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The contagion has spread: Charts and analysis

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A chart is worth a thousand words and therefore we focus on charts and analysis.

So with a few introductory words, we will present the charts.

The problem for the policy makers is that risk is being repriced faster than they counteract.The EU banking system is under-strain because they are being denied funding and also deposits are moving elsewhere. The speed of the adjustment is difficult for the banks to maintain their solvency. The confidence virus is a self-reinforcing one that requires an entity to backstop it just as the Fed did it during 2008. The under-capitalised EU banks are being required to de-leverage faster than they can re-capitalise.

The increasing strains have pushed the EU banks to become more reliant on ECB funding
as a lender of last resort. While the draw-downs are modest at the moment, it hints that as the EU banks need to roll-over more debt, the funding gap will need to be provided by the ECB. Furthermore, other sources of funding may become untenable, particularly the repo
markets if further inter-bank strains became evident.

The rapid declines in Asian and emerging market currencies alongside a rallying dollar
point to capital flight. It appears that rather than just holding cash overseas, investors are preferring to deposit it in ‘safe havens’.

“Bad news drives out good news”, Spiro Agnew

“Severe financial crises rarely occur in isolation. Rather than being the trigger of recession, they are more often an amplification mechanism: a reversal of fortunes in output growth leads to a string of defaults on bank loans, forcing a pullback in other lending, which leads to further output falls and repayment loans, and so on”,

This time is different , Reinhart and Rogoff.

The events of the past two months are not without precedent. Investors who experienced
the 2008 US financial crisis will remember the headlines concerning ‘funding problems
for banks’ or ‘inter-bank liquidity strains’ and the rout in equity prices as investors sought cash at any price. Sovereign defaults and banking crises have been the staple of economic history since 1800. The adoption of fiat currency systems and the ability to develop a ‘fractional banking system’ empowered bankers to expand credit based on their
customers deposits. Thus dis-intermediation was born. Gresham’s law states that ‘bad money drives out good’. However an alternative law has been proposed by Peter Bernholz, called ‘Thiers’ Law”. He showed under some circumstances that good money drives out bad particularly whenever the bad money eventually becomes worthless. In essence if you gave a person the choice between two currencies to own, people will chose the money they consider to have the highest perceived value.

“With US$2.7 trillion in assets, US money market mutual funds (MMMF) are systemically important institutions. Any change in the MMMF willingness to hold European bank paper is likely to affect the cost and availability of dollar funding. Ample dollar funding had also helped to contain pressures in dollar funding markets despite intensifying sovereign risk. That is no longer the case: Offshore dollar denominated issuance by European banks and dollar denominated foreign issuance has begun to decline, as money funds are reluctant to increase exposure to European banks and pressures in dollar funding markets have risen. The cushion of reserves built up by US branches of European banks helps to buy time, but the cushion is at risk of being depleted if a pullback by the money funds is accompanied by a generalised rise in risk aversion among other lenders. This could lead to further pressures in bank funding markets”

IMF Stability report, September, 2011

The contagion has quite clearly spread and we are heading for a global fall across asset classes. Our technical analysis had already suggested the scenario on Sept 5 when we were laughed to scorn but obviously we are now been subscribed on a fast scale. We do believe we have not yet seen the end of the fall till the time that Bernanke launched QE3.

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Twist has just reimposed our Intermarket analysis: Charts and analysis added

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Bernanke has played a smart move here as he moves into the Twist operation. Effectively he has killed the game in the town: Borrow short and invest long term/play the commodities game. By announcing an intention to sell short curve, FED has now signaled its desire to bring down commodities in a heap. It is a one handle move to strangle speculative bank/hedge fund positions. Will there be a systemic crisis? Am not yet sure but I think the FED would have thought about this.

Now once he has seen the equity and commodities classes to have corrected *adequately*, I believe, there will be a strong case for QE in Nov citing the slowdown and fall in equity prices. Bernanke may even be lauded for his efforts to curb speculative borrowing by doing Twist operation in Sept and not doing QE till the time it was really required.

We believe over the next few weeks, Gold and copper and all leveraged classes of asset will take a beating like not seen since 2008. The herd of investment funds will then join towards the end of the crash only to be left holding the baton at the end of the move.

