Wednesday, October 29, 2008

What is next

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Sorry, no time to make any post during the week... This is not something I use to make money - I use it to put my thoughts in the order. I believe every trader knows that there are periods in the trading when you want run into the forest, find the dippiest hole, hide your head in and wait for a miracle. Usually such moments end with the portfolio crash.

To keep myself in the shape and avoid such situation I have this blog. The obligation to have at least one post a week make me to keep my head clear and to watch the market without emotions. If you see that you may not control your emotion, start a blog. The filling that somebody read what you write will make you to be unemotional and that may help you in trading.

Now, is not a moment for me to run into the forest. I'm happy. If you look at my previous posts the last two days I see exactly what I expected. Telling the truth the market exceed my expectation (see my previous "Nasdaq 100 chart" post). Even today's drop at last 10 minutes of the trading session looks promising (take a look at the volume during these 10 minutes...)

What is next, so far all my indicators are bullish and are pointed toward the October 14, 2008 highs. In such volatile market, the indexes especially the DJI may do it in a single trading session. As I mentioned several times before, only when I see that these highs are broken I can more or less be positive that what we saw on October 10, 2008 could be the end of the stock market crash. Again, I repeat, market is extremely volatile (watch ATR) and if you do not have ability to monitor charts during the day it's better to stay out of the market, unless you would like to invest into long-term (401K and IRA), last week was a good time for that (read my previous posts)...

See more in my weekend post.

Sunday, October 26, 2008

Nasdaq 100 chart

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I do not know where the market is going to be in a month. However, I'm sure that this not the end of the world and the market must be up  in a couple of years and much higher than it is now. Yes, we could be at the bottom of the recession, yet, as I told before I would not even think about it until I see the indexes moving above October 14, 2008 highs.

I do not know when the market will be even in a week. I such volatile days I can have some degree of confidence in the coming day only. That is why I do my home work on daily basis - I do my technical analysis every day. From the chart below you may see that my 60-day technical analysis looks positive at this moment - the SBV, MACD, RSI, Stochastics and McClellan Oscillator are moving up. Yet, the Bullish sentiment can turn into Bearish on Monday or in  a couple of days... So, watch out... Do not trust me, but do your own home work.

Nasdaq 100 chart - Technical Analysis

 The technical indicators on the S&P 500 and DJI charts look similar to the Nasdaq 100 technical indicators.

Longer-term charts (1-year, 1.5-year) suggest the high possibility of the strong mid-term recovery. However, it's difficult to say if this is going to happen tomorrow. We already saw that the stock market ignored the extreme panic selling in the middle of September - something very unusual for such huge volume surges. The investors were ready to come into the market and those volume surges witnessed that many traders started to by and that is why we had 10% run up in a single session. The only explanation of sharp change in the sentiment from Bullish into Bearish again I see in the "Bailout news". On my opinion the games around it pushed the market down again.

Will the market react healthy on the current Bearish volume and will go up? I hope so... The history shows that the market always react on huge volume during the price drop by a strong recovery. Yet, what surprise our politicians are hiding? New President will come on the throne in a couple of days... I hope the tax increase will not be his first bill. I'm not against tax increase, but not now. Now, when all businesses are suffering from the crash on the stock market and crash in the financial sector, now, when all businesses are trying to survive, the tax increase may completely destroy them and push the market in so deep recession that we may forget that USA is the world leader... Later, when the economy is stabilized, become healthy and growing, maybe... Bu not now...

I think there is the possibility that the market may wait to see who the new President is and what his intentions are. Nobody wants to invest in a company that may file bankruptcy in a month because of sudden additional expenses (increased taxes) that could be put on the company's shoulders in such difficult time (when the market is in the deep recession).

Long-term investment

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In my last "S&P 500 Chart" post the technical indicators were positive. We still had the positive market on Monday, yet, on Tuesday the sentiment turned into the bearish and by the end of the week we had third attempt of the market to break the October 10, 2008 bottom. The Nasdaq 100 index did pass this support level, however the S&P 500 and DJI indexes stayed above. One more time I would highlight the importance of monitoring chart on the daily basis. In such volatile market the sentiment changes very fast and if you are not watching, your yesterday's winning trade could be in deep loosing situation today.

