"We are now experiencing the first truly major crisis of financial globalisation. Never before have banks seen such destruction of their balance sheets in such a short time. Moreover, there are signs that the problems are spreading. The risk premiums on commercial property, consumer credit and corporate loans have risen sharply." Swiss central bank governor Philipp Hildebrand.

Last week was such a news filled week that there are several individual news stories that justify an article of their own that have gotten lost in the shuffle due to the dramatic technical swings in the stock market. Take NY Governors Elliot Spitzer's resignation over hiring a prostitute for one example. One thing that hasn't been talked about on TV about this is that this scandal would never have broken ten years ago. Spitzer's activities got revealed when the authorities monitored bank transactions of a prostitution ring to build a tax evasion case against them. They caught him talking with the ring and discovered some of his financial transactions as they made their case. This never would have happened ten years ago. But we now live in a total national security state in which the power has been given to the government to monitor any bank transaction and phone call at whim. He just got caught up in this. No one has any privacy anymore. You must consider any transaction, phone call, or email you write as being monitored by the Federal government in the homeland security surveillance state. All it takes is one misstep to get caught up in the criminal justice system.

By the end of the week most of us had forgotten about that story as the market along with gold stocks fell back down to its major support lows on Friday. I was traveling much of the week as we completed our WSW Las Vegas get together last weekend. The get together was fantastic. Everyone had a good time and enjoyed the hospitality of Lance and his family who opened up their home to us. We were able to put faces to the names and make new friends. Lance's home provided a perfect spot for us. Thanks again Lance! Hopefully we'll have a get together like this at least once a year and I'll be able to meet those of you who couldn't make it this time in the future.

The market was trading weak as I held my seminar last weekend. I told the people there that I was looking for a potential bottom once the market showed signs of panic - which I didn't think would happen until the market broke the January lows. On Monday the market closed right on those lows. If the market fell hard Tuesday it would have been setup for a potential bottom, but right before the open the Fed prevented that by announcing a new money pump program. It said that it was going to allow several banks to exchange $200 billion in mortgage securities for treasury bonds to try to help shore up their balance sheets. The DOW rallied over 400 points on the news. The market reacted as if the Fed had made a surprise interest rate cut.

It was clear that the Fed was trying to bail someone out. There were rumors the day before that Bear Stearns, our nation's fifth largest investment bank, was in trouble. On Wednesday the stock market was down a bit. The action there wasn't that unusual. You have to expect to see the market down some after going up so much the day before, but the action in the Fed funds future market, bond market, and currency markets was very troubling. They were moving in such a way that suggested that those trading those markets did not believe that the Fed action the day before had fixed anything.

As I wrote Thursday morning in a WSW Power Investor pre-market bulletin:

"Tuesday's Fed action was no quick fix. On the close Tuesday the fed funds market was pricing in a 50% chance of a 75 point rate cut next week. By the close yesterday those odds moved to 80%. There was no public news out there, but something was going on in the market. The action in stocks wasn't that unusual, but the long-term bonds jumped up, the dollar dropped hard, and the FXY yen/dollar ETF made a new high as there was an evident flight to safety and more selling of US assets by foreign investors. The moves were a rejection of the belief that the Fed fixed things Tuesday. If they had the Fed wouldn't be cutting 75 points next week."

After the close on Friday Fed fund futures were pricing in a 100% chance of a 75 point cut and a 58% chance of a full one point cut that would take the funds rate all of the way down to 2% this Tuesday. What we are seeing in the financial markets and what the Fed is doing is unprecedented.

Of course now we know that the Fed was trying to bailout Bear Stearns on Tuesday. The thing is it took less than 48 hours for Tuesday's bailout to collapse.

The problem is that several of the countries largest banks are basically bankrupt. A large portion of their assets are mortgage securities that no longer have bids. They can't be priced and therefore can't be sold. Nonetheless, the banks still have them on their balance sheets listed as "Level 3" assets. At the end of 2007 Bear Stearns had $28 billion in such assets, while Citigroup had $133 billion of them. If you take these assets off of their balance sheets than Bear Stearns has negative $16.376 in equity and Citigroup is under the water by over $20 billion dollars. Lehman Brothers and J.P. Morgan also have Level 3 problems, but none of them approach the magnitude of Bear Stearns or Citigroup.

In one day Bear Stearns fell over 47% as people went on a run on its stock as the Fed Bank of NY and JP Morgan announced a 28-day rescue package. The Federal Reserve released a press statement saying that it agreed with the rescue actions. CEO Alan Schwartz and finance chief Sam Molinaro used a midday conference call to emphasize that Bear Stearns's financial situation was stable and claimed that the company was suffering a classic run on the bank due to innuendo and unsubstantiated fears and rumors that led some firms to pulls it financing. The bank faced huge demands for cash from hedge fund clients who were trying to close out their prime broker accounts. The CEO talked as if the cause was just investor nervousness. This was the type of talk we heard as Enron went down to zero from their finance managers.

