I was reading a writeup from a fairly well known analyst yesterday stating confidently that QE announcements are followed by bull runs of 10% to 15% in the following four to six weeks. He shall remain nameless, but the evidence doesn't really back up that view. It's true that when QE1 was announced in November 2008 there was a rally from the 800 area to the January high at 943.85 but there's a very good argument that was coincidental, as SPX was already rallying from a very oversold short term double bottom at 741.02 into the January 2009 high before the final bear market decline into the March 2009 low. The picture from the announcement of QE2 looked rather different.
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Friday Night Frights
I'm sure I could be forgiven for not falling all over myself to put together a post tonight. It's been a rough week – – pretty much everything the bulls could have asked for was delivered on a shiny silver platter over the past couple of weeks. The ECB pledged infinite bond buying. The German Court gave a big thumbs-up to the bailout. Bernanke likewise pledged infinite bond buying at a new pace of $85 billion every single month. We live in unprecedented times.
Some indexes are at levels never before seen in human history. It is truly like the financial crisis and the so-called Great Recession never happened. Central Bank printing has erased them from history.
The NASDAQ is at a level not seen in a dozen years, although it won't be long before it nails its trendline of resistance (although these don't exactly act like iron walls these days).
The Dow – astonishingly – is within spitting distance of its October 2007 high. Mind-boggling, is it not?
The small-cap-based Russell 2000 tagged its lifetime high today; even a strong puff of air Monday will send this index to lifetime highs.
Although gold and silver had an amazing week to the upside (which caps an amazing several months), I do note with interest that a very powerful Fibonacci retracement has come into play. I wouldn't be surprised to see precious metals weakness next week.
Lastly, just about the honest-to-God, holy-crap-it's-going-to-plunge chart left is the bonds. This is a massive head and shoulders pattern.
As for myself, since I'd rather not have a $0 account balance, I remain conservatively positioned, with two-thirds in cash and one-third in a variety of small shorts (I goosed this up from 25% at the opening). We truly seem to live in a QE-infinity world now, and until such time as, for whatever reason, it's evident that QE simply won't work anymore, this is our New Normal.
Forks in the Road (by Springheel Jack)
Every so often you reach an important fork in the road where a market must take one way or the other, and once taken, the option not taken becomes very low probability. Yesterday was such a day. I told my brother in the morning that if we were going to see a major top on equities in 2012 then that was likely to be yesterday around 1440 SPX. Obviously QE3 was announced in the afternoon and 1440 was broken with a lot of confidence. I'd like to see that confirmed with a weekly close today over 1450, but I'm now no longer seriously considering the possibility of a major top in equities in 2012, and am writing off all the huge bear patterns that have formed over the last three years on many instruments and indices as a huge bear trap. I'll be expanding on that with various charts in the next few days but it what it is, and we are where we are. The trend is now most likely up well into 2013.
The Age of Fed Bubbles
We have reached a very important crossroads on bonds and equities as we wait to see whether the Fed will announce QE3 today. I was writing about the likely test of this level on SPX in my weekend post on the 19th August at Marketshadows and you can see that here. I've updated the chart but have left the comments on the chart as I wrote them then and they're well worth a read again today I think:
Descending Triangle (by Springheel Jack)
SPX tested the lower bollinger band yesterday, and if this has just been a retracement, that is the obvious bounce level:
On ES descending triangle support was tested yesterday and there was a strong bounce from there. Triangle support is at 1395 and on an hourly close below the triangle target is at 1374 with rising channel support in the 1375.5 area. Triangle resistance is at 1309.5 and on an hourly close above the triangle target is in the 1432.5 area, slightly below major SPX pivot resistance in the 1440 area. These triangles break down 64% of the time of course, but have a much higher probability of making target on an upward breakout:
A 64% bearish pattern has a 36% chance of breaking up of course, and as it happens there is a very good example of one of these descending triangles breaking up recently. That triangle is on gold of course, and the target is in the 2050 area, comfortably above the current high at 1923.70. Gold has broken up from the triangle, retested the break and then made new short term highs. On Bulkowski’s stats gold now has an 84% chance of reaching the 2050 area:
There wasn’t a triangle on silver, but there was a perfect test there of rising support from the 2008 low, and then a break of the declining channel from the high, retest of broken channel resistance and further move up. As with gold this looks like a solid breakout and confirmation of a major trend reversal:
Looking at EURUSD, the first double-top target that I gave yesterday morning was almost made overnight. The next obvious support levels are the larger double-top neckline or valley low at 1.2465 and rising wedge support at 1.244. If EURUSD consolidates at the current level those two support levels could be tested near the same level in a day or two. On a break below both the larger double-top target is in the 1.23 area. I am expecting a test of rising wedge support in this retracement:
On CL there was a strong decline yesterday that re-broke the rising wedge support trendline. Overnight that held as resistance which looks bearish. There is some positive RSI divergence that makes me think that broken rising wedge support trendline may be tested again. On a break below 93.9 a double-top will trigger with a target in the 89.5 area. This topping setup could also be read as a sloping H&S with a target in the same area:
Overall I’m leaning bearish here. Descending triangles are a bear pattern, EURUSD looks weak, CL looks very weak and TLT is looking very strong. On the other hand we have not seen the test of the 1440 SPX pivot that I was expecting and some decent support has been tested repeatedly and held so far. The bulls aren’t out of the game yet, and you can see from the chart below that FTSE hit rising support from the June low at the low yesterday:
Good arguments for a break either way from here. We’ll have to see which way the triangle breaks. Until then 1409 looks a decent risk/reward short entry and 1395.5 a decent long entry as long as triangle resistance has been tested first. The next obvious move within the triangle is to triangle resistance at 1409.5 and a test of triangle support before that happened would have a higher probability of seeing that support break.
