The Charts Before the Fed Meeting

Jan 30, 2008: 10:50 AM CST

Agreed, it may be pointless to study the technical (chart) picture of the current indexes right before the Federal Reserve meets, because their decision will determine how the market breaks out of its current precarious position, which actually is at an interesting juncture.

How so?

  • There was a bullish rejection of lows about the 11,600 level – the two long wicks (candles) serve as a place the bulls took over aggressively
  • There was surging volume to the downside, meaning a potential capitulation (bottom) is in place
  • Volume is not being confirmed to the upside on the most recent upswing (green descending line on volume).
  • While the volume readings are bearish, one must realize the extreme amount of panic on the downside and that a subsequent force can’t overcome that yet
  • Price also made a new momentum low, hinting that lower prices are yet to come
  • Price sits at a precarious level because we have a classic bear flag set-up, complete with confirmation from volume.
  • Classic technical analysis would have us loading up in a short-sell trade to target a measured move at most (from the prior swing) or at least a retest of the prior lows at 11,600
  • However, the announcement by the Fed today could change all this with a positive boost, projecting price above the falling 20 period MA and voiding the ominous bear flag set-up.
  • If so, shorts would be forced to cover en masse and we would have the birth of a potential reversal to an eventual uptrend.
  • That is a big “if” however.
  • Conclusion:

    While the technical picture puts the odds in favor of further downside price action (actually quite strongly), the announcement by the Federal Reserve with their interest rate decision could negate all this negative pressure.

    Another thing to remember is that when a technical picture unfolds so clearly, odds favor the picture deteriorating in a perverse, unexpected way.

    Also, it helps to consider the power of contrary thinking, in that virtually every small investor/trader has heard that we may be in recession and a large percentage already think we are and have already pulled money out of the market. If everyone has already sold and is extremely bearish, who is left to sell? All that money would be on the sidelines to help fuel a nice rally. But contrary opinion is never 100% certain either.

    My advice? Wait until the announcement and then take a position on Thursday or perhaps Friday, once it’s just a little more clear which way price will break.

    Will it overcome all these bearish signals and negative price structure? Or will it defy it to break this string of lower highs?

    Oh, you have to love this game!

    Update, 4:00pm EST:

    It looks like the Fed rescued the markets again, with a .50 basis cut, but was that enough for the greedy market?

    The market closed negative after rocketing just shy of 12,700 (Dow Jones).  Here is a sample of the intraday action via Yahoo Finance:

    cut.png

    Notice the impressive surge in volume. 

    The most recent news reports that the negative turn was a result of a Bond Issuer Report (via Reuters) that explained, “U.S. stocks turned negative in late-session trading on Wednesday after CNBC reporter Charles Gasparino said he believed that ratings agencies may downgrade bond insurers AMBAC Financial Group Inc. (ABK.N: Quote, Profile, Research) and MBIA Inc. (MBI.N: Quote, Profile, Research) as early as today.”

    “Once he (Gasparino) started talking, we got the sell-off. As soon as that went across, those shares went down immediately,” said Joe Saluzzi.

    Let’s see the fall-out from this news, and potentially other news as well.  Recall that, during a downtrend, the market will look for virtually any reason to sell-off. 

    If the Fed Cut can’t save the charts from the over-arching bearishness that has set up, what will?

1 Comment

One Response to “The Charts Before the Fed Meeting”

  1. gary Says:

    Actually I think what happened was a big trader spiked the Yen in the last hour. All the black boxes had to kick in to protect carry trades. Quite the profitable strategy IMO. How long they can make it work is another thing all together.