We warned about the crash in Sept in this article:
Bloody September coming

Then more recently we looked at the CRB index to draw further conclusions that we are headed lower given the tight correlations. SPY is just a index and there is no point charting waves over it. It is defined by the underlying intermarket connections and therefore all the more important to understand the underlying correlations which is what we do at Capital3X.

These are all premium analysis and therefore are updated first for premium subscribers. Premium subscribers also get to trade our portfolio of FX,COMMODITIES. Just in Sept, they have made +2300 pips over 70 trading calls.
Vix charts have bounced off 50 dma with powerful wave of Oscillators and stochastic giving credence to this move.

We warned our subscriber on Sept 19 that VIX was only consolidating and about to turn back from 50 dma which was exactly what it did.

Analyzing the metals charts we see the break of support.
Metals charts (Daily)

The daily charts have clearly broken down support with vortex indicator in negative zone pointing to further losses.
On a weekly basis, the trend is now down.
Metals charts (Weekly)

On weekly charts, the longer trend is now to the downside with massive downside risks.

Metals: SPY Ratio charts (Ratio Charts)

The Metals to SPY ratio chart has broken down key levels with trend lines broken and Vortext indicator pointing to further steep losses coming.

While the commodity markets are swathed in blood for a few weeks (Warned by us more than 10 days back to premium subscribers) the treasury markets are in a blow out stage (long curve of treasury) while the short treasuries are slowly moving down to breakdown. It could add further losses to equity and commodity markets.

US 3 YEAR TREASURY BOND charts (Daily)

The 3 year bonds are about to break down as banks join the FED in selling their portion. This will increase the yield on the short term and therefore making it far more expensive to borrow short term which is generally used by speculative players to invest into commodities.

US 30 YEAR TREASURY BOND charts (Daily)

So while the short term bonds are breaking support and about to induce a wave of de-leveraging across assets, the 30 year which supports the dollar has broken out. As we said above, the FED knows what it is doing. This is a deliberate aim to curb commodities more than anything. They need to inject capital into the economy but cannot do so until they have asset inflation under control.

Gold:TLT ratio charts (Daily)

The GOLD:TLT ratio (which is the GOLD prices to 20 year bond prices) have broken down key support levels. Oscillators and stochastic are pointing to further falls. We warned about this here
Therefore the intermarket analysis pointed to us that Gold was about to break down from 1775 levels even while analysts were churning out buy on Gold. (Another reason to look to intermarket analysis at Capital3x.com?)

Dollar Daily charts

On the daily charts, DXY has broken in to an outright run but we also believe that we will see dollar stabilizing at these levels as we enter October before another move. The oscillators are now strongly advocating bullish moves while stochastic are resting at 70 levels. The direction indices are also pointing to bullish moves. However the pace of dollar move should now wane. ADX has moved to above 40 levels thus helping the trend.

Dollar Weekly charts

On the weekly charts, dollar, has now reached an important confluence point of the 100wma, 200wma and 50 wma. The 100 and the 200 are converging at the same point of 78.6 levels which is the level from which dollar paused.

CRB Index

The commodity equity index has broken through all support zones as warned by us here on 19 Sept 2011 of the coming blood bath. Our subscribers were well in knowledge of the coming rout even while chartists were pumping in bullish views about a SPY break of 1220.


Gold has knifed through 50dma. Expect a bounce back to close out the gaps but we have clearly now pierced the 18 months uptrend. This is why we believe Gold is just as leveraged as any other asset. By one stroke, Bernanke killed the entire asset inflation train or at least made an effort. Gold was a direct result of the short curve borrowing existent over the last 2 years. A must analyse are the inter market charts on Gold and 30 year bond prices and how they have broken support which implies large downside for Gold. They are provided here.

We will be posting more analysis and updates as we go along.

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An excellent read: Recovery or playing 1937 (and 2008) again

Recovery, or Replaying 1937 (and 2008)?

The President laid out a series of policy measures in today’s speech which are, by textbook standards, entirely reasonable. And yet, many have been declared by the pundits to be DOA. I’ll leave the assessment of political feasibility to others, but the very fact that these specific measures [0] are so reasonable by textbook standards makes me wonder if we have in fact experienced technological regress in our politico-economic discourse. Maybe those shocks in RBC models are just the fact that so many individuals with influence never took an intermediate macro course, let alone an economics course [1] (I highly recommend Robert Hall and John Taylor’s Macroeconomics, or the later editions, by Hall and David Papell).

