Picking Tops, Fading the Fed, Algebra, Geometry

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(To be read while listening to the old classic Not Fade Away)

What are retail traders' favorite things?  Ok, maybe not algebra and geometry, but we'll save those for this post.  It's been awhile since our last post due to other projects – so a very belated, happy, healthy, and prosperous new year to all!

So what do prosperity, algebra, and geometry have in common?

Well, let's take a look at another old friend, the Emini S&P futures.  So many have written about how we're overbaked, the end is near, the top is in, some indicator is signaling a major selloff, you name it.  But, let's imagine the Fed will continue QE2 and will not letup until they start seeing signs of their intended effect, whatever that may be.

What are their objectives with stock prices?  If you were the Fed, what would you try to accomplish to really prove to the bears and the rest of the world that this rally and market recovery is for real?  Think about who's on the other side of your trades almost every afternoon (other than Market Sniper).

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Let's just say, hypothetically speaking, that the Fed is roughly halfway through its 8-month QE2 program, with four more months left to go until the end of Q2.  Since 11/1/2010, ES has risen from ~1170 to ~1340, a nice 170-point move, pretty much in a gorgeous 45-degree line once non-believers got with the program.

If we're halfway there, if ES continues on pace for the next four months, what would the target be?  Yup, you guessed it: 1510.

Now, let's say just for kicks that the Fed starts running out of steam with the remaining half of QE2 going into Q2.  Let's say it's only 61.8% as effective with its remaining POMO activities, as a rough round number.  What would that target be?  Yup, out of pure coincidence 1445.

You can see we have marked the ES chart with prior S/R levels as very interesting reference points.

Ironically, those who engage in sensitivity analysis are often those who failed corporate sensitivity training.  So finally, let's say shorts really panic and actually start covering.  Since Jackson Hole, ES has risen from 1037 to 1340, a nice 303-point move, with one little non-believer interruption ironically right when the Fed was scheduled to begin its QE2 installments.  Assuming we're halfway there, what would that target be?

Nah, they wouldn't really be trying to break prior ES highs would they?  Nah, it could never happen…

Of course, we're not forecasting or saying ES will hit any of these targets.  It's too preposterous.  Everyone knows QE2 will never work and the ES is doomed.

However, we confess we do not plan on taking macro shorts seriously until we can at least break below the latest S/R level at 1310 for starters.  And, we'll need to see some red volume – especially since they just bought 1310s on a volume increase less than two weeks ago.

Isn't math fun?  We hope you enjoy this context model.  With QE2 and the debt ceiling allegedly scheduled for completion, Q2 will be interesting.

Originally published on www.tradeflight.com