I have already mentioned two weeks ago in my "Stock Market Crash Analysis" about the importance of the high volume surges. Now, you may see that I was right and the high volume surges did mark the support on October 10, and this level has become very sensitive for many investors.

What we see now looks like normal market behavior in the support corridor:
  1. The market hit the Bottom on October 10, 2008 and high volume surges reveal us that a huge number of panic sellers left the market by selling their investments. The volume was extremely big and it tell us that the same big number of shares was bought by other investors (volume is always two side transaction - if somebody sold then somebody bought from him).
  2. Those investor who bought on October 10 did not sell yet - we have not seen any volume during the price advance that would be even close to the volume surges on that day. That means that those buyers are still in the market and they are not in panic yet. Their positions are not in the red zone - the indexes did not drop below October 10 lows.
  3. It looks like not all traders who are in fear were hit on October 10. Many of them started to sell after October 14 when they saw better price to cut losses, by pushing the market down to retest the support level.
  4. On October 14 again, new investors decided to start buying at bargain and again we saw volume surge which was, however, smaller than the one on October 10. That tell us that there were no as much panic sellers as before.
  5. And again after October 20, another panic seller who still did not cut losses started to push the market down.
  6. And again we see smaller than before volume surge that stopped them at support level on October 23, 2008.
So, what's now? The market may go up, there are not a lot of sellers who is in panic - big part of them already left the stock market on October 10. The market can continue to fluctuate around this support level until all who is in fear leave the market and more traders become attractive by low priced stocks. Or, we may see a new surprise from Government (as we had before with bailout) which may push market again deeper down.

I will repeat one more time what I was repeating over the past two weeks. This is a good time to invest into pension - for a long term. The stocks are underpriced and sooner or later thy will cost much more. Some of the stocks could double or even triple over the couple of years. Of course it's bad idea to invest all you have now. You may divide it in 2-3 portions and if the market is still going to drop you just wait for another volume surge and invest another portion of your portfolio into IRA or 401k. This is very simple principle of long-term technical analysis - Every time the stock market crash and you see big volume surge you start to invest.

Tomorrow, I'll try to post a chart.

Sunday, October 19, 2008

S&P 500 Chart

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As I mentioned in my previous "End of the market crash" post on October 13, 2008 in majority situation after the strong bounce up we may see the attempt of the market to retest the support levels and later this week we witnesses such drop down when on October 16, 2008 the Nasdaq 100 hit the October 10 lows and the S&P 500 and DJI indexes went down close to it. Yet, after that we saw bounce up again and the indexes are still on its way up. I think the question that I put last week "if this is the end of stock market crash" is still not answered. The same as before I would state that October 10, 1008 has put serious point to consider the trend reversal. We had huge volume at that day, the market is in extremely heavy oversold condition, strong rebound has confirmed that market can run up very fast very strongly... All of this make me to consider the high possibility of strong reversal and if not the end of the stock market crash then at least strong mid-term up-trend. Yet, as I mentioned before, I would like to see that the October 14, 2008 highs are broken and the indexes are moving up above them as confirmation of that. Still, for long term investments (401k) I consider that this is good time to buy on such volume when the indexes are so deep down. Even if the indexes will go lower then on the high volume at better position you will buy again. Over the long term the returns from the multiple positions should be rewarded.

Going back to the short-term chart, in my case it is 60-day S&P 500 chart, I may say that the technical indicators are more or less positive and my technical analysis tells me that we still may see some up move. It's difficult to say where the market is going to be in a week. I such volatile market (VIX Volatility index is above 60) we may see strong change in either direction any time. At such time it's especially important to monitor charts on the daily basis. For those who cannon watch charts daily, yet, still would like to make short-term trades I may suggest one thing only - stay out of the market until the volatility is down, your time will come

SP 500 chart - Technical Analysis

The S&P 500, Nasdaq 100 and DJI indexes show similar pictures. The reading of the technical indicators on all these indexes are pointed in the same direction

 - SBV, MV, Advance/Decline Oscillator, RSI and McClellan Oscillator are Bullish
 - MACD and Stochastics are bearish

Overall, more points are in the favor of the further recovery.

Monday, October 13, 2008

End of the Market Crash?