The Context: The Stimulus Package of 2009

To begin with it’s useful to review a little history, given the heated rhetoric that has been used in the past few years. From Chapter 5 of Lost Decades (forthcoming 9/19, W.W. Norton), written by me and Jeffry Frieden:

The standard macroeconomic view is that in recessionary conditions, incremental government spending and tax cuts can stimulate the economy. If the government spends an additional million dollars to build a bridge, that spending directly adds to GDP. But that is only the beginning: the spending on materials and labor is income to suppliers, contractors, and workers, and some of this income will be spent on consumer goods and services, which then further increases GDP. This in turn becomes income for other workers, who similarly increase their spending, again adding to GDP. This process suggests a “fiscal multiplier,” typically associated with Keynesian macroeconomics, such that every one-dollar increase in government spending results in a greater-than-one-dollar increase in GDP. Especially when the economy is stuck at ZIRP, so that private borrowing and spending are particularly weak, the multiplier can be large…

Even before the new administration took office, its economic team had been considering a fiscal stimulus. Romer’s evaluation indicated that a $1.2 trillion package was needed. However, President-elect Obama’s political advisers insisted that this was not feasible, and the numbers were shaved. Once in office, President Obama proposed a $675–$775 billion package to stimulate the economy.32

Intervention here: When I hear statements that “the stimulus failed”, I think it important to recall that between the election and inaugural day, business economists revised downward their estimates of GDP [2]. The proper metric is then to compare against the counterfactual as of the time of implementation, as described in here, here and here.

Some policymakers and economists believed that any government intervention, even in so troubled an economy, was unjustified. Congressman Ron Paul (R-Tex.) complained that “the US government just won’t allow the correction the economy needs.” He invoked the recession of 1921, which was deep but short, in Paul’s view because the government permitted insolvent companies to fail. “No one remembers that one,” he averred. “They’ll remember this one, because it will last 15 years.”34 Paul’s view was reminiscent of the position of the “liquidationists” of the early 1930s, who were led by Treasury Secretary Andrew Mellon. Mellon’s advice to President Herbert Hoover was typical: “Liquidate labor, liquidate stocks, liquidate the farmers, liquidate real estate … purge the rottenness out of the system.”35 The idea was almost moralistic: bad loans, bad debts, bad businesses, and bad deals had to be exorcised before the economy could right itself. Satisfying as such a scorched-earth policy might be (at least to those not caught in its path), few serious economists or policymakers ever considered it.36

Some theoretical objections to an active fiscal stimulus were based on the view that government spending would inevitably be wasteful, providing no real benefit to the population. Others emphasized the expectation that increased government spending would be counteracted by an offsetting reduction in private spending. The budget deficits that would result from tax cuts or more government spending would drive interest rates higher and reduce, or “crowd out,” private investment and spending. The economists who held these positions were generally hostile to traditional Keynesian views, especially because of the Keynesian inclination to assume that there were market failures that government could correct…

But among most economists, there was a general consensus on the desirability of some form of active fiscal policy. In a February 2009 Wall Street Journal poll of economists, 68 percent said that the proposed stimulus package was about the right size or too small. Only 31 percent said that it was too large. Most economists in the policy and business circles viewed a stimulus package as something that could soften the blows of a deep downturn and hasten the arrival of a recovery.38

Well, we know about how much interest rates have risen in response to the stimulus package [3] [4]. And with that decline in long term interest rates, we know how much interest-rate-induced crowding out of investment has occurred: nil. Instead, the drama we seem to be witnessing now is a replay of 1937 [Krugman], when policymakers overly worried about inflation and deficits withdrew stimulus too early. Whether we will (re-)learn that lesson is the question of the moment.



After 2 days in Poland, nothing to show for the EURO

Reuters update

WROCLAW, Poland, Sept 17 (Reuters) – EU finance ministers broke no new ground in dealing with the euro zone debt crisis in discussions over the weekend, instead absorbing some ideas and rejecting others and taking stock of progress on agreed steps.

In an unprecedented visit to the informal talks of top EU financial officials, U.S. Treasury Secretary Timothy Geithner made an appearance in Wroclaw on Friday to urge Germany to provide more fiscal stimulus to the slackening euro zone.

