FOMC Decision-day that is. This Tues/Wed surrounding FOMC day is setting up to be very important from a count/pattern perspective. I'll explain in a minute, but first let me cover the System.
Friday's rally was impressive. The System was stopped out for an approximate 1% gain (counteracting the previous 1% loss which followed a 6% gain) after going short at 1256, taking 25% profits every 12-13pts (1%) and reloading every 8-12pts as recommended and then exiting at 1247. Given the generally bullish configuration and TRIN>5 on Thursday, I possibly could have switched the System to long mode on the 2-candle resistance break around 1242, but not many indicators were oversold and such TRIN days typically lead to a gap down, lower low and/or bottom retest so the odds were better to wait. For now, I'll leave the System in a neutral state meaning it will go short on Monday on a 2-candlex (two 60min candles from the closing extreme) support break (currently 1252.10). I expect 1 more System long trade in the coming week, but I'll take it day by day.
Back to the FOMC. Before you read the reasons I think the Tuesday Fed meeting could be pivotal to the next couple months, you might want to review my preferred counts (see my public daily chart and the description at the bottom of this post).
1. Dec 2-19 was the window that my discretionary spending analyses projected for a significant SPX top
2. Dec 8-13 was the window for a tremendous amount of global monetary news
3. Dec 10 full moon and lunar eclipse (take it for what it's worth...many societies believe this marks turning points)
4. Dec 23 +/- is the next projected System mid-cycle low. Jan 19 +/- is the next projected System cycle low
5. 1 of my preferred counts is likely to be eliminated at 1210 or 1293 although I think 1220/1267 are probably the lines to watch.
Basically, those reasons lead me to believe that SPX should top by Monday 12/19 if it hasn't already and that indicates that the Tues/Wed FOMC reaction is likely to cause a final quick spurt to 1290+ or disappointment solidifying the bearish triangle count.
Since the Fed is truly a wildcard, nobody can be sure what will happen. However, I will continue to slightly lean towards the bearish triangle count because...
1. TRIN>4 typically leads to a decent 1 day bounce as we've had but, in 10 such cases in 2011, only 1 bounce lasted beyond 2 days and that happened after a 15-20pt lower low first which we did not get in this case indicating SPX probably did not get oversold enough. This would not preclude SPX rallying to 1267+ on Monday before falling but that seems doubtful.
2. Check out Cobra's stats on MDD days (major distribution days like we had Thursday). They indicate 1231 will almost certainly be largely retraced and probably broken.
3. The Fed will transition to more dovish members in January, so it is less likely to do something extremely accommodative in December and the outgoing hawks don't have strong reasons to turn dovish now.
4. Many inflation signals are near or above generally accepted Fed limits with oil still near $100 so the Fed is unlikely to inflate much
5. Consumer confidence, the stock market and the EU have rebounded sharply from Aug/Oct lows, so there is little outcry or obvious need for extreme Fed action especially with the negativity towards the Fed in presidential debates and in OWS
6. The Fed just got through coordinating with global central banks to temporarily prevent a European bank run with swp line easing and the ECB has now lowered rates 2 meetings in a row, so the Fed is unlikely to do anything more than its current Operation Twist and possibly a lower discount rate which it has kept in its back pocket to match the lower swap rate
7. SentimenTrader revealed 2 different stats that basically indicate when the market is trading near break-even for the year in December, it typically stagnates into year-end and Frank Hogelucht at Safehaven has stats that also indicate stagnation after a 10-day 6%+ rally on volume 10%+ below average.
8. OPEX max pain for Dec 17 and Dec 31 is likely to stay near 1230-1240, and SentimenTrader points out 1245+ to close the year would almost unanimously make 2012 a bullish year historically (of course that's on one stat alone and you'll have to take a free trial to find out why), and 1200-1260 would keep Dow and/or SPX positive for the year, so call me skeptical for thinking SPX will hang around those price levels to close out 2011.
