In our last update (MM of October 23) we were mentioning that commodity prices had tumbled to a four- year low today, at 266 points (point C on the chart), and that a further move downward was likely as the indicators were clearly bearish.

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The price action actually hit the following expected support level at 230 points It means that the CRB has lost more than 50% of its value in 5 months (between points A and B on the weekly chart). This new support level at 230 points is a previous high point posted in October 2000 (point C), then in January 2001and in October 2002 (points D and E). Once this resistance was cleared, it became a new low and the inflection basis point for the bullish trend development that started in March 2003 (point F).

The RSI shows that the CRB is clearly oversold now. Therefore technically, the current support level may be an opportunity for a bounce back. But as long as the RSI does not jump above its signal line and gets out of the oversold area, there is no positive alert triggered. Consequently the price action can potentially decline further with a RSI that remains oversold during several weeks.

A break of the current support would open the door towards the historical low levels posted in February and July 1999 (points G and H) and in October 2001 (point I), when the CRB bottomed at 182 points. Roughly it’s a further 20% fall from the current levels.

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On the daily chart, we see that the immediate resistance during the large decline generated last July is the 30-day moving average. If the support at 230 points holds (yesterday the closing price of the US session was 233.35), the Fibonacci retracement ratios are likely to become the price objectives.

In the meantime there is the small matter of BHP Billiton [ASX:BHP] pulling out of the takeover of Rio Tinto [ASX:RIO].

Let’s be honest, it isn’t a major surprise. For some time the market has doubted that the deal would go through. Based on yesterday’s BHP share price Rio should have been trading closer to $90 a share rather than the $63.90 that it closed at.

Chairman Don Argus summed up the reasons for the decision:

“We have said that we would only seek to complete the transaction if it was in the best interests of BHP Billiton’s shareholders. While we have not changed our view of the basic industrial logic of the combination, or of the longer term prospects for natural resource demand growth driven by emerging economies, we have concerns about the continued deterioration of near term global economic conditions, the lack of any certainty as to the time it will take for conditions to improve and the risks that these issues imply for shareholder value.”

After Mr. Argus finishes his stint as BHP chairman he may want to consider giving the circus a try. Because that’s the best example of tightrope walking we’ve seen in a while.

In effect the statement reads, “Not making the acquisition is now good, but we still think the resources sector is going to boom… only not right now, but in the future. Honest.”

Now the story is over and the papers and web pages are stuffed stories about the “Bid Collapse” and “BHP scraps $150bn tilt at Rio Tinto” we think about what the real reason for backing out is.

After all, $450 million is a lot of money to spend on putting the deal together. And it is also a lot of money to just write off by backing out of the deal.

So, three points stand out. First, it is a crappy market for one resources company to be taking over another. Second, Rio Tinto has a big stack of debt - $9 billion due to be refinanced by next October. And third, when you combine the first two it just doesn’t make much sense to proceed… for now.

We’ve got no idea what is going on in the mind of Don Argus and Marius Kloppers, but we would be surprised to see BHP come back with a new deal once the market has steadied and once Rio has tidied its books up.

It may mean paying more. And they could even miss out all together if China Inc decides to have a go. But there is just as much chance of BHP picking up a leaner, meaner and possibly less indebted Rio at a later date even if it does involved paying a premium.

Better that than getting lumped with $70 billion worth of debt in a falling resources market.

Australia’s Apollo 13 ‘Moment’
“Is this a new $800 billion the Fed and Treasury are stumping up?” I asked Daily Reckoning editor Dan Denning this morning.

“Yep” he replied.

This time it is to support the credit card and mortgage debt collateralisation markets. Roll back the clock three months ago when the $700 billion TARP was first proposed and there was almost universal shock and alarm that the government could spend that much on bad debt.

Today $800 billion seems like a drop in the ocean. There’s no vote in Congress, no suspension of Presidential campaigning, no special TV programmes. In fact it doesn’t even make the top story on Yahoo! Finance.

We imagine it to be like the space race in the 1960s and 1970s. Everyone stood up and paid attention the first couple of times, but as more and more missions were scheduled the public took less and less interest. Until Tom Hanks got into trouble on Apollo 13 and the world watched again.

We’re not sure whether the market has had its “Apollo 13″ moment or not yet. With any luck last week was it.

The issue for Australia is not so much whether the US government can repay all its debts (clearly it can’t) but how closely the Australian federal government is watching. Is it picking up ideas, and working out ways to spend and increase government debt?

If it is like most governments it will try to get away with as much as it can, all in the ‘national interest.’

So, looking at today’s report for instance, a couple of points stand out. First is the daily short selling volumes are greater than we thought they would be if you compare it to the total volume traded in a stock.

BHP Billiton [ASX:BHP] had nearly three million shares traded short yesterday. Compared against the total number of outstanding BHP shares of 3.3 billion that only equates to less than 0.1%. However, when you compare the three million shorts against yesterday’s share turnover of about 18 million shares then this is nearly 17% of the daily turnover that is going short.

A more bizarre one is Fairfax Media [ASX:FXJ]. According to the short report over four million shares in Fairfax were traded short yesterday. Again, as a percentage of its total outstanding shares it is only 0.26%. Yet, as a percentage of yesterday’s traded volume of about 5.5 million shares it equates to 73%.

We just make the point out of a matter of interest. Remember that only ‘covered’ short selling is now allowed on the ASX. This means that the brokerage firm executing the trade must be satisfied that the short seller is able to deliver the stock on T+3. Also, as we understand it, the report only shows the gross amount and does not take into account short positions that may have been closed out intraday.