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Isn't it a good day? Read my Friday's (Stock Market Crash Analysis) post. Yes I expected strong run, but this rally up exceeded all my expectations - DJI run 11% up, S&P rally 11.5% up and the Nasdaq 100 has made 12,5% profit. S&P 500 and DJI have recovered from more than the half of the last week losses and the Nasdaq 100 index almost made to the October 3, 2008 close.

I had bullish feeling and I was reworded. Yet, let's not forget the lessons of the past by following the golden rules: protect the profit and cut losses. Even I'm still in Bullish mood and even all my technical indicators point to the continuation of the recovery, it is a good strategy to have trailing stop set.

I do not post any chart today, as I mentioned all my technical analysis is bullish at this moment and I see the odds are on the side of the further up-move. The fact that the market ignored huge volume and oversold levels in the middle of the September tells me that there is a possibility of the indexes running to this level. Yet, before that the indexes has to run over the September 29th, 2008 bounce level.

I believe the main questions many traders are asking now is "Is this the end of recession?" My answer is "I do not know...". Yes, it could. During the recent crash a huge amount of money left the market. Friday and today we saw that the investors started to buy by pushing the price up. I would say we will see how the recovery develops. In majority situation after the strong bounce we may see the attempt of the market to retest the support levels and today 11% run up is not a complete victory on the recession. I will say that the recession is broken only when I see after the first recovery run a down move and then reversal which would beat the first recovery run highs.

Again, as a mentioned in my previous post if you are long-term investor and for you it is not very important where the indexes are in a month if over the long period (several years) you are in profit then you use each drop to buy. Friday October 10 was a nice day to buy in long term (see my previous post). Even if the indexes drop lover in a month, then you will make just another injection into your 401k and IRA accounts. If you wait when the indexes are back to the July 2007 highs and then start to invest into your pension funds I may guarantee that over the long term your pension will be broken.

Sunday, October 12, 2008

Stock market Crash Analysis

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Friday was a nice day. The sentiment become positive and it happened on the high volume. See the DOW Jones Industrials chart below.

DJI chart -Stock Market Crash Analysis
As I always state, I associate the high volume during the price decline with panic selling and extremely high volume with extreme panic. We already had the huge volume surge in the middle of September 2008 (see my "DJI Chart" post) which marked the end of the crash (on my opinion) at that time. I still convinced that it would be the end of the crash or at least a very solid bounce before further slide. Yet, the market dropped further down by ignoring the highly oversold levels. Why? - I think only because of the bailout (see my "Wall Street" post). When you show a "candy" to a spoiled kid you have to give it to him otherwise the child will black mail you. That is exactly what happened, credits were frozen and the kid received what he wanted...

One more point into the the favor of protecting profit strategy. We had a strong bounce on September 19, 2008 (only one day), however the reaction on the high volumes in September was not as strong as I expected, yet strong enough to be in profitable position. This situation show importance of the protecting profit - those who did not a set trailing stop instead of winning trade could end with loss.

The same is now. We have second wave of the extremely high volume - huge amount of shares changed hands - somebody was buying from panic seller in huge amounts... That tells me that we have very good chances of the strong bounce up. This week high volume together with unprocessed volume surges we had in September can push the market significantly higher. The stock market is extremely heavily oversold. Now, we saw some light when the buyers were dominant on the market (Friday's afternoon) and based on what I see I think this could be a begining of strong movement.

Yes, I'm positive - my technical analysis shows that on Friday we hit some bottom. I'm not telling that this is the End of the stock market crash and now only bright days are ahead. What I want to say is that there is a high probability we will see up-move as the reaction on the high volume surge. Will this bounce grown into the long-term recovery is another question, which would be premature to discuss now. That is why if I have opened a long position I set a trailing stop to protect a profit.

For long-term investment (IRA, 401k) I may say only one - you bought last month on the decline and high volume and now you buy lower on the decline and high volume again. If the market in a month is lower and you see high volume you will buy again. If you are long-term investor you will be reworded. If you do not know what to buy then invest into the indexes - the weak companies are dropped from the indexes and on their place come stronger ones and you do not have to do a research to find out what companies are strong.

Friday, October 10, 2008

Stock Market Crashes and Bubbles

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I'm for the free market, yet, it does not mean I'm against regulation. We live in free country and we have police, we have court, we have law, we have army... We need all of these in order to protect the freedom. The same is with stock market. We have free trading, yet this free trading has to be protected. That is why I vote for regulations.

