The End Of The Rope

Boy, where to begin? Yesterday’s FOMC announcement and in particular Bernanke’s Q&A session shows us a Federal Reserve that is coming to the end of its rope of monetary options. For over four years now the Fed has been acting as the (treasury and else) buyer of last resort – it’s been the most expansive quantitative easing experiment the world has ever seen. I leave it to smarter people than I do decide whether or not it was worth taking on almost four trillion Dollars in assets via its credit and liquidity programs. What I do know however is that the intended affect – in simple terms low interest rates – apparently seems to have stopped working. Take a look at the TNX – the yield for the 10-year treasuries:

Bernanke mentioned yesterday that he (and his colleagues apparently) was puzzled by the recent increase in treasury yields (as the Fed’s printing pump has continued unabatedly). But as usual it’s not just about the printing per se – it’s all about the perception and currently the market appears to be abandoning perceived risk assets (i.e. foreign markets and high yield investments).

And this has been the result – in particular long term rate are on the rise and may be breaching the late February highs today. What puzzles me a bit however is this:

FAGIX:VUSTX is still clinging to its recent highs, so perhaps the fat lady hasn’t sung just yet and in particular participants on the equities side simply require a bit more time to digest yesterday’s events.

On to equities – it’s been about half an hour since I took this charts and there has barely been any movement since then – that along is telling us a bit about the confusion and a perhaps fear that seems to have gripped equity holders. The volume hole above terminates near 1595 and that bottom was scraped earlier today. There is plenty of volume below and it would be wise for any buying interest to stage a defense above it. More selling below will beget more selling.

Our daily chart has us slightly above our next daily NLSL at 1591.75 – again that is via the September contract but the Net-Line is based on June (so use a continuous chart if you can). A drop through this Net-Line (and thus through the bottom of the volume hole) would be bad medicine for the bulls. Of course this also means that our Fakeout Sell entry from yesterday is looking extremely good right now and I intend to hold it until its stop has been touched or we push into that 100-day SMA.

On the long term panel we have a weekly NLSL at 1607.25 and we are back below it – a close below it tomorrow (Friday) would be another bearish memento pointing downward. Also note that we are about ten days away from producing an inside period on the monthly, so it’s fair to say that this is getting very interesting.

The VIX has managed to hold its rising trendline and as you can see the slightly smoothed ATR is on the rise as well. Such an increase in volatility is not something one would traditionally expect ahead of the vacation season but here we are and it seems like it’ll be one hot summer!

A quick short term pointer for you Zero aficionados – we have a rising trendline on the Zero Lite and if it holds we may see a bit of buying interest at the EOD. Let’s keep an eye on that.

Gold update – for weeks on end we got tortured by inside periods that didn’t really go anywhere. But I maintained that the pain would be worth the pay-off once this thing would jump out of its sideways correction. After all – it did it several times before and odds suggested that it would do it again. Well, that inside period setup on Monday has already paid off handsomely and if you’re still in it then I strongly suggest you take profits now.

I’m curious how many of you actually took this setup? My guess would be very few – which is why I keep preaching about consistency and taking every technical setup as it represents itself. FWIW – this is another reason why Scott and I are working on introducing a range of automated trading systems. Apparently the discretionary ones are often being ignored in favor of personal opinions. And by now you probably know what I think about that.

Before I call it a day here are a few more setups for the subs:

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Cheers,