But Geithner’s call for action by those who can afford it was rejected because the euro zone believes that market trust in the sustainability of its public finances, and therefore consolidation, is more important than spending on growth.

“Fiscal consolidation remains a top priority for the euro area,” said Luxembourg’s Jean-Claude Juncker, chairman of euro zone finance ministers.

And with the next redemption date as near as Sept 20, Greece still maintains that it has the cash 700 millon euro to pay.


Greece’s finance minister on Saturday dismissed talk that the debt-strapped country was headed for default, while saying Prime Minister George Papandreou cancelled a trip to the United States because tough decisions had to be made imminently.

“The comments and analyses about an imminent default or bankruptcy are not only irresponsible but also ridiculous,” Finance Minister Evangelos Venizelos said in a statement.

“Every weekend Greece … is subject to this organised attack by speculators in international markets,” he added.

Venizelos said Papandreou decided to return to Athens not because of an economic emergency but because the government had to take tough decisions as talks resume with its international lenders before a next bailout tranche is released.

In other interesting titbits from the weekend outing, we have US been lectured by EU finance ministers and we thought only China could do that.

Several euro zone ministers in Wroclaw seemed peeved that the United States, itself burdened with a large budget gap and debt, was lecturing Europe on what should be done.

“He (Geithner) conveyed dramatically that we need to commit money to avoid bringing the system into difficulty,” Austrian Finance Minister Maria Fekter told reporters after the meeting.

“I found it peculiar that even though the Americans have significantly worse fundamental data than the euro zone, they tell us what we should do.”

Geithner also pointed out that euro zone finance ministers could boost the firepower of their bailout fund, the 440 billion euro European Financial Stability Facility, through leveraging.


DAX charts & euro zone fundamental key update


We make a quick update on DAX which has now crashed to the abyss with literally no end in sight. The end of this post will also include what brokers have to say of DAX recent moves.

DAX Daily charts: Daily bounces of 3% cannot be ruled out

Accentuated fall since Aug 1 2011, the first day of risk aversion this season. But given the severity of the fall (20% in less than 2 months), we do not rule sharp daily bounces. Germany equities still command respect among world peers but it is the macro picture of the rest of EU which has then hampered the German Banking index.

Full Commentary

DAX Weekly charts: Bearishness reaffirmed

DAX Monthly Charts: Gory

Important to understand data points from EU land as it has pristine impact on the DAX technical:

Much of DAX worry can be seen in the expected German growth rate for 2012 which is a paltry 0.8%. But taking out the biases from the broker (who we do not know if they are long or short the DAX and hence biases), we can safely assume the that the world is slowing down from its engine (Germany has led much of EU and US growth).

A further break down of GDP growth by components will throw fresh light:

On the debt crisis swirling EU into a black hole DB has the following suggestion which we emboss and like:

In our view, far from embarking the ECB further into “adventurous” activities, transforming the EFSF as a bank would actually protect the ECB against potential defaults and reduce the risk of conflict between its role as a safeguard of financial stability in the Euro area and as an independent interest rate setter..DB Research

By doing so, it will be in ECB interest on two accounts:

  • First, in case of default in the collateral – peripheral bonds bought by the EFSF – the subsequent counterparty risk would actually much lower when dealing with an EFSF backed by AAA countries than when dealing with private banks, only implicitly backed, in many cases, by states which themselves are not necessarily credible.
  • Second, following the agreement on 21 July, the EFSF will have the possibility to participate in bank recapitalization

Key updates from Italy which has been slowly to adopt austerity measures. The following key updates:

  • The Italian Senate (upper house) on Wednesday 7 September approved, as expected, the fiscal emergency decree in a vote of confidence called by the government. The fiscal package, which aims to balance the budget in 2013, was approved with 165 votes in favour and 141 against. We expect the lower house to approve the decree towards the middle of next week.
  • The main positive development is that the government largely removed the concerns about a watering down of the size of the fiscal package. This was mainly achieved through the increase in VAT.
  • The negative outcome is that the package is heavily based on tax hikes rather than expenditure cuts.
  • Moreover, the fiscal projections are based on too optimistic cumulative GDP growth forecasts. But Italy cannot simply just rely on fiscal targets but needs stimulus packages kickstart growth.