The Wall Street was created to support economy and to help it grows. It looks like now it's opposite - the economy has to support the appetite of the Wall Street and when the economy fails to do so we have stock market crash. That is why we need regulations. The stock market is not as it was a century years ago, it's not even as it was 10 years ago. The volume traded on the US stock market more than doubled over the last 10 years. Did the economy become better??? Maybe... but I'm not sure it's twice better as it was a decade ago... So, what is the source of increased trading volume - my answer is speculators (which includes me as well). That is why I think this is a time for some increased regulations against speculators (against me). When the market becomes driven by speculators and not by economy then the Wall Street may destroy the economy - this is my opinion.

Right now, I'm talking not as a trader, because what I'm taking about is against the trader's nature. The greedy buying and especially panic selling has to be under the control of the regulations. Otherwise we will have bubbles (like internet bubble in 2000) followed by stock market crashes. Nobody talks about that, yet we had bubble again and now it was in the mortgage sector. Because the mortgages became tradable commodity the demands on them increased and when the economy was not able to support the Wall Street demands the mortgage bubble has collapsed...

We will not be able to avoid bubbles and crashes. This is the nature of the free stock market. By having bubbles and crashes the stock market self regulates itself by helping the economy to move in the right direction. However, the free market is very attractive to the speculators and that is why the regulations are needed, without them we will have even bigger bubbles and more extreme stock market crashes. Especially more extreme crashes, why, because a speculators make more and faster during the stock market crash (market is more volatile).

The economy has to be protected from the situations when speculators are selling short stocks (stocks they do not have) in huge numbers - this creates a demand on the bear market and may turn a healthy down-trend into the global disaster. How to do it - this why we have government and all the institutions including SEC. Yet, it looks like they do not work in this direction... From my side I may say that even simple rule may help. For instance "In situation when the DJI drops for more than 3% in a single session, none of the traders or funds managers should have more the $10M in short position within the next week. Those traders who has more than $10M in short position on the moment when the rule is triggered, has to cover extra within the next trading session." It's simple: the market is still free, the crash is still possible because if you own stocks and you want to sell in panic it you may sell it and you may sell as much as you have. Yet if you want to sell short in order to profit on crash your greedy selling abilities are limited and your short trading activity will not affect the market.

Thursday, October 9, 2008

2000, 2008 Stock Market Crashes

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It  took 2 years after the internet bubble until the stock market hit the bottom and start the recovery movement. During the 2000 year market crash the S&P 500 dropped by 50%. It took more than 4 years for the S&P 500 to recover and reach the same high levels.

It took only a year for the S&P 500 to crash down for 42% now and we still do not see the end... How long will it take to recover from this hole???

Stock Market Crash 2000 2008 Chart

Tuesday, October 7, 2008

Stock Market Crash 1929, 1987, 2000, 2008

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The Stock Market Crash 2007-2008

Stock Market Crash 2007 2008 Chart
Stock Market Crash Causes:
  1. Corporate Corruption (as always, even it's not announced yet).
  2. Overvalued Stocks  (as always, even it's not announced yet).
  3. Mortgage crisis.
  4. Over unregulated financial institutions (on my opinion).
  5. Unregulated big speculators playing short (my opinion again - we have now much bigger number of speculators including hedge funds who may play short).
After the Crash:
  1. Bailout of the financial institution????
  2. ???
  3. ???

The Stock Market Crash 2000-2002

Stock Market Crash 2000 2002 Chart
Stock Market Crash Causes:
  1. Corporate Corruption.
  2. Overvalued Hi-tech Stocks.
After the Crash:
  1. New Rules for Daytraders;
  2. CEO and CFO Accountability;
  3. Accounting Reforms.

The Stock Market Crash of 1987

Stock Market Crash 1987 Chart

Stock Market Crash Causes:
  1. No Liquidity. During the crash, the markets were not able to handle the imbalance of sell orders;
  2. Overvalued Stocks.
After the Crash:
  1. Uniform Margin Requirements;
  2. New Computer Systems. Stock exchanges changed to new computer systems that increase data management effectiveness, accuracy, efficiency, and productivity;
  3. Circuit Breakers. The New York Stock Exchange and the Chicago Mercantile Exchange instituted a circuit breaker mechanism, which halts trading on both exchanges for one hour should the Dow fall more than 250 points in a day, and for two hours, should it fall more than 400 points.

