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Keene Little : 1/22/2007 12:45:32 AM

As can be seen in this chart of calculated M3 money supply, the Fed was very busy last week. You can see how the rate of change shot higher last week and the week before. Other than the pullback in the shortened first week of January money creation this month is going through the roof. Helicopter Ben is living up to his reputation and he's clearly worried about a slowing economy (and causing inflation). Link

With the money supply shooting higher last week I'm surprised we didn't see a strong market rally. This begs the question why not. It's either because sellers overwhelmed the Fed's new money or else the new money is being pooled to goose the market higher this coming week.

I could speculate forever as to what may be happening here but it's not unreasonable to think that there are many who want to be sure January goes out like a bull--as January goes, so goes the year. What better way to keep the public bullish than to have a bullish January? But if the market doesn't rally when we have this much money coming in (bond market didn't rally either) then we could be closer to a steep decline than many are now thinking.

Keene Little : 1/21/2007 11:21:42 PM

Since the pullback from December's high I've been waiting to see if we get an A-B-C move to a new high. As of last week's high and pullback it appears that we might have had the A-B portion of that move which would leave wave-C up to finish off the rally. Whether the pullback from last week's high is finished or not I can't tell. It's possible we'll get another leg down to finish the pullback, in which case I would expect SPX to pull back to about 1420. The bulls wouldn't be in trouble until SPX drops below January's 1404 low.

If the pullback is finished (which was deep for RUT and NDX, less so for SPX and NYSE and almost nothing for the DOW) then we'll see a rally out of the gate on Monday. Link I like that possibility because of the Fib projection for the move up from January's low--two equal legs up is at 1455 which matches the Fib projection for the move up from October 2002 where we'd have two equal legs up at the same 1455.

Throwing cold water on this bullish possibility is the RUT--it looks like a clean 5-wave impulsive move down from its January high (making for a trend chance to the downside). If the current bounce, which should press slightly higher (787 is a good Fib target), then turns back down and makes a new low then at least on that index I'd only want to be short. Link I would think that would also make it difficult for SPX to rally much further but who knows. Stay cautious on both sides.

Keene Little : 1/21/2007 10:51:30 PM

Monday's pivot tables: Link and Link

OI Technical Staff : 1/21/2007 9:59:59 PM

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