The market got what it wanted today, and more, from the Fed and reacted favorably, with the DOW rocketing 200 points off its low following the FOMC announcement. Now we wait to see if the rally will stick.
The FOMC announcement was kind to the bulls since there was no mention of tapering. This was a surprise and as there were expectations for some kind of tapering of the Fed's asset purchases. The Fed heads have been warning the market that it was coming but the announcement made no mention of it. That means the $85B/month will continue with no tapering in sight and the market rejoiced at the "gift" of more drug money to come.
The Fed is not convinced the economy is doing well enough yet to support any tapering of the Fed's help. In fact they again ratcheted down their estimate for GDP growth for the rest of the 2013 and 2014. But in this Bizzaro World where the only thing that matters is how much drug money the banks are getting, this announcement is to be treated as very good news.
And since the Fed has done so much for the economy so far with their asset purchases (cough) they must feel that they need to keep up their support (cough). What they're doing is making the rich richer and the middle class poorer. History will not treat this period kindly and identify it for what it is -- a greedy money grab by those in control of the money and a total failure of the central banking scheme.
The FOMC members have been very concerned about the spike in yields and what they're doing to the sputtering economy. Actually what they're really worried about, but of course won't say out loud, is that they do not want to exacerbate the rising yield problem by withdrawing demand for Treasuries. I think that's the real concern by the Fed right now but they're boxed in here -- their Treasury purchases are losing value as yields run higher but they need to keep up their purchases to prevent a further decline in value. It's kind of like China having too many dollars but they can't sell them off without negatively affecting the value of the dollars they hold. As the buyer of last resort the Fed has boxed itself in as being required to continue buying otherwise they hurt the value of their own portfolio. These are private bankers more concerned about themselves than our country or the people affected by their decisions.
Bonds rallied on the announcement so the Fed at least accomplished the start of a more serious decline in yields. As I'll show with my updated 30-year bond chart, the rally has been expected and the Fed's decision kicked it up a notch. Could a bond rally start to see some rotation out of stocks and into bonds? I see that potential.
As Jim mentioned last night, the failure to start tapering asset purchases might start to make the market a little nervous as traders start wondering why the Fed is not tapering. What do they know that caused them to back away from following through on their taper talk? But for the moment the market got the all-clear signal to buy, buy, buy.
The DOW rocketed out of negative territory and gained 200 points in the hour following the announcement as shorts ran for cover and the bulls rejoiced. Now the bulls need to get some follow through on Thursday since it's common for the market to head in the opposite direction following the post-FOMC move. Typically the wrong side exits the market quickly, giving us the big post-FOMC move but then there's no follow through the next day. While I see the potential for at least slightly higher Thursday morning, watch for the possibility that new highs will not hold and selling will follow.
Gold also shot higher out of negative territory since more money printing by the Fed will continue to debase the dollar and inflate the value of gold and other hard assets. The U.S. dollar dropped sharply and at the moment we're left to wonder if each move is starting a larger move or if instead it was just a kneejerk reaction. As I'll show on their charts, there's reason to believe the latter but we'll have to wait to find out.
The weekly chart of SPX below shows the potential for a high today, maybe tomorrow, at the top of a rising wedge pattern, which it hit today with a little throw-over above it. Many have been looking for 1730-1750 and the lower end was tagged today (1729.44). The rising wedge, starting from the June low, might need another down-up sequence to complete it (shown with the dashed line) and it could of course just keep rallying from here. But considering the fact that the market often reverses the direction of the afternoon move following the FOMC announcement, the setup here is that we could see it happen again on Thursday with a decline.
S&P 500, SPX, Weekly chart
The rising wedge is shown more clearly on the daily chart below and shows the small poke above the top of it today and the close on the line. SPX 1725 could be a strong magnet for a Friday-morning settlement price so even if we get more to the upside tomorrow we might find it pulling back to the same level into the close. Just a thought on opex settlement. Any strong decline from here should be taken seriously since it could be the start of a more serious decline. But if the bulls maintain control we could see a blow-off move up to 1776 (too bad not on July 4th) where the move up from June would have two equal legs. Inside a rising wedge like this it's more common to see the 2nd leg achieve 62%, which at 1719.76 was achieved today. Again, it's a good setup for a reversal so we'll see if the bears take advantage of it.
