The following is an excerpt from commentary that originally appeared at Treasure Chests for the benefit of subscribers on Tuesday, August 18th, 2009.

Many are now talking about how the markets appear to be managed these days, and these people are now taking conspiracy theories in this regard far more seriously. And without a doubt the Fed and Treasury are working overtime to keep the bubbles afloat, the bubbles in both equities and debt. The key in this regard for now is keeping interest rates low, however this will not be enough forever if revenues keep shrinking in the face of rising costs. Sooner or later, foreigners will see the US has no hope of honoring it's debts short of hyperinflation and continued acceleration in monitization efforts (particularly in debt markets), and will begin pulling sufficient assets out of American markets to send market interest rates past the margin consumers can handle.

This will collapse consumer credit demand further, and in doing so, pass along deflation in the demand for goods, services, revenues, and asset prices. Like dominos, one by one, all facets of the economy will contract / fall, which will bring about a funk that will make the Japanese experience of the last 20-years look like a walk in the park. This is because the entire globe will be caught in a period of readjustment and decentralization away from the American Empire, which will affect business models and living standards around the world. Historically, periods like this have caused war as economies crumble. Lets all hope this can be avoided in the here and now.

The first sign process is accelerating in this respect will be when the US Dollar ($) falls but asset prices do not respond favorably. Yesterday the $ (and Treasuries) rallied while equities fell hard, however it could not close above 80, suggestive the trend lower is still alive on an intermediate-term basis. A rising $ and falling asset prices would really hurt right now with the economy continuing to contract, so you can count on every effort to be made to keep it below 80. Correspondingly then, a multi-day close above the previous high at 79.66 and the 50-day moving average would be very telling, suggestive the second larger degree wave down in stocks (all equities) was underway, with the test and possible failures at the March lows in the making.

Such an outcome would be at odds with the post crash analog of the Nikki, ushering in the likelihood of the post election pattern becoming dominant. You will know this is so when the $ breaks higher, as per above. Until then, and because the $ is counting lower in five-wave affairs, the possible dominance of the post crash Nikki pattern dominating is still alive, where it's possible the $ breaks higher but fails. This would keep the $ and equities consolidating right through October, while the post election pattern calls for significant weakness in equities beginning in September. So, we will likely need wait until next month to see how all this resolves, with stocks (equities) essentially moving sideways until then.

If the $ does break higher next month, and stocks correspondingly lower, key supports on the major averages would then come into play. In looking at a monthly chart of the S&P 500 (SPX) in defining these levels, the first of significance brings us right back to the all important Fibonacci 233-exponential moving average (EMA), currently at 918 and change. This is 'last ditch support' for the bulls past Fibonacci and trend-line support in the 700 area. Of course like Fibonacci resonance resistance at recent highs stopped the rally, corresponding support along the way at 840 would likely provide temporary support, however I would be very surprised if the March lows are not tested before its all over, with failure not out of the question (likely in fact) considering we are dealing with a very high level (the highest short of species extinction) move here. (See Figure 1)

Figure 1

And the story is basically the same when looking at the Dow, with the exception it was the 155-EMA (a number in nature) that stopped the rally, not the simple 200-month moving average (man defined) as with the SPX, making support / resistance metrics on this plot very important indeed. So, although we are ultimately looking to see if the 233-EMA holds on both the SPX and Dow plots, one may wish to give the Dow greater deference considering the movements are more profound, not to mention a breakdown would be signaled earlier with support now at 8,000, the large round number. Once this support fails, then the possibility of a trip down to the crash zone comes into play. (See Figure 2)

Figure 2

This is when the $, bonds, and equities would be crashing in unison, with precious metals making the proverbial moon-shot as panicky investors endeavor to secure the last vestiges of their wealth (borrowing from Rodney Dangerfield in the movie Caddy Shack) in something more secure than a popcorn fart. In this respect it's important to realize fiat currency systems ultimately become increasingly destabilized and collapse when the debt loop (debasement extremes) gets out of hand. We are there now, just waiting for real estate based credit to roll over in the States, once this happens, retirement dreams and lifestyles will go flying out the window with peoples portfolios.

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Good investing all.