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May 12, 2006

Bernanke's Test Has Arrived
by Dan Basch

FINALLY. It's been 3 months since my last essay, "How Basch Turns a Crash Into Cash", and instead of a decline materializing there as I had anticipated, the market initiated week after grueling week of volatility deprived doldrums, just bobbing and weaving almost to the point of my becoming disillusioned with the markets. But in the end, one can step back and look at the then seemingly meaningless jiggles in the charts and conclude that the wait has been well worth it.

At these market junctures that yield "aha!" moments, it makes me just sit back and laugh. But the charts that have me tittering is going to be no laughing matter to our recently confirmed and, as of yet untested Federal Reserve Chairman, Ben Bernanke.

All major indices got slammed hard today, but it wasn't just any down day: it was the day I'd been awaiting for a long, long time because it broke the NASDAQ 100's (NDX) multi-year Rising Wedge support as you will soon see. I expect this to be the opening salvo in a steep plunge and this short essay serves to update my aforementioned essay with some remarkable developments and... well, I'll just let the charts speak for themselves.

Here is a daily chart showing what happened leading up to the crash of 1987. Could the NASDAQ be at the indicated juncture today?

And here's what's happened so far in today's NASDAQ: not quite as perfect a retest of the Pivot Line today, but as the old saying goes, close enough for government work. Compare these two daily chart's light blue areas with the "W" patterns and the glaring negative divergences:

Next, the big picture weekly chart of the Crash of 1987, also known as Black Monday: this was Alan Greenspan's big test just a couple of months after being confirmed. He passed. Read the annotations and then guess what today's NASDAQ 100 chart looks like?

You guessed right! Bernanke's test has arrived also in the form of a gigantic multi-year bearish Rising Wedge which today broke support! Who says God doesn't have a sense of humor? The market is going to use this crash to test the mettle of our Great Depression expert academician turned Fed Chairman. Looking back, Greenspan did two things to ease his way out of the crash of 1987: inject lots of liquidity into the system and lower interest rates. I expect his successor will do the same.

For those worried the Fed is going to raise rates beyond 5.00%, if my expectations pan out, you can rest assured Mr. Bernanke is going to be forced to stop raising interest rates by what appears to be an imminent stock market crash and now has room (and will soon have the excuse) to cut them. Also, given the skyrocketing price of precious metals, there's already tons of liquidity currently being injected into the system, probably because they see what's coming. In the smoldering aftermath of the coming freefall, hopefully "Helicopter" Ben won't have a similar experience of an ejection seat in a helicopter, the same thing might happen if his tools don't work as well for him as they did for his predecessor given the fate of many other nominees of GWB.

So how will our hero Fed Chairman Ben Bernanke fare in his imminent test? I don't know, but what I do know is that I'm keeping score at my totally free public chart site, Black Magic Charts and you're welcome to stop by and see how I play this anticipated capital implosion.

Please don't take anything in this essay or at that site as actual trading advice because it's just for fun, like a cookout, but on this menu is going to be barbecued hedge funds smothered in liquidity sauce.

After all, it's just money. Right, Ben?

Dan Basch

Copyright © 2005-2007 Dan Basch

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