Thursday, February 21, 2013
down then up
The market reacted bearishly to the release of the Fed minutes which suggested the possibility of watering down or ending the Fed's QE program sooner rather than later. This possibility will give traders something to chew on but I think the outcome of the next Fed meeting on March 20-21 is foreordained. The Fed will stand fast by the policy it announced last September and will quash any talk of an early end to QE. To do anything else would be to abandon the course set in September before it has had a chance to effect the economy. Consequently I think there will eventually be a relief rally when the market decides that is what the Fed will do or observes it doing just that.
I think the current drop will more or less match the size of the December 2012 reaction (blue rectangles, bottom chart). The September top at 1472 (green line) or so will also act as support and thus reinforces this estimate for the size of the reaction. I will be watching the 10 day moving average of the daily count of the number of advancing issues traded on the New York Stock Exchange (top chart). Once it reaches oversold territory and starts to turn up it will be signalling the start of an advance which I think will carry above yesterday's high.
From the point of view of the mini-domed house which I discussed in last week's post the current drop is probably the left shoulder of a head and shoulders top. Another rally to a new high would form the head and and point 23 of the mini-domed house as well as point 27 of the major 3pdh formation. That top would end the rally from the November low. The November low was point 10 in the mini-three peaks and a domed house formation.