And we still do not have a problem either with the concept or the practice of short selling. After all, in order for a short sell to go through there must be someone else who is prepared to buy them. Hence the argument that short selling helps to add liquidity to the market.

There are many explanations for the seemingly high day-to-day shorting volumes. One is obviously those terrible hedge funds. Another is the retail investor using Contracts for Difference (CFDs). Another reason could be institutions reweighting portfolios. And another could be companies that are hedging their DRP schemes. In addition there are probably another dozen or more explanations.

The upshot of it is that the ASX will need to provide a more thorough short selling report that displays more meaningful information than what it is supplying at the moment.

Or maybe the funds are trying to get rid of B&B. We aren’t completely sure which party is the most desperate.

Now B&B can hear the sound of the death rattle from the ratings agencies. Standard & Poor’s has downgraded the company’s credit rating to ‘BB’ due to the “impact of the financial market dislocation on the pace of asset sales required for BBIPL’s debt reduction plans.”

This morning the B&B share price is down by 26% to just 55 cents. There must now be a serious question about whether it can survive… or whether it will go the same way as Allco Finance and ABC Learning.

Based on the evidence of last Friday it is the former. As you may have read, the federal government is tipping $22 million of taxpayers’ money into a failed private business. To be fair, it isn’t much. It is only a few dollars for each taxpayer.

But there is a bigger problem with it. First, does it represent the beginning of the beginning for government sanctioned bail outs? We’ve seen in the US how once the flood gates are opened, there is no stopping it. Remember the USD$700 billion Troubled Asset Relief Program (TARP) which was supposed to provide liquidity to credit markets? Now it seems as though it will be providing relief to Ford, General Motors and Chrysler as well.

Just as important is the message it sends to other businesses. What about all those successful child care centres out there? Many of them are run on a for-profit basis, and many are run on a not-for-profit basis. Most of them have not gone through with a stock market listing, and they have not put themselves into hock in order to go on a frenetic domestic and international expansion programme.

Instead they have grown their businesses responsibly and have provided a reliable service to the community. Their reward for running a good business? They now face competition from the new government backed ABC Learning Centres. Of course, they had competition from ABC before, but now they are being denied the opportunity to take on new business from ABC centres that would have closed, plus they are being denied the opportunity to potentially buy these centres at bargain basement prices.

The argument from government is that they are helping working families. The reality is that they are helping to save the bacon of a failed business.

In 6 months in 2007 prices doubled. They have been multiplied by 7 in 4 years, with an historical high price on October 15 last year at $3,980 a tonne. However they have been experiencing a large decline since this date. They lost more than70% of their value as a low has been posted in late October this year at $1,140.

The last two weeks, the price action has rebounded by 33% after it has hit the support line (point D on the chart) of the bearish trend started last year. Indeed, this support line goes through the lower lows that have been posted since August 2007 (points A, B and C).

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The indicators are bullish as the MACD and the technical Momentum indicator are well-oriented and argue for a further rebound.

However traders like to complete trends before generating a new medium to long-term trend in the opposite way. The bearish completion would occur here if prices fall to $825, which correspond to the low posted in 2005 and would act as a new support basis. Rebounds have already occurred in the past (points B and C especially) but failed to reverse the bearish trend. That’s why it is likely to be one more time a technical rebound that may not end the current long-term decline.

In this scenario the two first resistances will be a test for the current rebound. The first one is just there, around $1,550, as it was the previous low posted in early July (point C). It could be the new high now as traders often fill the gap and then move back in the other direction. The other resistance is around $1,700, for the same reasons: it was the low posted in August.

If the price action fails to breakout those levels, a pull-back towards $1,000 then to $825 is probable.

The main reason it went up yesterday was because more people were prepared to buy at the prices quoted. The reason it dropped late on today is because more people were prepared to sell at the prices quoted.

The 0.5% rate cut by the US Federal Reserve was already built into stock prices so it isn’t entirely surprising that there was little further upside.

The interest rate story here could be a little more interesting. As of yesterday there was still a 100% chance of the RBA cutting interest rates by 0.5%, leaving rates at 5.5% next week. If you believe the futures market.

More interesting is that the futures market still has a 94% probability of a bigger cut to 5.25%. What we don’t know is whether institutional investors have fully priced that into stocks.

In a speech that Deputy Governor Ric Battellino gave in Sydney this morning it seems as though he is trying to cool expectations. He said, “We have acted pre-emptively in reducing interest rates. Nonetheless, there is still a big task ahead to bring inflation down and this could limit room for manoeuvre on monetary policy.”

The question we ask is, why reduce interest rates if inflation is still a problem? Which it is. Instead of focusing on a long term and the more insidious issue of inflation the RBA have been caught up in trying to address the short term problem of the credit crunch.

RBA Says Home Balance Sheets Strong - Are They?

Also in the speech, Battellino claimed that the average household financial position was strong. As he presented it in the following graph it is a fair comment.

However, is the graph fair. For a start he has combined short and long term assets and liabilities. If we subtract Superannuation from the balance sheet we can clearly see that liabilities exceed assets.

Considering most people have paid off their mortgage prior to retirement and that Super can’t be accessed until retirement then it skews the argument by including it in household finances.

So the position for households at the moment is a lower value of liquid assets, with debt repayments remaining roughly the same, inflation rising and uncertainty about job stability.

It isn’t the kind of environment that suggests consumers will be getting revved up anytime soon.