Central Banks Intervention Raises Questions

Did a big European bank come close to failing last night?  European banks, especially French banks, rely heavily on funding in the wholesale money markets.  Given the actions of the world’s largest central banks last night, it raises the question of whether a major bank was having difficulty funding its immediate liquidity needs.

The Federal Reserve, the Bank of England, European Central Bank, the Bank of Japan, the Swiss National Bank, and the Bank of Canada in a coordinated action moved to provide liquidity to the global financial system.

In a separate move, the Chinese Central Bank cut bank reserve requirements.  The People’s Bank of China cut reserve–requirement ratio by 0.5%, the first cut in nearly three years.

The problem was not at U.S. banks as is evidenced by the following excerpt from a statement by the Federal Reserve.

"U.S. financial institutions currently do not face difficulty obtaining liquidity in short-term funding markets. However, were conditions to deteriorate, the Federal Reserve has a range of tools available to provide an effective liquidity backstop for such institutions and is prepared to use these tools as needed to support financial stability and to promote the extension of credit to U.S. households and businesses."

These are the type of actions that were being taken during the financial crisis in 2008.  Now most knowledgeable experts agree that not rescuing Lehman Brothers was a mistake.  The authorities are not about to make the same mistake again.  The only explanation for the massive action is that central banks were concerned about a pending failure that is not publically known.  The readers may want to make their own judgment from the following excerpts from a statement by the Federal Reserve.

These central banks have agreed to lower the pricing on the existing temporary U.S. dollar liquidity swap arrangements by 50 basis points so that the new rate will be the U.S. dollar overnight index swap (OIS) rate plus 50 basis points. This pricing will be applied to all operations conducted from December 5, 2011. The authorization of these swap arrangements has been extended to February 1, 2013. In addition, the Bank of England, the Bank of Japan, the European Central Bank, and the Swiss National Bank will continue to offer three-month tenders until further notice.

As a contingency measure, these central banks have also agreed to establish temporary bilateral liquidity swap arrangements so that liquidity can be provided in each jurisdiction in any of their currencies should market conditions so warrant. At present, there is no need to offer liquidity in non-domestic currencies other than the U.S. dollar, but the central banks judge it prudent to make the necessary arrangements so that liquidity support operations could be put into place quickly should the need arise. These swap lines are authorized through February 1, 2013.

Trade Guideline For Wednesday (Nasdaq NQ)

On Tuesday, short-covering soon after the open did not attract any buyers, hence the market sold off for the rest of the day.

For Wednesday the key inflection level is 2225. Resistance is Tuesday's swing high 2240.75, support 2200.

• A sustained break above 2225 should trigger another round of short-covering that could easily push price up to Tuesday's swing high resistance 2240.75. A falsebreak above would cause the market to reverse back down to support 2200. However, a sustained break above the high should rocket price up to 2255-2260.
• A sustained break below 2225 should tank NQ down to 2200. A sustained break below 2200 should trigger another round of liquidation , targeting a decline down to 2275-2280.

Trade Guideline for Tuesday (NQ)

A huge gap-up on Monday triggered short-covering rally, with NQ closing near the day high. With key inflection point at 2220 and key support at 2200.

• Above 2200 implies the uptrend should continue.
• Above 2220 may trigger another round of short-covering, targeting a quick move up to 2255-2260.
• Below 2200 implies NQ would likely decline to re-test support at 2275-2280.

European sovereign debt crisis should continue to dominate the financial news, with their main focus on Italy. Should ECD and the US Federal Reserve not come to the rescue by printing money the Euro endgame is just around the corner. But with the mainstream economist all disciple of Keynes, whose only known solution to every economic problem is money-printing, we should expect another round of money-printing by at least the Central Banks of the G7 countries. If so, look for the stock market and gold to rally.

Trade Guideline for Friday (NQ)

With Germany's opposition to the establishment of the Euro Bond to bail out bankrupt Euro-zone member countries, the stage is set for a cascade of sovereign debt defaults, which should further intensify European credit crunch and European bank run, which also set a stage for total market collapse, unless of course Germany change its stance, or unless the ECB is prepared to print as much Euros as needed to bail out banks and countries. If not Euro-zone will disintegrate, and Euro currency will just disappear. 

