TO-FOLLOW? – MAINTAIN BUY

5/28/2015
CASH RICH UNIQUE TECH DRIVEN MICRO-CAP POSTS RECORD Q1 2015, STRONG NEAR-TERM BACKLOG, SHARES SURGE 61% – RATINGS MAINTAINED

Briefly: In our opinion, speculative short positions are favored (with stop-loss at 2,140, and profit target at 1,980, S&P 500 index)

Our intraday outlook is bearish, and our short-term outlook is bearish:

Intraday outlook (next 24 hours): bearish
Short-term outlook (next 1-2 weeks): bearish
Medium-term outlook (next 1-3 months): neutral
Long-term outlook (next year): bullish

The main U.S. stock market indexes were mixed between -0.7% and +0.3% on Friday, as investors remained uncertain ahead of news concerning Greece debt crisis. The S&P 500 index trades within a short-term downtrend. The nearest important level of resistance is at around 2,115, marked by local highs. On the other hand, support level is at 2,070-2,080, among others. There have been no confirmed negative signals so far. However, we can see negative technical divergences:

Larger Image

Expectations before the opening of today’s trading session are negative, with index futures currently down 1.0-1.3%. The European stock market indexes have lost 1.6-3.5% so far. Investors will now wait for the Pending Home Sales number release at 10:00 a.m. The S&P 500 futures contract (CFD) is within an intraday uptrend, following gap-down opening. The nearest important level of support is at 2,050-2,060, and resistance level is at 2,080-2,090, marked by Friday’s local lows, as the 15-minute chart shows:

Larger Image

The technology Nasdaq 100 futures contract (CFD) followed a similar path, as it traded as low as 4,400 following weekend news concerning Greece debt crisis. The nearest important support level is at 4,400, and resistance level is at 4,440-4,460, marked by gap-down opening, as we can see on the 15-minute chart:

Larger Image

Concluding, the broad stock market slightly extended its short-term downtrend on Friday and it is bound to continue its decline today. We maintain our speculative short position (2,098.27, S&P 500 index), as we expect a downward correction or an uptrend reversal. Stop-loss is at 2,140, and potential profit target is at 1,980. You can trade S&P 500 index using futures contracts (S&P 500 futures contract – SP, E-mini S&P 500 futures contract – ES) or an ETF like the SPDR S&P 500 ETF – SPY. It is always important to set some exit price level in case some events cause the price to move in the unlikely direction. Having safety measures in place helps limit potential losses while letting the gains grow.

Thank you.

The Shanghai Composite falls almost 20% from its recent peak.

“This is probably not a dip to buy,” wrote analysts at Morgan Stanley. The bank lowered its price target for the Shanghai benchmark in a report Thursday, citing concerns like lofty valuations and high margin debt relative to China’s free float market capitalization. Margin debt, or the use of borrowed cash from brokerages, has reached 8.5% of the value of China’s tradable shares. That’s well above the 4.6% level Taiwan reached at the height of its market bubble.

…read more HERE

Available Mon- Friday after 6:00 P.M. Eastern, 3:00 Pacific.

DOW                                                     – 76 on 850 net declines

NASDAQ COMP                                   – 10 on 200 net declines

SHORT TERM TREND                          Bearish

INTERMEDIATE TERM TREND            Bullish

 STOCKS:  It’s hard to believe that three days ago, the S&P 500 was within a whisker of all time highs.

Near term bounces aside, it looks a bit grim. The advance decline line is close to a 5 month low and the Transports, which we featured yesterday broke the support we discussed.

GOLD:  Gold was down less than $1. Not much to report here.  

NEXT DAY: Friday should be higher.

CHART:  On Wednesday, the Trading Index (TRIN) closed above 1.50. When this happens, the market tends to bounce within a day or two. In the previous 8 occurrences, this rule has only failed once. That was in early June, the 5th arrow from the left.

BOTTOM LINE:  (Trading)

Our intermediate term system is on a buy from Feb. 20, 2015.

System 7   Buy the SSO at the opening. Sell at the close if there are more declining issues than advancing ones at 3:45 EST, otherwise hold over the weekend.                

System 8   We are in cash. Stay there.                    

GOLD  We are in cash. Stay there.     

News and fundamentals:  Jobless claims were 271,000, less than the expected 273,000. Personal income rose 0.5%, more than the anticipated 0.4%.  On Friday we get consumer sentiment.

Interesting Stuff  We cannot do great deeds unless we’re willing to do the small things that make up the sum of greatness.—   Theodore Roosevelt

TORONTO EXCHAN GE:   Toronto dropped 84.

S&P/TSX VENTURE COMP: The TSX was down 1.  

BONDS:  Bonds pulled back slightly.                                           

THE REST:  The dollar pulled back slightly. Silver and crude oil were lower.           

We’re on a buy for bonds as of June 11.                      

We’re on a buy for the dollar and a sell for the euro as of June 23.                       

We’re on a buy for gold as of June 17.                        

We’re on a sell for silver as of June 23.                        

We’re on a sell for crude oil as of June 4.                             

We’re on a sell for the Toronto Stock Exchange as of May 6.    

We’re on a sell for the S&P\TSX Venture Fund as of October 30.    

We are on a long term buy signal for the markets of the U.S., Canada, Britain, Germany and France

.  INDICATOR PARAMETERS

Monetary conditions (+2 means the Fed is actively dropping rates; +1 means a bias toward easing. 0 means neutral, -1 means a bias toward tightening, -2 means actively raising rates). RSI (30 or below is oversold, 80 or above is overbought). McClellan Oscillator ( minus 100 is oversold. Plus 100 is overbought). Composite Gauge (5 or below is negative, 13 or above is positive). Composite Gauge five day m.a. (8.0 or below is overbought. 13.0 or above is oversold). CBOE Put Call Ratio ( .80 or below is a negative. 1.00 or above is a positive). Volatility Index, VIX (low teens bearish, high twenties bullish), VIX % single day change. + 5 or greater bullish. -5 or less, bearish. VIX % change 5 day m.a. +3.0 or above bullish, -3.0 or below, bearish. Advances minus declines three day m.a.( +500 is bearish. – 500 is bullish). Supply Demand 5 day m.a. (.45 or below is a positive. .80 or above is a negative). Trading Index (TRIN) 1.40 or above bullish. No level for bearish. 

No guarantees are made. Traders can and do lose money. The publisher may take positions in recommended securities.