Everything is Possible, it Just Depends on How Stupid the Fed Wants to Be

From Adam Hewison, co-founder of MarketClub.........


                                                    Will the Fed come to the rescue of the market?

Everything is possible, it just depends on how stupid the Fed wants to be. In the study of economic history and capitalism in America there are periods of maximum euphoria and maximum depression. You almost can’t have one without the other, that is one of the ways capitalism works. We’ve gone through a period of time that we’ve seen unprecedented euphoria and debt put on America’s chalkboard. And we have witnessed millions of Americans faking their way to happiness using credit cards.

As hard as it is for everyone to accept that the good times are over, it is now time for what everyone doesn’t want… Economic pain. You may want to look at an earlier posting, that I posted in 2008 on cycles in American capitalism. It holds true now just as it held true 100 years ago.

The next shoe to drop will be interest rates. Interest rates have only one direction to go, and that is to the upside. This a fact of the marketplace and probably more pain than most people want to endure.

The potential for the equity markets to continue to erode and drift lower is very high, in my opinion. To temper that thought I’m going to say up front that I’m a trader, not an investor. Right now, the days of buy and hold are over and will not resume for many years to come.(See 100 years of capitalism). If I am right, the equity trends will remain negative with minor counter trend rallies. We could see the equity markets on the defensive until right before the 2012 elections. Only time will tell…

When I was a member of the Chicago Mercantile Exchange and trading in the pits, I first heard the expression, “they slide faster than they provide.” That was never more true than in the world markets yesterday.

Is the move to the downside in equities over? I don’t think so, as I believe this is a replay of what happened in 2007 and 2008. There are several negatives for the current market climate. I’m not going to list the fundamentals, as they are well known to everyone.

Instead I am going to focus on all the technical… One of the oldest and perhaps, best tools that any technician has in their toolkit is a simple trendline. If one were to draw a line from 666.79 in Q1 of 2009 and extend that line through 1010.91 in June of 2010, it gives you an intersection point on the current chart exactly where our Trade Triangle kicked in last week. Breaking a trend line that is 30 months in duration is a major change event and change in sentiment for the market.

Another big negative is that the S&P 500 index was in an overbought position on the monthly charts. The market has subsequently taken some of the pressure away and appears to be heading to an oversold area. The daily and weekly charts are very oversold and we would expect to see a reflex rally from yesterday’s lows. However, on the monthly charts this is certainly not the case. Any short term rallies in this market will more than likely fail, as the predominant monthly trend for this index remains negative. We still believe there is more to come on the downside.

So let’s go to the 6 major markets we track every day and see how we can create and maintain your wealth in 2011........

S&P 500

Monthly Trade Triangles for Long Term Trends = Negative
Weekly Trade Triangles for Intermediate Term Trends = Negative
Daily Trade Triangles for Short Term Trends = Negative
Combined Strength of Trend Score = – 90

Chances are that we reached an interim low point yesterday.The Fibonacci retracement zone has been satisfied and this market is in a heavily oversold condition. We would not rule out a reflex rally.

SILVER (SPOT)

Monthly Trade Triangles for Long Term Trends = Positive
Weekly Trade Triangles for Intermediate Term Trends = Negative
Daily Trade Triangles for Short Term Trends = Negative
Combined Strength of Trend Score = – 70

Silver is proving to be a negative for many precious metals enthusiasts as it is lagged quite dramatically behind the price of gold. Our -70 reading indicates more two-way market.

GOLD (SPOT)

Monthly Trade Triangles for Long Term Trends = Positive
Weekly Trade Triangles for Intermediate Term Trends = Positive
Daily Trade Triangles for Short Term Trends = Positive
Combined Strength of Trend Score = + 100

Yesterday, had all the earmarks of chaos, and potential mini top in gold. We would use our trade triangle as a timing tool.

CRUDE OIL 

Monthly Trade Triangles for Long Term Trends = Negative
Weekly Trade Triangles for Intermediate Term Trends = Negative
Daily Trade Triangles for Short Term Trends = Negative
Combined Strength of Trend Score = – 100

The massive liquidation in the crude oil market yesterday looked to us like we have put in the bottom for the time being. We would not be surprised to see further two way action and a further reflects rally.

DOLLAR INDEX

Monthly Trade Triangles for Long Term Trends = Positive
Weekly Trade Triangles for Intermediate Term Trends = Negative
Daily Trade Triangles for Short Term Trends = Positive
Combined Strength of Trend Score = + 75

The dollar index presents a mixed picture at this time. It remains below its 200 day moving average while our longer term trade Triangle remains positive.

REUTERS/JEFFERIES CRB COMMODITY INDEX

Monthly Trade Triangles for Long Term Trends = Negative
Weekly Trade Triangles for Intermediate Term Trends = Negative
Daily Trade Triangles for Short Term Trends = Negative
Combined Strength of Trend Score = – 90

The trend for the REUTERS/JEFFERIES CRB COMMODITY INDEX remains negative We would not be surprised to see this index have a reflex rally from current levels.

As always, we rely on our market proven Trade Triangle technology for catching the big moves.

Check out today’s MarketClub Trading Triangles