The bulls are trying to hold it up, but are not making much headway yet. SPX closed back inside the Bollinger band. It was a mixed day with a few indexes up and some down. Not much new information on this time frame. Lets look at the SPY 60 minute chart.
SPY has made three attempts to mount a rally. However, each one was met with significant selling. The volume pattern is still showing big red bars dominant. There is a descending triangle forming on this time frame. That is most often a continuation pattern so odds are for a break to the downside.
Watch that upper trend line for a sign the bulls are getting control back. As the lines are getting closer together early next week we should get the break one way or the other.
I believe the move down is taper fear. If that is the case it is unlikely the market will bottom before the FED meeting. How does a money manager step in and buy just before the FED tapers? Lets look at why there might be taper fear. Earlier this year Bernanke said this:
“If the incoming data are broadly consistent with this forecast, the committee currently anticipates that it will be appropriate to moderate the monthly pace of purchases later this year, and if the subsequent data remain broadly aligned with our current expectations for the economy, we will continue to reduce the pace of purchases in measured steps through the first half of next year, ending purchases around mid-year,” Bernanke said in a press conference following the Fed’s two-day policy-setting meeting.
“In this scenario, when asset purchases ultimately come to an end, the unemployment rate would likely be in the vicinity of 7 percent, with solid economic growth supporting further job gains.”
So Bernanke said he would like to end QE completely at 7% unemployment. Guess what folks we are there and he has not even started. For supporting data we had GDP over 3%. Later in the year the struggles in Washington were mentioned as a reason to keep QE going. Well guess what. They have come to a budget agreement passed by the House and assuredly will be passed by the Senate. His conditions to end QE altogether seem to have been met. His latest excuse not to taper has been removed. Could someone explain to me how the FED does not do some form of taper at the next meeting and maintain any credibility. I sure don't see it.
The question is how does this affect the market. My guess is that smart money is selling now to get ahead of the announcement. That seems likely to break the key 1775 level next week and cause an increase in selling pressure into the FED meeting. If the FED does taper there could be more selling that day and maybe the next as dumb money bails out. We should then get a bottom and rally into year end. A no taper announcement could actually be very negative. The majority of people think the economy is getting better and would likely wonder what does the FED see that they need to keep up QE.
For Monday we should see the resolution of the 60 minute triangle. If it is down then selling should increase considerably. The 50 DMA is at 1761 which is the next support level down. I doubt that would hold for long though. Below that there is 1746 which is the low of the violent key reversal day that saw no follow through. The next level down is probably the 100 DMA at 1720. That has been the line that held all pullbacks since May. A break of the upper trend line probably gets SPX back above 1800. Whether there will be any buyers up there is unknown.
Have a great weekend all,
Bob
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