According to Fortune, "Bear Stearns is dealing with a classic run-on-the-bank. The firm's short-term creditors refused to lend the firm any more money via the extension of overnight loans, and simultaneously demanded repayment of outstanding debt. The one-two punch overwhelmed Bear's cash position, forcing it to seek help. Had the Fed not stepped in, it appears doubtful Bear could have operated today.... In short, the Fed is allowing J.P. Morgan - a commercial bank - to act as a conduit for pumping cash into Bear Stearns. The bank is being permitted to give Bear Stearns collateral at the Fed's emergency-lending discount window to secure 28-day financing, which in turn is lent back to Bear Stearns in order to finance its business. The Fed's role in the deal suggests federal officials fear a systemic collapse of the U.S. financial system were Bear Stearns to fail. The fear stems from Bear central role in a multitrillion-dollar web of interconnecting derivative contracts."

If Citigroup dos not get an injection of cash soon it is going to blow up just like Bear Stearns. That is why the Fed tried to bailout Bear. It is worried that if one bank collapses investors will wake up and connect the dots and realize that the balance sheets on other Wall Street banks are works of total fiction too and cause panic in the stock market and a run on some of these banks. Banks that made stupid mortgage bets deserve to suffer, but the Fed is owned by the banks and works on their behalf instead of the greater good of the general welfare of our country. The costs of the bailout are born by you at the gas pump and the inflationary pressures created by a falling dollar.

As William Fleckenstein writes, "we have become a bailout nation. You would think that if ever there was an example to be made of a brokerage firm that took risk-taking to its extreme, it would be Bear Stearns. Given that the company put itself in harm's way, why shouldn't it be allowed to fail? But the sad fact of the matter is that the Fed and the regulators think they can and should prevent anyone from failing. Which is how we got to this point in time -- where, notwithstanding efforts by the powers that be -- the problems are too big to bail out. Meanwhile, the consequences of their attempts are a collapsing dollar and a higher gold price. And, at some point, it will matter to the Treasury market, though it certainly hasn't yet. The repercussions to the policies pursued by Greenspan and the Fed are now manifesting themselves. Over the course of the coming months, it will finally be clear to everyone just what an abomination and what a dangerous entity the Fed has become. Perhaps the good that will arise from the crackup ahead is a new regime at the Fed, though I am not holding my breath for when that becomes reality."

On Friday the Bear Stearns move took the market all of the way down to its January lows. A close below those lows at this point has the potential to bring on a mini-meltdown like the market faced in January. But as the market approached the close CNBC helped spur on a rally by reporting a rumor that Bear Stearns may get bought out over the weekend.

You have to howl at laughter with this. It was just a few weeks ago on a Friday that the market averted a horrible close when rumor monger Charles Gasparino announced on CNBC that a bailout for Ambac would be announced within 48 hours. Of course it never happened. And Bear Stearns won't be bought out before Monday's open either. Use simple logic. If you were going to buy Bear Stearns you would wait for the stock to drop more like Countrywide did before you started to talk to them about a buyout price.

The S&P 500 currently has support at 1270. Below that its next level of support is in the 1170-1210 area. This is the 50% retracement level of the 2002 bear market bottom and 2007 October cyclical bull market top. I believe we will see this level reached this year - and probably within the next few weeks in a panic sell-off after the S&P 500 closes below 1270.

Current resistance on the S&P 500 is in the 1335-1340 zone - a few points above its high of last week. After that resistance is at 1350. It would take a close above 1350 on the S&P 500 for the market to break its current downside momentum. With the market trying to hold up into Friday's close and a Fed meeting Tuesday in which the Fed may lower rates by a full point odds favor some sort of bounce into Tuesday's Fed meeting and perhaps a few days beyond that if the Fed cuts by a full point. After this current bounce fades though I expect the market to come back down to its January lows.

Personally I'm in cash and am looking for the market to either stabilize for a few weeks and then break to the upside to confirm a bottom or to close below 1270 and have a panic washout like we saw in January to buy. Obviously right now I think this is the most likely scenario. In fact this may be the scariest moment in the markets I've ever seen. I traded all through the last bear market, but what we are seeing now is nothing like that bear market. It isn't the time for me for stock trading.

In that last bear market there many sectors went through a bull market of their own despite the weakness of the overall market. Right now the only sector that looks bullish is gold. Even oil stocks look like they are topping right now. But even more important back in the last bull market oversold technical indicators and bearish sentiment in the stock market always led to big rallies. This time it isn't. I bought near the January lows and was looking for a rally up to at least the 1450 area on the S&P 500, because several key technical indicators reached levels that have always led to market rallies. In fact some of them, such as the bullish percent readings, reached oversold conditions not seen since the bottoms associated with the September 11th terrorist attack, 1998 Long-term capital blow up, and 1987 stock market crash. For the market bottom in January to fail would mean we were witnessing something that has NEVER happened before - the market failing to have a substantial rally after reaching such historic extreme oversold conditions..

And it looks like we are going to see this happen over the next few weeks if not sooner. And that's scary. I think it means that the market is on the edge of disaster. The fundamentals are deteriorating so fast that the technical indicators of the stock market and sentiment readings are no longer reliable. When it goes to trading the market now all you have left to go on is simple price action.

This is a video of Ron Paul the day after Tuesday's bailout attempt of Bear Stearns. Only hours before it unraveled in a puff of smoke:

For the rest of this article with more charts and analysis, including price projections, click here.