Traders deliver a lesson from the bears

Today's fall on the Australian and Asian markets could be more serious than the weekend New York decline which was linked to end of the year book balancing.

We are seeing multiple forces hitting Hong Kong and that is spilling across to Australia. Because the market is volatile we will see more fluctuations, but have no doubt about the strength of those underlying bear market forces.

I am going to start off with the force that most people ignore – the charts are breaking down. Remember that we are dealing with a market that is a traders market. Huge funds punt the markets day and night and they use charts. Whether the charts are right or wrong, in bear and bull markets, they can be self-fulfilling because people act upon them.

I confess from time to time I have a quick look at Futures 618 group and they are saying that the US S&P500 monthly chart shows a series of broadening patterns – so called megaphone wedges.

"The recent megaphone remains very bearish while the three megaphone patterns reveal an unstable market where buyers and sellers battle for control," the group said.

"The 'Long candle wicks' on the September chart reveals substantial buying support which only slows the decline.

"The March 2009 lows will still be breached. Prepare for the next Black Swan."

In other words, charts as interpreted by Futures 618 say we are in a decline that will be in interrupted with buying support, but it may go below the March 2009 lows. That may not happen but that's the fear message that is influencing traders.

And of course we can see this in the fundamentals via lots of danger points. At the weekend, I took my eye off Europe and concentrated on what the markets were telling us about China (Cracks in China's poker face, October 1). I am not going to repeat what I wrote there but you cannot understand what is happening in Asia unless you read that material or something like it. And don't forget Karen Maley's A growth check from Dr Copper (September 30).

And then of course we come to Europe and in essence the traders are telling the European politicians and central bankers that they are yet to come up with a sustainable solution. And to teach the politicians and central bankers this lesson the traders will make the situation worse. As the traders punish the markets, the massive European rescue efforts which were possible a month or so ago are now looking out of reach. We are now getting closer to a euro break up and the biggest banking rescue the world has ever seen (McKibbin delivers a market warning September 30, Traders crack the market whip September 26). And on top of that, the market fears a deep recession in Europe and bad times in the US.

Markets have been wrong in the past but they are not telling a pleasant story.