The Stock Market Crash of 1929

Stock Market Crash 1929 Chart

Stock Market Crash Causes:
  1. Overvalued Stocks.
  2. Low Margin Requirements.
  3. Interest Rate Hikes.
  4. Poor Banking Structures.
After the Crash:
  1. The Securities and Exchange Commission (SEC) was established;.
  2. The Glass-Stegall Act was passed to separated commercial and investment banking activities.
  3.  In 1933, the Federal Deposit Insurance Corporation (FDIC) was established to insure individual bank accounts for up to $100,000.

Monday, October 6, 2008

S&P 500 Chart

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A few numbers:
  • DOW is more than 4,500 points down from its October 2007 high and only 2,100 points above March 2003 low;
  • S&P 500 is more than 500 points down from its October 2007 high and less than 300 points above March 2003 low;
  • Nasdaq 100 is mote than 800 points down from its October 2007 high and about 500 points above February-March 2003 low;
Pretty scary... Yet, I'm optimistic. It's going to be up and taking look at volume surges I saw during this crash I would expect to see a recovery to the August 2008 levels at least. The question is when it will go up. The answer is "sooner or later, but not during this week to that levels for sure" (smile). But seriously, I do not expect the indexes to recover to that levels even by the end of this month, on the other hand anything could happened and that is why it is good monitor the market on daily basis. I believe many traders my find this time good for long-term pension investments by using 401k to buy some stocks on monthly basis (using dollar cost averaging).

For short term speculative investments I may suggest only one - protect your profit. As soon as your position is in profit it is good to have trailing stop set. If you are today in winning position, in such volatile market without this profit protection you can be in losing position tomorrow very fast...

So, what my technical analysis tells me.

S&P 500 chart
This week I decided to use the same chart explanation table I used in my "Nasdaq 100" post on September 6, 2008

  Nasdaq 100 S&P 500 DJI
SBV Bullish - Moving up
MVO A lot of red MVO and absence of green MVO suggest highly oversold market
Bearish - MVO still negative. only when it becomes zero we may say that the volume went down and panic selling is behind Bullish - MVO=0 and the last MVO was negative
AD Osc. Bearish - Moving Down
MACD Bullish - Moving up
RSI Bullish - Just moved above 30
Stochastics Bullish - Just crossed 20
McClellan Bearish - Negative, moving sideway or down
VIX VIX (Volatility index) is above 50 indicates extremely oversold levels. Yet, it does not move down and could indicate bearish sentiment

Keep in mind that technical analysis based on the 60-day chart cannot be used for mid- or long-term trend. The usual trend that could be expected from the 60-day chart analysis would not last longer than 5-10 days in the normal market. In the high volatile market we have I would not bet beyond 1-2 days from now. Again in such volatile period it is very important to monitor charts constantly - the sentiment changes are very fast and rapid.

Thursday, October 2, 2008

DJI - Stock Market Crash

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Made on request of - the only source of volume and advance decline charts for indexes and exchanges.

To take closer look at the current sentiment on the stock market as well as to define the general market tendency I decided to take closer look at higher-time frame chart in particular on 2-year DJI chart.

Chart #1: DJI index. 2-year chart. 1 bar = 2 days. SBV(10), MVO(5,25,3).

DJI chart
From the chart above we may see the extremely high volume surges during the recent crash. Starting from the middle of September 2008 we had records in daily trading volume. The history of the stock market did not see such extremely huge panic selling ever before. This high volume tell us that the extremely huge number of investors left the market, yet we have some group of other investors who was buying in that period at small bargain price - some traders decided to satisfy demands of those who were leaving the stock market in panic. That is why we had this high volume (volume is two side transaction - for each seller there is a buyer).

The average trading volume on NYSE in 2007 was about 3.1 billion shares per day. The average NYSE trading volume in period from the middle of September 2007 until now is about 7 billion shares per day. Starting from September 8, 2008 more than 130 billion shares were traded. Even by assuming that the average price of a stock on NYSE is only $10 per share it will give us more the 1.3 trillion of negative money flow (out of the market).

