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Washington's Russian Roulette?

Wall Street is facing increased volatility for as long as the budget dispute in Washington drags on, and it is already keeping a partial government shutdown in place longer than anticipated. Also, the more critical issue of raising the U.S. debt ceiling by the October 17 deadline has the market on edge.

According to some savvy market strategists out there, if this debt limit is not raised on time, the consequences for the U.S. and global financial markets could be catastrophic.

Yet, the VIX fear index at 17 on its scale is still low by historical standards. In the summer of 2011 during another debt ceiling debate the VIX traded as high as 48 which ushered in a major selloff on Wall Street and a recession on Main Street.

This implies that the market expects the U.S. government to reopen anytime soon, and that the U.S. debt ceiling will be raised in due time. In the end it's what the Fed is going to do and what the earnings will be like in a few weeks, that really matter.

But meanwhile, it is this incredible brinkmanship practiced by the Washington politicians that could get out of hand as they play "Russian Roulette" with the market and the economy.

But there is hope that all of this is just Washington's political theater which will work itself out within a few weeks. There is also hope that this idiocy will cause the Fed to take "taper" off the table for a while longer, which would be a great plus for the market.

But let's see what the market has to say about all of this.

Check these X:X and SML charts and note that the X:X keeps pressured down by its negative MA lines configuration [green line above the red line] while its MACD momentum index and RSI strength indicator remain deep down in their respective bearish territories.

Now check the SML chart and note that this Small Cap index is well supported by a bullish MA line configuration [green line below the red] while its MACD momentum index and RSI strength indicator are both solidly in their respective bullish territories.

For as long as the X:X remains geared to the downside while the SML remains poised to the upside the internals of the market remain bullish.

Check the Troika charts SPX, SPXL and SPXS and note that the two bull components of this Troika are consolidating while being well supported by their respective MA lines configurations [green lines below the reds.] Meanwhile the bear of this Troika remains stuck at the lower end of its chart, pressured down by its negative MA lines configuration [green line above the red.] Put it all together, and you'll have the outlines of a bullish market. Therefore, any selloff caused by Washington's political fiascoes will be a buying opportunity.

Check the NASDAQ index NDX and note that the bulls have total control of this market. Its MA lines configuration is strongly bullish and so are its MACD momentum index and RSI strength indicator. The main drivers behind this strength are Energy, Financials, Health Care and Materials.

This market-forecasting junk bond canary JNK tried to surge to the upside and thereby signal an all clear for the market. But its MA lines configuration remained sharply bearish [green line above the red] and so it had to pull back.

But now that this MA configuration has turned positive [green line below the red] expect this little bird to chirp bullish market forecasts again.

While the economy still appears a bit woozy, this TRAN index shows that something out there is moving. Again, this index soared up on top of a bearish MA lines configuration [green line above the red] and so had to come to a dead stop with a consequent slow-down in the economy.

But now, TRAN has a chance to consolidate and with its MA lines configuration bullish again [green line below the red] it signals that the economy can keep on rolling along and pick up speed in the process.

The CRB commodity supply index and its twin the BDI commodity demand index still present a puzzle. While the CRB still is trending lower under a negative MA lines configuration, the BDI soared to the top above its strongly bullish MA lines configuration.

Could be that during the lean months between April and June the CRB was stock piling commodities, and now the BDI is still feeding on it. But something's got to give. Either the CRB is going up, or the BDI is coming down to a point where both indexes move more or less in tandem again. If not, then the commodity market will be in trouble.

While the gold index GOLD had slipped since the beginning of September, its MA lines configuration remained positive with the green line below the red. This implied that the yellow metal would soon rally again.

But now that this MA configuration has turned bearish with the green line above the red, expect the price of gold to tank further.

Surprisingly enough, the U.S. dollar USD, has joined gold on its slide to the down-side. Usually, these two indexes move in the opposite direction, but not this time. The greenback's strongly bearish MA lines configuration [green line above the red] reflects the concern of the global financial markets vis-a-vis the political brinkmanship practiced in Washington.

