Long or short, this is going to be a tumultuous week.

We enter the week having blown through the 50% retracement levels on the S&P 500, headed for the 61.8% level. The following chart is quite illustrative....



Note that the 61.8% retracement, which I believe is a critical level, lies just above where we are today in the SPX cash - right near 1485/1490. 1490, incidentally, is that strong support level that we took several attempts to breach on the downside, as you can see from the above chart - it is now overhead resistance.

The fly in the ointment is that you also had a very nice downward trendline that was broken Friday late, just after the noon hour. That was what led me to take some of my shorts off. Why? Because its possible that we may not stop at 1490, and may head for somewhere between 1500 and 1520 before failing! If we don't stop there then you simply have to consider that this really was just a correction - and its over - at least for now. As such I am abandoning non-performing shorts and will continue to do so if currently-performing ones head north - even a bit.

I can always put them back on at higher prices.

Technicals do not a market all on their own make. But technicals coupled with fundamentals often do, and on the fundamentals we have a number of problems over the weekend, with some stresses showing up even now in the overnight electronic and Asian sessions, even though all the Asian markets are showing bright green.

First up, we have a second German Bank that got in serious trouble and was basically sold off "free" (well, not really, but close enough); effectively, they had to give it away. The culprit? Off-balance-sheet investment "conduits" that blew up. This is a story that is likely to repeat -we've now got two German banks that have gotten in serious trouble in the last couple of weeks. If and when this comes to the US things are going to get really interesting really fast.

The NY Times ran a scathing hit piece on Countryslide over the weekend. I have no way to gauge what this will do to the firm's stock price Monday, but I think its a reasonable bet that it won't be pretty. Having had my trailing stop hit Friday afternoon I can only sit back and say "damn!", but heh, it will be fun to watch.

The Home Depot deal apparently got done. That's the good news. The bad news is that it was done on seriously worse terms - to the tune of nearly $2 billion dollars - than originally agreed. That's the bad news. How this affects the firm's stock price - and the broader markets - is difficult to determine up front. What is not difficult to figure out at all is that the bloody fighting over this is almost certainly "game over" for highly-leveraged big LBO deals. Over time this will remove the PE/LBO "PUT" from the market, but it may not do so immediately. That "PUT" is estimated by many to be anywhere from 10-30% of the current equity market's price, with me being on the higher end of the scale.

In a sign of severe credit market stress, the 3mo Treasury bill came under extreme pressure overnight once again, driving down the yield in a big way. I have no idea if this will stick or not overnight, but if it does, it augers for trouble in the equity markets right around the corner.

As well it should. As I noted in my Friday Ticker, the Fed removed the safeties from the ticking nuclear weapons at two large money center banks last Monday, and nobody seemed to notice until Friday after the market closed. Could we have an implosion similar to that in Germany on our hands? Maybe! There's simply no way to know, and you can bet that nobody is going to talk until they have to on the matter.

So if I was a betting man, my money would be on a retest of the 1485/90 level with a high probability that those levels hold and we roll over from there, with all this happening possibly as soon as tomorrow.

Why?

Because all the arguments for much lower prices in the markets are there. A softening consumer. Overleveraged balance sheets that are now running into trouble within Corporate America and especially among hedge funds, LBO firms and even banks. Outright bank rescues (so far confined to Europe) and huge liquidity injections made to try to stave off a full-on collapse. A dysfunctional commercial paper market, Countryslide in trouble, and others folding literally by the day. Horribly bad housing numbers, no matter how people try to spin it - it is what it is, and its not pretty.

Add all this up and I see a recession in the cards sooner rather than later, with commensurate damage to equity prices. 30% down from here looks totally reasonable over the next six to twelve months, and it could come in fits and starts, or even "all at once" in the form of a crash.

By definition the triggering events for severe and violent moves downward in equities are almost impossible to determine in advance. But what we do know at this point is that the stage is set - the financial markets are literally balancing on knife-edge, with the recent recovery all pinned on the hope of Fed rate cuts.

While rate cuts might trigger a big rally, it won't put the Genie back in the bottle. You can't make an insolvent company solvent again by cutting interest rates. The root problem doesn't lie there; it lies in the fact that leverage was inappropriately used and now the check has to be paid.

Good luck in the morning folks..... it looks to be setting up to be quite the interesting day!