So here we sit at 7:00 AM on the cusp of a breakdown of the flat triangle that has been forming over the last couple of weeks.

We actually threw under it overnight, but have regained the lower boundary. 

If this fails to hold we are looking at a violation that should lead to a ~200 point SPX drop, taking us into the mid-600s - and the DOW into the 6,000s.

That, of course, is ugly stuff.  Very ugly stuff.  The last line of defense lies at the 2002/03 lows; if those fail then support is going to be very, very difficult to find.

The underlying cross-current here is not local to the United States; it has shifted overseas.  We are seeing the smashing of currency crosses, but here's the nasty part - if you look at history, it wasn't that long ago that the Euro/Dollar cross, for example, was below where we are now.  Ditto for the pound.

The bigger issue is the Yen/Dollar cross.  That is in a range only seen in 95/96.

So what's all this mean?  Pretty simply that the stupidity that wound up all of this false prosperity in the last few years is now coming off, along with the valuations.  It is smashing forward profit prospects, as that falsehood is coming out of the market too.

But at the same time it is restoring some balance in trade, in that the false "economy" of importing everything into the US, made beneficial only due to a depressed dollar, is starting to reverse.

Those who have, for the last year, thought that the dollar was going to collapse imminently have been proven wrong. 

Period.

And by the way, last summer, I was in that camp.  But as the facts changed so did my opinion, and into the fall it became clear that while we were in bad shape, the rest of the world was going to get it worse than we are - far worse.

If you think our markets are in bad shape, have a look over in Japan, China (!) or for that matter into Europe.  We still have a major stability problem in Europe, and there is no evidence that this has (or will in the short run) resolve cleanly. Specifically, there is far too much leverage in the European banking system and an utter lack of admission that this is a key element of instability that has led to the morass we find ourselves in.  Worse, the emerging market economies have nearly all of their potentially bad debt being held in those banks.

If this gets out of hand - and the jury is out on whether it will - the consequences will be especially severe, as we will be forced to choose between cutting off these nations (and letting them collapse) or putting our own political system at risk of collapse.

While the concept of "helping everyone out" sounds good in theory, providing swap lines back and forth to various nations, in truth this just enables the lying, just as the person who has an alcoholic spouse can only continue to booze away so long as they have someone who will cover for them, both providing them with the funds necessary and bailing them out when the cops stop 'em while driving.

Drug or alcohol abuse, just as with credit abuse, only stops when supply is withdrawn or the patient dies.  While everyone loves to talk about "managed withdrawal" you must in fact do the withdrawing.

We've seen no evidence - at all - that any such withdrawal and forcing of reasonable credit standards, as opposed to "gimme another case of booze", is on anyone's agenda.

In fact, it appears that we're on path to try another Greenspan style "kickstart", although this time I not only doubt it will work, but fear it will produce the very collapse that everyone is claiming to want to avoid.

For today, watch the key level of 839 in the SPX and, if it fails, watch the 760ish level, the 2002/03 Bear Market bottom.

Below there the abyss beckons, and the smell of sulfur has been detected wafting upward; if I had to take a bet here it would be that we're likely to get a bounce either here or off the 760ish level that will likely go into the end of the year - then reality hits on all the Treasury Supply in the form of much higher real interest rates, along with the dislocation in the broader economy and job environment. 

As such I rate the odds of the 02/03 bear market bottom holding through next year as essentially zero, and "investing for the long haul" (as opposed to trading this market) is, at this juncture, idiotic.