Other Key updates on EURO Data:

The Week ahead for Europe:

The Week ahead for US and rest of europe:

Source: of Charts and Data: Eurostat,ifo,Reuters, Bloomberg, DB, GS, European Commission

And we wind up by looking at the EURO yields:

Concerns about renewed economic weakness (already visible from some of the survey evidence and export data) and deflation (notwithstanding the lesser impact that the
currency seems to have on core CPI relative to Europe or the UK, and the central bank’s forecasts for above-target inflation by end-2013) have prompted SNB to act decisively over the past month to weaken the franc. The story across eu is no different as growth and austerity need to be balanced. But what has worried the bond markets over the last 45 days is the utter lack of leadership and a complete negligence on part of member nations when it comes to stand by commitments to honor their debt agreements.

Germany has taken the load till now but Germany forgets that it is in their own interest that they continue to help ECB shoulder the debt problem and evolve a comprehensive EFSF mechanism which needs to absorb the debt from member nations. Till the time we see the proposal being passed and all nations to adopt those mechanism, there will be too few takers for EU monetary union scheme.

Technically speaking, the DAX has fallen beyond what we expected. We now expect DAX to make a bear rally maybe towards the end of this year and hopefully beginning as soon as Greece next tranche of bailout is released in Sept. No other redemption of debt till Dec which gives ample room for DAX to make a comeback. We will be studying the signals for DAX and issuing trades when required.

FULL Analysis of this detailed post can be found once you subscribe

The DB report about the EU fundamentals and justifying EFSF to be converted into a full fledged bank is provided in members area (not to be downloaded)

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Joerg Asmussen, Axel Weber prodigy to replace Stark

Germany has proposed deputy finance minister Joerg Asmussen to replace Juergen Stark on the European Central Bank’s executive board, Finance Minister Wolfgang Schaeuble said on Saturday.

Stark, the top German at the ECB, announced on Friday he would quit early in what sources said was a protest against the ECB’s policy of buying bonds to help troubled euro zone debtor states.

A worried Germany has almost seen the writing on the wall that EURO may not be saved.
“The euro cannot be saved by one person but he would be without a doubt the right person,” Juncker told reporters in Marseille.

A respected economist who studied under former Bundesbank chief Axel Weber, Asmussen has moved rapidly up the career ladder at the German finance ministry, moving from junior advisor in 1996 to deputy finance minister just 12 years later.

Asmussen is a Social Democrat but was kept by German Chancellor Angela Merkel’s conservatives after the last federal election due to the experience he had gained in fighting the financial crisis.

G7 Statement on weekend: EURO stands condemned

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One would have expected a little more concrete and solid statement backing the EURO and EU bailout packages. But not to be so and EURO is now condemned for floodgates to open down into the low 1.30s.

Statement of G7 Finance Ministers and Central Bank Governors

August 8, 2011

In the face of renewed strains on financial markets, we, the Finance Ministers and Central Bank Governors of the G-7, affirm our commitment to take all necessary measures to support financial stability and growth in a spirit of close cooperation and confidence.

We are committed to addressing the tensions stemming from the current challenges on our fiscal deficits, debt and growth, and welcome the decisive actions taken in the US and Europe. The US has adopted reforms that will deliver substantial deficit reduction over the medium term. In Europe, the Euro area Summit decided on July 21 a comprehensive package to tackle the situation in Greece and other countries facing financial tensions, notably through the flexibilisation of the EFSF. We are now focused on the quick and full implementation of the agreements achieved. We welcome the statement of France and Germany to that effect. We also welcome the statement of the Governing Council of the ECB.

We are committed to taking coordinated action where needed, to ensuring liquidity, and to supporting financial market functioning, financial stability and economic growth.

These actions, together with continuing fiscal discipline efforts will enable long-term fiscal sustainability. No change in fundamentals warrants the recent financial tensions faced by Spain and Italy. We welcome the additional policy measures announced by Italy and Spain to strengthen fiscal discipline and underpin the recovery in economic activity and job creation. The Euro Area Leaders have stated clearly that the involvement of the private sector in Greece is an extraordinary measure due to unique circumstances that will not be applied to any other member states of the euro area.

We reaffirmed our shared interest in a strong and stable international financial system, and our support for market-determined exchange rates. Excess volatility and disorderly movements in exchange rates have adverse implications for economic and financial stability. We will consult closely in regard to actions in exchange markets and will cooperate as appropriate.