It is technically possible for SPX to rally above 1267 or fall below 1231 and still keep both of my preferred counts alive. The 1075-->1293 rally took 4 weeks. The 1293-->1159 drop took 4 weeks. The 1159-->1267 rally took 8 days. That may be long enough for wave C of the triangle (and DRSI does favor it as corrective) but one more push to 1267-1278 would not violate reasonable time or price parameters for a triangle. Since OPEX week is coming with max pain around SPX 1235-1240, the 2 likelier scenarios would seem to be a run-away move OR consolidation surrounding 1230-1240. Given my 2 preferred counts would support a rally to 1290+ or a drop to 1180, I suppose you could say OPEX doesn't give us any predictive power for this week. However, given that I'm expecting a momentum top no later than Dec 19 and given that a runaway OPEX move is not as likely to develop on Thu/Fri, I'd say the 1290+ zigzag count is probably dead if we don't see a strong rally by Wednesday. So, once again, I am drawn to the fact that the FOMC meeting is likely to eliminate 1 of my 2 counts and thus narrow the projections for the rest of December and January. There are other potential catalysts to spark rallies or downtrends: credit downgrades (bearish if announced) and payroll tax cut extension (bullish if passed). But, I think both of those could cancel each other out and are largely anticipated. Good luck.
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My 2 preferred counts assume 1371 was a WXY top from 667 and that 1371-->1075 was the first leg in a 3-legged drop to 1000ish and likely 850-900.
(1) multi-month triangle from 1075
A=1371-->1075 (5 months)
B=1075-->1293-->1159-->1267-->1180-1200-->1230? (3-month triangle)
C=1220-1260-->850-900 (3-13 months)
i of C=1220-1260-->1050-1100 (1-3 months to the Jan/Mar FOMC meetings)
(2) multi-month zigzag from 1075
A=1371-->1075 (5 months)
WofB=1075-->1293
XofB=1293-->1159
YofB=1159-->1290-1320? (3-4 month zigzag)
C=1290+-->850-950 (3-13 months)
I am taking the bull side in the recent bear/bull debate. It looks like the massive improvement in the consumer indexes is starting to filter through into the data. This is to be expected but changes in the indexes do not always result in similar moves in the stock markets. As you are well aware the last big correction in the consumer indexes did not translate into much of anything in the stock markets. The markets went up even though the correction was much worst than the 2007-2008 correction. I chalk that up to market expectations and preparedness. If the markets and the economy as a whole, are prepared and expect the correction then there is very little effect in the markets and in fact the feeling that it was not as bad as expected takes hold and we get a bull market.
ReplyDeleteWhen the surprise factor comes into effect then the corrections and the rallies tend to be more severe. My current assumptions are that corporations have cut to the bone and any uptake in consumer spending will catch them unprepared. This should lead to a wave 3 type rally. As you know the indexes are reporting a double digit improvement in the consumer and this is starting to find its way into the data. Tony has reported 3 weeks in a row with positive indicators outnumbering negative ones by a 2:1 margin which backs up the indexes. Junk bonds have been rallying since their bottom back in October.
My count is a little different as I see the entire rally as a series of nested 1,2’s. The big wave from 666 to 1219 is 1 then 2 to 1010 with 1 of 3 to 1370 and 2 of 3 to 1074 with us currently in 3 of 3. Thus, I have wave 3 extending. I have not seen this count anywhere and given all the downside fear mongering out there I feel that this would surprise the most and it fits with the double digit improvement in consumer indexes coming in as a big surprise.
Dyugle, I understand that viewpoint and have been keeping up with Tony's posts. My view is technically quantitative and fundamental as is OEW and yet we arrive at 2 different conclusions. Cycles, DRSI, leading indicators (oil, spending, demographics...) and the economic backdrop should not allow a wave 3 up at this stage with one possible exception that I'm going to address in a new post and public USD chart. None of us have a crystal ball and all of us adjust, so we'll see what happens. Good luck.
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