by JW Jones
The Federal Reserve is holding a two-day meeting Tuesday and Wednesday of
this week. Market participants are expecting the Federal Reserve to prop up
financial markets yet again with some grand new plan. The fact is the Federal
Reserve is running out of bullets.
Interest rates cannot move much lower in terms of the Federal Funds rate,
additional quantitative easing seems redundant since Treasury yields are close
to all-time lows, and finally a twisting of maturities will do little to alter
the current economic conditions. The Federal Reserve is just repeating practices
which have proven over a long term do little to create jobs or get the economy
moving in the right direction. A stock market rally does not help a person
looking for a job!
It is possible that even if the Federal Reserve proposes additional stimulus
the market could sell off. I have been trading less in this environment and have
been focusing on looking for trade setups that could work regardless of price
action. For now I am sitting predominantly in cash waiting to see how price
action reacts to the news flow tomorrow.
S&P 500
If I had to guess, I continue to believe that
the S&P 500 will get back to test the key 1,250 – 1,280 price level. While
this resistance level is apparent, Mr. Market will be able to tear up traders if
price jams into that resistance zone. Mr. Market loves nothing more than to
shake people out of positions. If price works higher I would expect the 1,250 –
1,280 price range to offer just enough risk / reward to get investors and
traders involved in a choppy trading environment. The key upside levels on the
S&P 500 are shown below on the daily chart of the S&P 500 Index
($SPX):
The flip side of that argument would see the S&P 500 jamming into recent
resistance around the 1,230 price level. If prices rolled over and momentum
picked up, a test of the recent August lows would likely transpire and could
produce a breakdown and a lower low.
When looking at recent price action, the S&P 500 Index has put in a
series of higher lows which is a bullish signal, however the S&P 500 has a
long road ahead to break out above the 2011 highs. If the S&P 500 carves out
a lower high on the S&P 500 Index at 1,230, 1,250, or even 1,280 and
subsequently takes out the August lows then the secular bear will be back. The
weekly chart of the S&P 500 Index ($SPX) shown below illustrates key support
levels:
For now I am just going to sit in cash and wait for Mr. Market to provide me with some better clues. The trading range is pretty wide going from around 1,100 to 1,280. What I will be watching for is a strong move supported with volume that pushes price out of this range. As of the close today, price action was trading around the middle of this range but depending on how price action reacts to the news that comes out Wednesday it is possible that in coming days we could see a breakout in either direction.
Dow Jones Industrial Average
It will likely surprise long
time readers that I am actually going to comment on the Dow. I will keep this
brief, but I wanted to point it out to readers as I have not heard much mention
of this pattern in the main stream financial media.
Over the weekend I was looking at some longer term charts and I accidentally
stumbled across this head and shoulders pattern on a weekly chart of the Dow
Jones Industrial Average. I rarely pay much attention to the Dow as I monitor
the S&P 500 closely. However, I could not ignore what I was seeing. I also
noted that a similar pattern also exists on the S&P 500.
I am generally not the kind of trader who tries to predict where price action
will arrive in the distant future. However, I am not going to ignore clear chart
patterns that I recognize regardless of the time frame I am looking at.
For those not familiar with a head and shoulders pattern, it is a very
ominous signal. Head and shoulders patterns are generally topping formations
that if triggered result in violent selloffs. On this chart the pattern is
obvious and if the pattern were triggered the forthcoming price action would be
decisively negative for domestic equities. The long term monthly chart of the
Dow is shown below:
If the pattern is triggered on an undercut of the March 2009 lows, the head
and shoulders formation would produce selling pressure that would target the
3,800 – 4,000 level on the Dow. Yes, you read that right! I want readers to
recognize that this pattern is not a given and it could play out over a long
period of time. The pattern would suggest that a test of the 2009 lows is
possible, but I will leave the likelihood of that test up to Mr. Market.
I view this pattern as a potential warning signal for long term equity
positions. Consequently, it is far too early to jump into a plethora of short
positions or sell every equity position owned simply because of this pattern.
While I do not know where price goes from here or if this pattern will ever
trigger, I think market participants should be aware of its existence.
It would take the perfect concatenation of events to push prices down to the
March 2009 lows, but unfortunately the condition of social mood paired with all
of the risks facing financial markets is notable. The recent selloff in August
came on the heels of a head and shoulders pattern that was triggered. We all
know how August played out, but this pattern on the Dow Jones Industrial Average
has a long way to go before it can even trigger. Time will tell, but readers
should at the very least put this chart pattern on your radar!
U.S. Dollar Index
The U.S. Dollar Index has ripped higher by more than 5% since August 29th.
The strength in the Dollar has likely been precipitated by fear based on the
European sovereign debt and banking crisis. While the Dollar certainly has long
term flaws, it may simply be the best of the worst.
If the situation in Europe begins to break down
further based on any number of events it could likely push the U.S. Dollar Index
considerably higher. My trading partner Chris Vermeulen has been riding this
strong impulse wave with his subscribers Swing trading the UUP
etf and thinks there is big potential still if Euro-Land fears continue to
rise.
Mid-Week Market Trend Conclusion
Wednesday will be filled with a variety of news and headlines. The Greek
government is meeting and a news release regarding the conference will likely
come out around the time domestic markets in the United States open. The news
has the potential to move markets considerably.
In addition, the Federal Reserve is set to end its September meeting and
market participants will be sitting on the edge of their seats waiting to hear
from the Federal Reserve about any stimulus the central bank may provide.
Overall, the news and headlines on Wednesday will certainly impact the
current conditions of financial markets. Right now I am pleased to be sitting
primarily in cash. I have a few positions open, but for the most part the trades
are not directional and are profitable based on time decay.
The one directional trade I have on presently is a remaining sliver of a
position I have already taken profits from and stops are in place. While I have
been risk averse the past few trading sessions, I am flush with cash and ready
to accept new risk if high probability setups emerge.
However, the best trade can sometimes be no trade at
all and I intend to remain patient. Risk is extremely high!
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