The impact of European sovereign debt default will reverberate to the US, taking down and collapsing the US banking system with it, and likely the US dollar with it as well. 

Unless there is a massive reversal in policy in regards to addressing the sovereign debt crisis in the Euro-zone, the market decline should continue to accelerate, and crash.

For Friday, key resistance is 2200.

• Below 2200 the downtrend should continue.
• A clear and sustained break above 2200 implies a bigger ABC pullback before it tanks again.

Trade Guideline For Wednesday (Nasdaq NQ)

Tuesday was a consolidation day. It may be ready to trend on Wednesday. If so, it should clearly break and stay below key support level 2200.

Inflection level for Wednesday is 2220, bearish below, bullish above it.

• Key support is 2200
• Key resistance is 2235-2240

European debt crisis and credit crunch should continue to intensify. The next in line for sovereign debt in Europe crisis is France.

Trade Guideline for Tuesday (NQ)

With key resistance now at 2250, failure to clearly break and stay above that level would imply more selling, down to the next support level of 2270-2275.

European debt crisis is now causing an acceleration of credit crunch, if it does not receive a temporary stimulus via quantitative easing, could easy trigger an intense cascade sell-off, aka a crash.

Trade Guideline for Thursday (NQ)

Another consolidation day on Friday following. Following a two-day consolidation I would be looking for a trending move on Monday,  up or down base on where price action would be in relation to key inflection level.

For Monday I will use 2260 as key inflection level.

• Bullish above 2260, targeting 2280 then 2300.
• Bearish below 2260, targeting a decline down to 240, then 2200.

European debt crisis should continue to intensify, and without a major quantitative easing program debt default is inevitable. Any haircut on Italian bond would cause total banking collapse in Europe (European banks who hold their bond) and the US (US banks sold CDS to the European banks).

Trade Guideline for Friday (NQ)

Markets continue to sell-off on Thursday morning breaking down below several support levels down to 2260. It consolidated the whole afternoon setting up a trending move for Friday.

Key level for Friday is 2270.

• Below 2270 implies another trending down move down to the next support level of 2200.
• Above 2270 implies NQ is in a pullback move targeting 2280, then 2300. If it can break 2300 then the next upside target is 2330

Trade Guideline for Thursday (NQ)

Wednesday trading ended with a strong sell-off into the close, with NQ closing just above key support level (2300). The bearish closing momentum should continue on Thursday as long as pullback up stays below 2340. 

• If 2300 support clearly breaks, the next support below it is 2280. 
• It would need a strong momentum move down to break through 2280

European debt crisis should continue to intensify, with most major banks on the verge of collapse, and it seems that no-one country in Europe is in a position to bail out their banks this time around. Banking collapse could trigger massive credit crunch that would lead to massive stock market sell-off unless central banks are prepared to print as much money as required.

Trade Guideline for Tuesday (NQ)

Narrow-range consolidation day on Monday, with NQ staying inside 2300 support and 2400 resistance. For Tuesday 2340 is a key level to watch.

• Above 2340 is bullish targeting a move up to 2380, then 2400.
• Bearish below 2340, targeting a decline down to 2300.

The stage is now set for a total monetary implosion in Europe. The bankers grip on power is getting tighter by the day.

• Greece new Prime Minister is a former Central Banker.
• Italian new Prime Minister is a former Goldman Sachs economist.

Trade Guideline For Monday (Nasdaq NQ)

Equity markets closed on a positive momentum on Friday, right at key inflection level (2350) for Monday. Resistance is 2400, and support is 2300.

• For Monday, above 2350 NQ is going to rally up to 2400 resistance.
• Below 2350 NQ is going to drop down to 2300.

Only a major economic event, such as major unexpected news from the European debt crisis that can knock off prices beyond the 2300 support and 2400 resistance for NQ.

Trade Guideline for Friday (NQ)

Following a massive sell-off on Wednesday the market consolidated all day on Thursday. Depending on where NQ opens on Friday in relation to key inflection level 2300, it could rally in the morning up to 2320 or 2340 then sell-off in the afternoon, or sell-off in the morning then rally into the close.

European debt crisis will continue to dominate the financial news, the focus is now on Italy.