The MA lines configuration for oil WTIC has also turned bearish with the green line above the red. Also note that the MACD momentum index and RSI strength indicator have both slipped into their respective bearish territories, which means more downside risk for oil in the weeks ahead.

All in all, the bias of this market remains geared to the upside, but much depends on what's going on with the politicians in Washington. So for now, it is best to follow smart money to the sidelines and wait for the outcome of these political wrangling.

But just in case the market comes your way with a somewhat sustainable rally or decline, here are some favoured ETFs to consider.

Leveraged Bull ETFs:

Silver 2x (NYSEARCA:AGQ), Nat Gas 2x (NYSEARCA:BOIL), DOW 30, 2x (NYSEARCA:DDM), Real Estate 3x (NYSEARCA:DRN),

Emerging Markets 3x (NYSEARCA:EDC), Energy 3x (NYSEARCA:ERX), Financials 3x (NYSEARCA:FAS), Mid Caps 3x (NYSEARCA:MIDU),

Regional Banking 2x (NYSEARCA:KRE), Mid Caps 400 3x (NYSEARCA:UMDD), NASDAQ 100, 2x (NYSEARCA:QLD),

Semis 3x (NYSEARCA:SOXL), S&P 500 3x (NYSEARCA:SPXL), S&P 500 2x (NYSEARCA:SSO), Technology 3x (NYSEARCA:TECL),

NASDAQ 100, 3x (NASDAQ:TQQQ), S&P 500 3x (NYSEARCA:UPRO), Russell 2000, 3x (NYSEARCA:URTY),

Russell 2000, 2x (NYSEARCA:UWM), Materials 2x (NYSEARCA:UYM), China 2x (NYSEARCA:XPP), Small Caps 3x (NYSEARCA:TNA),

Developed Markets 3x (NYSEARCA:DZK), Alerian 2x (NYSEARCA:MLPL), Russia 3x (NYSEARCA:RUSL) Biotech 2x (NASDAQ:BIB).

Non-Leveraged Long ETFs:

Solar Energy (NYSEARCA:TAN), China (NASDAQ:PGJ), Social Media (NASDAQ:SOCL), Internet (NASDAQ:PNQI), Biotech (NYSEARCA:PBE)

Japan (NYSEARCA:DXJ) and (NASDAQ:DXJS), Internet (NYSEARCA:FDN), U.S. Aerospace (NYSEARCA:ITA), Biotech (PBE),

Technology (NASDAQ:DWAS), Index Fund (NYSEARCA:FPX), Biotech (NYSEARCA:FBT), Media (NYSEARCA:PBS), Info Tech (NASDAQ:PSCT)

Tech Leaders (NASDAQ:PIZ), Health Care (NASDAQ:PSCH), Shipping (NYSEARCA:SEA), Small Caps (NYSEARCA:RWJ),

Small Caps (NYSEARCA:EES), Discretionary (NYSEARCA:FXD), Industrials (NYSEARCA:FXR), Europe (NYSEARCA:VGK).

Leveraged Bear ETFs:

Nat Gas 3x (NYSEARCA:DGAZ), Gold 3x (NASDAQ:DGLD), Inverse Silver 3x (NASDAQ:DSLV) Oil 2x (NYSEARCA:DTO),

DOW 30, 2x (NYSEARCA:DXD), Emerging Markets 3x (NYSEARCA:EDZ), Financials 3x (NYSEARCA:FAZ), Mid Caps 3x (NYSEARCA:MIDZ)


Russell 2000 3x (NYSEARCA:TZA), S&P 500 3x (NYSEARCA:SPXU).

Non-Leveraged Short ETFs:


Mid Caps 400 (NYSEARCA:MYY), NASDAQ 100 (NYSEARCA:PSQ), Real Estate (NYSEARCA:REK), Russell 2000 (NYSEARCA:RWM),


EAFE (EAZ) Russell 2000 (TBM).

Good Luck!

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.