There were a couple of developments yesterday that could be very important game-changers. The first from the Fed minutes is serious talk of implementing QE3 if the US economy continues to weaken, which seems likely. QE1 and QE2 both had a big impact on the equity and other markets and there's no reason to think that QE3 wouldn't have a big impact too.
The second was that the German representative on the ECB came out against the Bundesbank in favor of a European QE program that would buy up the bonds of troubled sovereigns as soon as the yields reached certain trigger thresholds.
Together they amount to a position where we may see a wave of QE implemented in the US and Europe on a large scale. If so this could boost markets to the next bubble highs and, in the US, could push SPX to the test of the 2007 highs that I was talking about in my weekend post, in the event that 1440 area SPX resistance is broken. You can see that post here:
None of this may happen of course. In the case of the Germans this looks like electoral suicide for the government there, and will at the least be most unpopular in Germany. They may well pull back from this or the German representative on the ECB may not have been speaking with Merkel's backing. In the US the Republicans may win the election. Obama's doing OK at the polls so far, but most sitting presidents in the past looking for a second term with a grim economic backdrop have lost. If Romney wins then the Fed's wings may well be clipped and the autonomy to carry out actions like QE3 severely reduced. In that case there may be no QE3.
We shall see. Short term ES made a nice W bottom yesterday on positive 60min RSI divergence and made the 1417.75 pattern target overnight. I posted that target on twitter yesterday afternoon. These patterns are very classical topping (M) or bottoming (W) patterns and always worth looking out for. On the slightly bigger picture I'm thinking the spike into yesterday's low may have been the valley low on a double or M top, and if so we may retest the highs or push a few points beyond. I have put a box round yesterday's W bottom on ES for anyone who wants a closer look:
On the broader markets we may well be seeing a shift in the policy backdrop that could give equities and precious metals particularly a major boost. I don't think this changes whether we are going to see (or have already seen) a swing high in the SPX 1420-1445 range, but it may change what happens when SPX nears support on the next retracement. As long as support holds on the main SPX rising channel, currently slightly over 1370, the overall trend should be assumed to be up. Only on a break below there do the pattern setups suggesting that we may see major falls across the board really come into play.
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