"Very well done scary stuff."

Eoin Treacy's view Thank you for this informative interview where Lakshman Achuthan from the ECRI predicts a US recession. While there are some mildly encouraging signs, one can only conclude that the S&P500 has entered a bear market. To what extent this reflects a deteriorating economic growth outlook is open to debate.

The pace of US economic expansion is likely to remain low over the short to medium term even in a best case scenario. At the lower end of expectations a recession is not beyond the bounds of possibility. Such an outcome would probably initiate a further deterioration in investor sentiment. I thought it might be instructive to examine a number of instruments central to both the existing problems and potential solutions.

The S&P 500 broke downwards from a Type-3 top (ranging, time and size as taught at The Chart Seminar) in early August. The 200-day MA has subsequently turned downwards and the Index has been ranging below it for eight weeks. It is currently testing the lower side of the short-term range and a clear upward dynamic will be needed to reconfirm support in this area. A sustained move above the MA, with a rally above 1240, will be required to indicate a return to medium-term demand dominance.

The Nasdaq-100 has been a relative strength leader and was one of only a handful of indices to have pushed back up into the overhead top formation. It pulled back from the 2300 level last week and broke the 8-week progression of higher reaction lows on Thursday. A clear upward dynamic will be required to check current scope for a further test of underlying trading while a sustained move above 2300 will needed to indicate a return to medium-term demand dominance.

The S&P 500 Diversified Financials and the KBW Regional Banks indices have borne the brunt of selling pressure in the US banking sector. While they have lost downward momentum over the last month, they continue to post progressions of lower rally highs and sustained moves above 250 and 42.5 respectively are the minimum requirement to begin to challenge the overall downward bias.

US 30-year yields remain in a consistent, albeit overextended downtrend. This deterioration reflects both government intervention, through the Fed's Operation Twist, as well as increasingly bearish economic forecasts. The progression of lower rally highs remains intact and a sustained move above 3.15% would be required to question the consistency of the decline.

West Texas Intermediate crude oil retains its medium-term downward bias with a progression of lower rally highs since April. A sustained move above $90 would now be required to question medium-term supply dominance.

The Continuous Commodity Index peaked below 700 between March and April. It fell back to range above the 200-day MA and broke below it three weeks ago. The MA has now turned downwards. While oversold in the short term, a sustained move above 625 would be the minimum requirement to question medium-term supply dominance.

The spike in commodity, particularly oil, prices earlier this year was one of the catalysts for the slower growth conditions evident globally. Lower commodity prices are a precondition for recovery and this facet appears to be falling into place.

The US Dollar Index broke out of a six-month base in August and continues to extend its short-term uptrend. A sustained move below 77 would be required to question current scope for additional upside.

The Asian Dollar Index reflects investor anxiety and flight from Asian equities into the liquidity of the US Dollar (JCI, PCOMP, SET, HSI). It broke its progression of higher reaction lows in September and fell to 114 where it has at least paused. The Index is overextended in the short-term and potential for a relief rally cannot be ruled out. However a sustained move above 118 would be required to begin to suggest a return to medium-term demand dominance. The Australian Dollar has a similar pattern. (Also see Comment of the Day on September 9th).

Greek 10-year spreads over German Bunds hit a near-term peak near 24% in mid-September and posted a lower high last week. While the perception of risk has improved somewhat, an additional deterioration and sustained move below 19% would be needed to suggest a medium-term peak has been reached.

A great deal of commentary has focused on whether Greece is going to default. It should be noted that under normal circumstances Greece would already be considered to have defaulted. In July a proposed voluntary debt swap was deemed not to constitute a default and those expecting a different ruling from ISDA are suing as a result. (Also see Comment of the Day on August 8th) This event a useful guide to how the Europeans plan to avoid a disorderly default.

This article from Bloomberg suggests European governments are close to agreement on collateral for the next tranche of bailout funds to be released to Greece. It is reasonable to expect the EU to ensure Greece's solvency until the EFSF deal is passed by the various legislatures since that will be the primary tool to counter contagion to other sovereigns and the banking sector in the event of a default. The greatest problem of course is that EU ministers have demonstrated over the last year that they are not always reasonable.

The Euro STOXX Banks Index posted its first higher rally high since July last week and from a considerably lower level. It retested the 2009 lows in mid- September and a sustained move to new lows would be required to counter the hypothesis that base formation development may be underway.

In conclusion, September was one of the most volatile months on record. In such an environment the perception of risk increases. Making long-term decisions is therefore difficult for most investors. The surge in the US Dollar reflects a desire for liquidity. Deteriorating commodity prices and tentative signs the Eurozone's banks are building support are encouraging medium-term signs. However, this remains a decidedly high risk environment in the short-term. The continued relative performance of shares leveraged to the growth of the global consumer suggests they will be among the first to hit new highs once a recovery is established.