S&P 500, SPX, Daily chart
Key Levels for SPX:
- bullish above 1730
- bearish below 1650
It's arguable where the current rally leg started from but if I use the August 30th low I can count a completed 5-wave move up to today's high. The 5th wave is equal to the 1st wave near 1724, which was achieved. This, along with the other reasons mentioned above, adds to my belief that we'll see a down day on Thursday and that this afternoon's rally was mostly short covering and will see little if any follow through. The market breadth for the rally from August has been negatively divergent with price and is more indicative of a final rally leg than the start of something bigger to the upside. The caution to bulls is to be careful about this one -- it might be over or could finish with a bang to the downside.
S&P 500, SPX, 60-min chart
There's a full moon tomorrow and it might be a good time for the market to make a top. Today's rally was a news-related event with lots of emotion, which is typically how rallies finish. The timing with a full moon could be just icing on the cake for bears.
SPX MPTS daily chart
The DOW has a similar pattern to SPX but shallower. The past two weeks it has shot higher but it's been a laggard otherwise. Today's rally brought it up close to the top of its wedge (trend line along the highs from May-August), near 15740, with a high of 15709. A rally above 15740, which stays above, would be a bullish move but until that happens I would view this line as resistance.
Dow Industrials, INDU, Daily chart
Key Levels for DOW:
- bullish above 15,740
- bearish below 15,290
NDX punched through the top of its rising wedge pattern today but the Nasdaq Composite just ticked its line, at 3790. For the a-b-c move up from June the c-wave would be 62% of the a-wave at 3820 so I see at least that much more potential to the upside. By this time next week that projection will cross the top of its parallel up-channel from October 2011 so if the bulls hold the market up (but not make a lot of headway to the upside) into the end of the month/quarter we could see that 3820 projection achieved. But as with the others, there is the potential for an immediate reversal back down from here.
Nasdaq Composite index, COMPQ, Daily chart
Key Levels for NDX:
- bullish above 2282
- bearish below 2237
Back in July and into the August 5th high the RUT had made it above the top of its parallel up-channel from October 2011, even using it as support at the end of July, as can be seen on the RUT's chart below. It then broke back inside the channel with the gap down on August 15th and it looked like that might be it for the bulls. But the dipsters won again and have driven the indexes to new highs. Now the RUT has achieved the same 62% projection for the c-wave as the other indexes, just shy of 1080 (today's high was 1080.49) and at the same time to top of a slightly wider up-channel using the July-August highs for the parallel line. In other words the size of the throw-over above the up-channel from 2011 is now the same as it was in July-August. This is oftentimes a good way to identify where resistance will be so once again, it's a good setup for a reversal but we'll have to see if the bears do something with it instead of running back into the woods, screaming like little girls.
Russell-2000, RUT, Daily chart
Key Levels for RUT:
- bullish above 1080
- bearish below 1047
Bond shorts ran for cover today following the FOMC announcement. With no threat of the Fed backing off their purchases traders feel there is now a floor under the market that the Fed won't let break. As I've been covering for a couple of weeks, we were already warned that a rally was coming and with today's news the 30-year bond broke out of its descending wedge pattern, the top of which is currently near 131'12 (today's high was 132'15). It ran into its 50-dma today and pulled back a little. The top of the wedge should now hold as support. The longer-term pattern suggests a big bond rally should follow into next year.
30-year Bond contract (e-mini), ZB, Daily chart
The banking index, BKX, has remained weak since the August low, having just now retraced 62% of its August decline rather than making new highs with the broader market indexes. Coinciding with the 62% retracement, at 65.15, is its broken uptrend line from April-June, near 65.35, which was tagged with today's high at 65.36. Following the high there was a sharp selloff into the close, which so far a back test and bearish kiss goodbye if there's no follow through to the upside. Follow the money either way here.