As a rule, after a huge amount of money is taken out of the market (when SBV declines) we see a rebound (investors start to invest again). From the chart above you may see a rebound each time after SBV decline in August 2007, November 2007, January 2008 and July 2008. Each time when SBV start to advance after being at low negative levels we see that it indicates positive money flow (investors coming back). Sooner or later the investor that left the market in the result of the recent crash will come back and start to inject funds into the stocks. It could be tomorrow, it could be in a week or even a month. When it happened depends on the current political and economical factors affecting the stock market and how fast the investor could be reassured in the coming stability.

At the current moment the declining SBV on 2-year chart show that the Bearish sentiment is dominant among the mid- and long-term investors. Yet, as soon as we start to see advancing SBV on this chart we may assume that the long- and mid-term traders start coming back which may lead the market up and which could be an indication of the rebound. Taking into the account that we had extremely high volume surges during the recent crash we may expect very strong up-trend.

To better anticipate a possibility of the trend reversal we may always consult lower time-frame by applying the same technical indicators to 60-day chart in our case.

Chart #2: DJI index. 60-day chart. 1 bar = 1 hour. SBV(20), MVO(5,25,3).

DJI chart
From the 60-day DJI chart (see chart above) we may see that the critical moment in the recent crash happened in the period from September 15 until September 19, 2008. Exactly in this period we saw the biggest volume surges and also in this period the biggest transfer of the shares occurred. When we see the big number of shares (big volume) is changing hands during the crash it tell us that the number of panic sellers is dramatically reduced (their demands are satisfied – they sold) which may lead to the shift in the supply/demands balance. After that starting from the September 20, 2008 we still see negative money flow, yet the trading volume is dropping and the number of investors leaving the marked reduces (the red SBV areas become smaller and smaller). That reveals that we see slow change in the sentiment on the stock market and we could be in the beginning of the new uptrend.

In Summary: Overall we believe that we are in the begging of the strong reversal which was defined in the middle of the September by huge volume (extremely panic selling) that pushed the stock market into strongly oversold levels. The exact day when the big long- and mid-term investors start to come back depends on many factors, yet we already see a begging of this process on the 60-day chart. From the more conservative point of volume based
technical analysis it could be recommended to wait for a confirmation on the 2-year chart when SBV(10) starts to advance.


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"Protection from the Golden Parachutes"

I read to the page #9, I found the paragraph below, I become disappointed and did not read further... I'm not a proficient in the art of bailing out the financial institutions - maybe this is why I have luck in understanding...

From the bailout Bill:

(e) PREVENTING UNJUST ENRICHMENT.—In making purchases under the authority of this Act, the Secretary shall take such steps as may be necessary to prevent unjust enrichment of financial institutions participating in a program established under this section, including by preventing the sale of a troubled asset to the Secretary at a higher price than what the seller paid to purchase the asset.

How do I understand it:

If a financial institution has paid for an assets that now in trouble $100K a year ago, and now the market price of this troubled assets is $1K, we have a guarantee that we will not bailout this assets for more than $100K, but there is a high possibility that we will pay $100K for something that currently worth $1K and is in trouble and could cost $0 in a few months.

Wednesday, October 1, 2008

Wall Street - Spoiled Kid

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The bailout will be passed. If not tonight then in a few days. It's out of the question they will play around it it until it's done.

"You do not take away a candy that you've already showed to your spoiled kid. You will give it to him sooner or later".

People of the Kingdom may scream as loudly as they want - nobody will listen. They will be assured that this candy is for their own good but it will be given to the spoiled kid. The huge mistake was done in the first place when this question was risen at all and the candy was brought to the light. Now, the kid already knows that the candy exists and when the kid's parents hesitated in delivering it on Monday the kid has send strong "Black Mail" by pointing to the kid's power and ability to crash the Kingdom.

So, do not worry, the candy will be delivered to the spoiled unregulated kid. You may see it from the fact that the parents do not discuss on delivering or not delivering. All discussions are only about wrapping paper that should be used with this candy.

Main personages
Spoiled Kid: Wall Street
Candy: Bailout
PParents: .....
The Kingdom: .....
People of the Kingdom: ....

I will not be surprised if they rename the "bailout" into the something like "the Kingdom rescue action" by granting themselves as heroes of the Kingdom.