Check Mate, for The Middle Class

From a strategy standpoint, we’re now ready for the next round of financial destruction.

If we use this article from ZeroHedge, as the pivot point, consumer credit has maxed out.

The consumer (i.e., middle class) is now on the downward slope, just as the layoffs are about to begin in earnest.

Following the typical corporate model, expect job losses (time stamp 15:18) to start slow, then accelerate into December of this year.

The latest employment numbers provide the perfect backdrop to raise interest rates into a declining economy; all going as planned.

Market Response

As is typical, everyone’s focused on the major indices; The S&P 500, Dow, NASDAQ, SOXX, and on.

However, there’s one sector covered in the past, that’s mostly ignored: Basic Materials, with ticker DJUSBM.

That sector has held up until recently; probably because the thinking was, we’re going to have infrastructure projects to keep the economy going.

Looks like someone got the memo; Basic Materials has broken down.

As of this past Friday, it’s at a critical point.

The prior post from last November, does an excellent job of highlighting the divergences (which have only become worse) as well as downside potential.

Basic Materials DJUSBM, Weekly

On the chart, we’ve got a breakaway gap that looks like it won’t be filled.

After that break, price action has formed a congestion area over the past three weeks.

However, it’s the congestion area giving us clues; the sector’s set up for an imminent break to the downside.

If that congestion holds true, it’s a stunning revelation of what may be about to happen.

We’ll go to the daily chart and start with a Fibonacci time correlation between pivot points.

Basic Materials DJUSBM, Daily

Well, it might not look like much.

However, let’s go one step further with another time correlation, shown below.

If you’re reading ahead, then you already know a trading channel has been defined.

The next chart shows the result.

For this channel to confirm Fibonacci ‘Day 21’, Friday’s action had to post lower … and it did.

That lower action also confirms, the channel’s a Fibonacci 13-Days wide.

Even more disconcerting (depending on one’s viewpoint), the channel lines are declining at approximately – 96.5%, on an annualized basis.

It’s not straight down but it’s close.

The next chart has a zoom of the congestion area.

Note how the grey dashed ‘center line’ is perfect in its contact points … further confirmation of the channel.

Leveraged 2X Inverse SMN, Daily

Although volume is still light, it has improved dramatically.

On a weekly basis, last week was the second largest trading volume at least going back to the ’07 – ’08, meltdown.

The inverse fund is shown below with the trading channel.

Liquidity is still marginal but has picked up over the last three weeks.

The Week Ahead

Obviously, the expectation for the next open is to post lower for basic materials.

Even with all the analysis, it’s the market itself that’s the final arbiter.

Positioning

As the hyperlink tabs in this post (top-left) show, I’ve positioned one account short the sector via SMN (SMN-22-01), with a stop just below Friday’s SMN, low at around SMN 14.05 (not advice, not a recommendation).

It’s a very tight stop.

The analysis is either in-effect, or it’s not. By this Monday, we’ll find out.

A Decline of Biblical Proportion.

On a strategic basis, we can see how expertly the middle class has been maneuvered into a corner.

For the past two years and probably much longer, that sector has been positioned to not have any recourse when the real decline hits.

We may be there now.

At the same time, if you’re up on Biblical references, you already know that when destruction came, there was always a ‘remnant‘.

The remnant was left to either escape or re-build and was typically 10% of the population.

If you’re reading this, you have already decided at some level, to be part of that remnant.

Stay Tuned

Charts by StockCharts

Note:  Posts on this site are for education purposes only.  They provide one firm’s insight on the markets.  Not investment advice.  See additional disclaimer here.

The Danger Point®, trade mark: No. 6,505,279

Active: Short DJUSBM via SMN, as SMN-22-01, stop @ SMN 14.05