KBW Bank index, BKX, Daily chart
Even the home builders got into the rally today and in fact quite strongly -- up almost +6% today to 461. It has at least a little more upside potential to the 469 area to achieve a 50% retracement of its May-August decline and a back test of its 200-dma. But for an a-b-c bounce off the August low the rally achieved the 162% projection for the c-wave and therefore it, like the other indexes, could start back down from here and head for new lows
Home Construction index, DJUSHB, Daily chart
The U.S. dollar collapsed on the news that the Fed is going to continue on its asset purchase program with no pullback. I imagine many are wondering if the Fed sees enough wrong with the economy and rising interest rates to prompt them to consider increasing, rather than decreasing, their asset purchases. The more they do this the more the dollar will be devalued. It continues to be a race to the bottom among the various countries as they pursue their own quantitative easing program.
The dollar firmly broke support at its uptrend line from 2011-2013 and could be headed for its H&S neckline from February 2012, near 79.50, or down to a price projection at 78.58 where the decline from July would have two equal legs down for an a-b-c pullback. But today's low at 80.17 was at the 62% projection for the c-wave, at 80.18, and we might not get any further pullback than this for the dollar (like the stock indexes but in reverse). That's what I'm showing on its chart but obviously we'll know more in the next couple of days.
U.S. Dollar contract, DX, Daily chart
Gold had dropped further during the last night's overnight session to a low of 1291.50 but after the FOMC announcement it shot up to 1367.80 for a gain of $76 before pulling back slightly in today's after hours. There's a large net short position in gold right now so it doesn't take much to ignite some short covering. While the bounce off the June 28th low could continue from here, I'll want to first see it climb above its 20-dma at 1374.40, which is also where its broken uptrend line from June is located. It could be setting up for a back test and bearish kiss goodbye, which is the way I'm leaning gold until proven otherwise.
Gold continuous contract, GC, Daily chart
Oil also rallied today but it was rallying some before the FOMC announcement. It remains inside its choppy trading range since mid-July. Nothing to see here folks, move along.
Oil continuous contract, CL, Daily chart
Tomorrow's economic reports include the unemployment claims before the bell but will not likely move the market. At 10:00 AM we'll get existing home sales, the Philly Fed index and Leading Indicators and these could negatively affect the market, especially if the market will already be struggling to find more buyers. The reports are expected to be worse than the previous month so there will obviously be some concern if they're weaker than expected. It might start tongues wagging as to why the Fed decided not to even mention taper and the worry about the economy and when the Fed will start to taper will start to weigh on the market.
Economic reports and Summary
The FOMC announcement caught most traders by surprise. Not mentioning tapering was not what most expected and the shorts in stocks, bonds and the metals ran for cover. This afternoon's spike was an emotional reaction and these news-related spikes following a rally are often the final leg of the rally so there's the potential for a more important high today, or possibly after a little more to the upside Thursday morning. It's also common to see the day after the FOMC announcement to reverse the afternoon move following the announcement, which means a reversal back down on Thursday.
Interestingly, even though the market reacted favorably to today's FOMC announcement it actually makes it more difficult for bulls from here forward. The Fed's words can't be trusted now that there was so much yammering about expecting $10-$15B in tapering and then tell us "never mind" when the announcement is made. It now also starts the whole worrying process all over again -- when is the Fed going to taper? Is it going to be December before Bernanke leaves? Maybe sooner rather than later? Maybe not at all for the foreseeable future? What does that then mean about the economy? The Fed has been telling us the economy is slowly improving and that they can therefore start tapering. Was it all a lie? All this uncertainty is what the market hates and today's announcement could backfire on the Fed.
As reviewed with tonight's charts, the indexes show a common pattern at this point and that actually strengthens the bearish pattern. We've had some strong differences for the past month and that made it more difficult to figure out which one was correct. Now we've got indexes hitting the same Fib projections, hitting (or near hitting) the tops of rising wedge patterns and showing daily/weekly bearish divergences. Market breadth has been weaker for the August-September rally than it was for the June-August rally, which is a clue that rally is not the start of something bigger to the upside.
We've got a full moon on Thursday and emotional highs and lows are often found on full and new moons. That makes this particular one potentially important, considering the technical setup. At the moment I'm thinking we saw an emotional reaction to the Fed that will not see follow through. We'll obviously know more by the end of the week but I would caution bulls to be careful (goes without saying for the bears).
Good luck and I'll be back with you next Wednesday.
Keene H. Little, CMT
In the end everything works out and if it doesn't work out, it is not the end. Old Indian Saying