Trade Guideline for Thursday (NQ)

Greek's and Italian's sovereign debt default would collapse most European banks who bought their debts and American banks who sold the European banks Credit default Swaps. Banking collapse would cause countries to collapse as well, leading to a massive credit crunch that should be much more severe that the 2008 credit crunch.

Global stock markets sold off hard on Wednesday closing on a very negative momentum. Without any central banks buying tonight the sell-off should continue into Thursday.

Key level for NQ on Thursday is 2320

• Above 2320 implies NQ is going to pullback up to 2340 then 2355.
• Below 2320 the sell-off should continue down to 2300. If that does not stop the decline nest supports down are 2280 then 2270.

Trade Guideline For Wednesday (Nasdaq NQ)

With a positive momentum into the close on Tuesday, Nasdaq should continue to be bullish as long as pullback down can stay above 2370.  However, 2400 is a very strong resistance. A sustained break above 2400 can trigger a massive short-covering rally.

• A sustained break below 2370 implies a bearish mode, a decline targeting the next support level 2360. Next support below 2360 is 2340.

Speculators are now moving their focus away from Greece and into Italy. Once Italy is done they should move on to Spain and France.

Trade Guideline for Tuesday (NQ)

With a positive momentum into the close on Monday Nasdaq should continue to be bullish as long as pullback down can stay above 2350.  If so, next upside target is a test 2400 level.

• A sustained break below 2350 implies a bearish mode, a decline targeting the next support level 2340. Next support below 2340 is 2320.

Trade Guideline for Friday (NQ)

Open-Test-Drive up on Thursday with a close near the high of the day. If the bullish momentum is going to continue into tomorrow pullbacks should stay above 2350

Sustained break below 2350 implies a larger pullback down to re-test prior breakout level 2320.

Trade Guideline for Thursday (NQ)

NQ remained inside a consolidation zone 2295 - 2325 on Wednesday. 

• A sustained break out implies a trending move in the direction of the break.
• A failed breakout implies a reversal to re-test the opposite range.

Trade Guideline For Wednesday (Nasdaq NQ)

A large gap-down day on Tuesday that was then followed by consolidation for the rest of the day, closing at key inflection level. If consolidation is complete I will look for another trending move, up or down, on Wednesday.

Key price level for Wednesday is 2300.

• Above 2300 implies NQ is going up to 2325-2330 then 2350.
• Below 2300 implies another down-leg on Wednesday targeting a move down to 2250.

Greek Referendum

With George Papandreau now calling for Greek referendum on the latest bankers bailout, the stage is now set for a European-wide bank-run with contagion that would spread like wild fire to the US banking system, which will take the US banking system down like a house of cards, which it is a house of card. Already, MF Global is the first victim of the sovereign debt crisis in Europe, not the last, it is just the beginning. US banks insured the debt through Credit Default Swap. Greek default will undoubtedly trigger the call on CDS.

With numerous reports showing that over 65% of the Greek people would vote against the latest banker's rescue package (50% hair cut), a total default and Greece exit from the Euro-zone is getting closer to being a reality. When Greece vote down the latest bailout the precedent will be set for the rest of the European countries to default as well.

Greek's debt default is sufficient to take down the whole European and American banking system if the printing press is not set to full blast. But with printer-happy Ben Bernankie as the head of the Fed, it is very likely the printing press will be set to work overtime, probably able to prevent total financial collapse at this time, but will set in motion the beginning of the end of the fiat monetary system (currency collapse/hyper-inflation).

But before that happens, European bank run would cause a massive spike in the US$ index as traders and investors rush out of Euro and into the US$, for temporary reprieve, because the US dollar is next to collapse. There is nowhere to run and nowhere to hide except in real assets (gold, silver, commodities, etc), and that is also another reason why Central banks are now going into overdrive in their attempt to push the price of commodities and gold and silver down. Their greatest nightmare is a stampede out of fiat paper currencies and into real asset.

Greece's total default on their debt will set in motion a contagion that could grow too big for any central banks or countries or their concerted efforts to handle. How long will the end game  (debt of fiat monetary system) takes, only time will tell, as it depends entirely on the responses of those in charge of the government and their printing press.