We will remain in close contact throughout the coming weeks and cooperate as appropriate, ready to take action to ensure stability and liquidity in financial markets.

In credibly vague and weak is that I can muster to say. This almost like a statement at the end of dinner deserts and someone reminded them that a statement need to released if they have to retire for the night.

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Classic hedge Gold trade: Charts and analysis

This is a trade update for premium subscribers with some analysis for free subscribers.

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Gold has been a tough chart to crack. It is well poised. I can assure you that not many in the hedge fund industry has a clue on where it is headed. While the outright bugs will not like any analysis on Gold topping process the bears have been too hurt to offer any kind of analysis at all. I am not too sure there are too many bears at all.

There are some who believe Gold should just keep going up one way cause of the money printing almost always forgetting that a mere mention of margin hike corrects it by 15 % in 2 days, not a sign of a healthy bull run at all.

To our portfolio, it does not matter where Gold is headed in the medium and long run. We are here to trade its every single wave and make as much as possible of it whether it goes up or down. We do not believe in long term holding of bars!

The bulls will argue that Gold is in ascending triangle. We do not disagree. But the bears will look and say that mean reversion has to happen in every asset and therefore a correction to 100/200 dma should entail a 20% correction. But traders and hedgies will love this market. Way too much money to be made and lost.

Right now the Gold charts are indicating a clear ….Rest of analysis on this is posted in premium section.

This was the trade we suggested on 9 September 2011 and it stands intact.

The GDX charts are telling a story too:

The GDX (Gold Miner ETF) is positioned as among the best ETF charts out….

Rest of analysis and commentary

Therefore combining the two Gold trades we have a near delta neutral trade.

Trade can be found here in premium section along with full analysis and commentary.
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“I lost everything and then I recovered everything” Capital3x Subscriber

Folks we thought this email from a fellow subscriber is not excess marketing and hopefully we are not doing anything wrong by giving ourselves a pat by putting this email up. It has been a good run since we began during which we have had brave a lot of hate emails, legal issues, charges of copying, identity thefts and many more issues. This email did make us smile and goes a long way in helping us continue what we do here: That is precision trading!
We do not do paid marketing and therefore we expect our subscribers to let their friends know about us as we increase our base.

Email from Subscriber named: Jas

I am an experienced equity investor from Berlin, Germany. In January 2011, I decided to begin trading currencies with a small capital $5000 and levered it up 6 times. I was doing this of my own and through some blogs out there. I had never traded currencies before. I was attracted to currencies in early 2010 by the extremely high leverage available. If I could turn lucky I could make a million a year. How hard would it be as I was already conversant with equity trading? I did not really need anyone help. Always of the opinion that paid online trading firms was day light robbery. And hence gave every paid site a miss.

Given the background in medium term investing I decided to start currencies, learning the trades and techniques available from the numerous free blogs available. Everything started to unravel in February 2011 as all my trades started to lose money. The reason was that on trades which made me money, I would not know when and where to take profit. On trades which lost me money, I would not know when to cut losses. By May 2011, I lost $32,000 of capital by May 2011 (I had increased my initial capital to loss fund my losses). And that was when I decided to quit and first learn or subscribe to high quality traders.

I knew that a few hedge fund (PIMCO) traders were getting together to start Capital3x and I knew they were starting in July 2011. Had seen their posts at a few forums. I decided to give it a shot. Well It is 9th September 2011 a good 2 months after joining Capital3x, I have recovered $30,000 of lost money. I am still negative by $2,000 but I am hoping that the good run with Capital3x continues and I can justify my decision to trade Forex, S&P Emini, crude, Gold, Silver. They do put up occasional stocks picks. I did take their last Stock trade “short MS at 22 and target 16″. But they have been wrong as well at times. The Apple trade at 360 may just be wrong given that markets are going down. But you never know.

For the record am also subscribed to Madhedgefundtrader, Ashraf Laidi, Stocktwits, HMS. I am happy with all of them but I trade on Capital3x and Madhedgefundtrader advise only as they seemed to be super accurate and sharp. Occasionally give Ashraf trades a try as well. I love his book on “Intermarket Insights”

Thanks guys.
And hopefully someday you will show your faces.

Keep the performance going.