Thursday, February 21, 2013

down then up

I think yesterday's sharp drop heralds the start of a normal reaction.

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.


Bill said...

Carl, I think this next week and half is critical. The market can be seriously challenged:

1) Italian election this weekend. I don't think anybody in Europe will want to be long over the weekend. So a further drop in Europe this Friday can carry onto North America. And Monday who knows, I read this italian election is high risk with leading candidates wanting to get out of the euro zone and parliament projected to be without a majority party, very unstable.

2) Fed clarity has to wait until March 21. Markets hate uncertainty.

3) Sequester goes live on March 1. Art Cashing of CNBC was saying yesterday a government shutodown threat is hanging if the sequester is improperly managed by politicians.

4) Fiscal cliff raises its ugly head in April.

5) A case can be made that we've seen the top for now. Sure support at 1470 is going to be very strong, barring some catastrophic news from the events I described above. And yet any bounce from 1470 I don't think it will take out the heights set earlier this week, but who knows if Italy and sequester become irrelevant in a couple of weeks, then yes the case can be made for new highs. Market psychology changed yesterday but again it might turned positive again if the sequester and Italy situation turned out to be good over the next couple of weeks.

john said...
This comment has been removed by the author.