Another day and another piece to the puzzle revealed itself. On Wednesday we learned from Federal Reserve Chairman Ben Bernanke that the Fed would consider new stimulus efforts – examining several untested means to stimulate growth if conditions deteriorate, including another round of asset purchases (so-called quantitative easing, or QE3) , to be exact.
The market’s initial reaction was much as it had been to the announcements of QE1 and QE2 — buy everything in sight. Of course, after very mediocre results at best from the first two quantitative easing exercises, investors are less enthusiastic about a third trip to this punch bowl. Hence, the more the initial happy feelings of the early morning doze of caffeine wore off, the worse the market slumped.
When it was all said and done, the S&P 500 had closed the day up a mere 0.3% after having been up as much as 1.3% intraday.
So it goes, and the puzzle piece we found on Wednesday had skepticism written on it. Skepticism on the part of investors as to whether Big Ben knows what he is in for, because even in his own words he admitted that these QE bazooka weapons haven’t been tested in the field.
It wasn’t clear how investors would take the news of more stimulus down the road, or the lack thereof, which is exactly why I navigate through the markets in a step-and-evaluate way. Like in a game of chess, each time the market makes a move we get a chance to evaluate before we make a move.
Wednesday’s market move was very defensive, which leads me to raise a miniature red flag, thinking that we may at least have to test 1300 on the S&P 500 before possibly heading higher again. On the S&P 500 daily chart going back to June, we see that we currently sit pretty at the 50-day simple moving average and 50% retracement of the recent rally. More alarming, however, are the past two days’ long-tailed candlesticks, which, of course, depict the faltering of the intraday rallies both days.
These long tails are all over the charts, from individual stocks to major sectors and of course also the Russell 2000.
Before the market opened on Wednesday, I pointed out the rally in gold and during the session it was silver that started moving higher as well. As I’m writing this, Moody’s just placed the U.S. credit rating on review for a possible downgrade and the dollar is thundering lower against other ‘perceived’ save haven currencies such as the Swiss franc. This, of course, could be beneficial to silver and gold.
Speaking of the dollar, it is still in process of making higher lows, and we are watching for a potential break in either direction of the dollar index chart below. A break higher may mean more headwinds for investors in stocks than a break lower would.
That’s as much as the general equity market and some of its key foretelling charts are concerned – I remain careful of buying into this latest consolidation period of the past few days and want to first see proof of buyers stepping up to the plate. On Thursday, JPMorgan
(NYSE:JPM) is on tap to release its earnings ahead of the opening bell, followed by Google (NASDAQ:GOOG) after the bell. There is much to digest here amid earnings releases, debt downgrade threats and all sorts of structural issues still afloat. Risk management remains the No.
1 objective.
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Serge Berger is the head trader and investment strategist for The Steady Trader. Sign up for his free weekly newsletter
