The short and medium term trends sideways and long term trend remains bearish.

Support:    $762.25 (yesterday’s low)                       Resistance: $819.00 (yesterday’s high)

Support:    $735.90 (low of 11/09/08)                       Resistance: $774.74 (40 day moving average)

Support:    $715.95 (low of 31/10/08)                       Resistance: $788.95 (low of 03/09/08)

Welcome to my newsletter in which I hope to offer some insight into the financial markets at a time when the future has never appeared so confusing and uncertain. To paraphrase Winston Churchill, is this “the beginning of the end or the end of the beginning?”The FTSE closed the week just 66 points down while the S&P 500 actually managed a small profit. However, the closing figures do not even begin to tell the whole story with the FTSE trading in a 521 point range and posting its best one day rally in history on Friday. In the case of the Dow Jones Industrial Average, it moved over 1000 points from Thursday’s low to Friday’s high, an achievement that represents a “first.”

The catalyst for this bout of turmoil was the bail out of Fannie Mae and Freddie Mac. This raised hopes of a similar bail out of Lehman Brothers. To say that investors were shocked when Lehmans was not only denied a bailout, but filed for insolvency would be an understatement. Lehmans collapse sent shockwaves throughout equity markets sparking a domino effect that knocked over Merrill Lynch, AIG and HBOS .

Even the most seasoned investors had a hard time steadying themselves last week as the newswires continue pump out dark news, and once in a generation headlines. Fear was understandably widespread with the Russian stock market suspended indefinitely after dropping 10% in an hour.Investors saw little choice but to fly to quality. The flood of assets transferring to short term US Government Treasuries, forced the yield on three month Treasury Bonds down to their lowest level since the great depression. Crude Oil and precious metals also exhibited powerful reversals. From a low of 90.51 on Tuesday, Crude Oil soared to close the week at 104.55. The rallies in Gold and Silver were just as spectacular and probably represented record (or near-record) gains in 1-2 days.

However, it was the two emergency announcements on Wednesday and Thursday that had the greatest impact last week. After central banks dropped a coordinated liquidity bomb overnight on Wednesday, global equity and credit markets initially seemed to show a very cautious reaction. The greatest reaction seemed to come from the Feds plan to create a giant bad bank that would absorb many of the toxic subprime assets held by banks. This measure accompanied with a crack down on short sellers, seemed to have hit the nail on the head for the financial institutions, with the root cause of the credit crunch (sub prime assets) being attacked.The rush to blame short selling for this current catastrophe ignores the role played by the regulators who abolished the uptick rule in July 2007.

The week’s headlines were dominated by Ben Bernanke’s testimony before congress starting on Wednesday. However, planned economic announcements are now secondary to surprise headlines or emergency measures.When markets move by whole percentage points in a matter of minutes, anything can happen, and probably will.

Even though equity markets bounced last week, the panic at one stage reached such an extreme level that the yield on 3 month US Treasuries reached 0.02% on Thursday, returning just $2 on a $10,000 investment. Investors weren’t just running to safety, they were blindly staggering to anywhere with no exposure to the credit markets. When investors press the panic button as they undoubtedly have done, there is potential for a counter rally to set in the short term as we saw on Friday. However, looking at large crashes from 1987, 1997, 1998, 2000 and 2001, the follow on reaction is typically a range bound market.

A small footnote to the current situation:A few weeks ago month the MPC’s (Monetary Policy Committee of the Banks of England) pension fund liquidated its portfolio of equities, property and private equity holdings and transferred the whole lot into government gilts. The cynicism took my breath away.You will soon be able to post your thoughts and comments in my soon to be launched forum.

Trading Question Answered:

I’m often asked about COT (Commitment of Traders) Data and how this can help us trade and invest.First the raw numbers for this can be found at: http://www.cftc.gov/marketreports/commitmentsoftraders/index.htm.The data is easy to chart using excel but if you don’t want to do this yourself other readers have recommended: http://www.timingcharts.com/. Second COT data is a sentiment indicator, which when taken with other signals can help us trade and invest across a range of markets. A fuller explanation of the COT report can be found by clicking on the link.

Market manipulation aside a quick look at the oil charts does indicate an imminent reversal (the same is true for both gold and silver). Oil weekly shows a two bar reversal with the monthly giving the strongest signal yet that the price is about to fall – a gapped up evening star. Gold and silver both show bearish engulfing candles on the week so expect prices to fall here too. This does not necessarily signal an immediate rush back into equity markets which are still very volatile (great for day traders!). What it does reveal is financial markets in transition.

However, while I would always advocate surfing any particular market sector and trend (up or down) the speed and extent to which commodity prices have risen is rapidly turning this sector of the market into the next “bubble”. A simple example. Farmers announced they were increasing plantings of soya beans by 18% and Wheat by 6%, while decreasing their planting of corn. This announcement caused soya beans to fall sharply, down to $11.35/bushel in the July contract. Just a month ago it was trading above $15.80. Wheat also fell, but corn soared. As stated in Wednesday’s Wall Street Journal, “Stocks of corn before the new harvest could fall to a decades-long low of 636 million bushels, compared with 1.4 billion bushels currently. If corn usage remains unchanged and if yields are the same as last year, he (Terry Roggensack of the Hightower Report) says ‘we’ll run out of corn.’”

If you are thinking of entering this particular market an understanding of the Commitment of Traders Report is essential. Whenever there is panic in the mainstream markets it is easy to be seduced into wandering into seemingly more predictable and surefire sectors. However, just remember that the market can only enrich itself with a constant supply of blood from its latest victims so just make sure it’s not yours.

The first quarter of 2008 was always going to be a difficult time for the dollar and the US stock market – bad employment figures and falling retail sales all contributing to a drop in corporate earnings, thereby making a half percent cut in interest rates more likely by the Fed. All in an effort to avoid a recession, which according to Goldman Sachs  is already underway. In addition there is talk of an inter meeting interest rate cut.

A raft of U.S. data this week will show how the economy is faring, including retail sales, industrial production, housing and consumer prices. This will keep the dollar under pressure as the outlook on the U.S. economy continues to be in doubt and fears of a global slowdown. Among the most anticipated quarterly results will be those to be released by Merrill and Citigroup, among the hardest hit by the U.S. subprime mortgage defaults and the resulting crisis.

These latter numbers are very important because if the losses are not as bad as predicted market sentiment will change and out of the ashes of this market will come a fresh bull run.