Every so often you reach an important fork in the road where a market must take one way or the other, and once taken, the option not taken becomes very low probability. Yesterday was such a day. I told my brother in the morning that if we were going to see a major top on equities in 2012 then that was likely to be yesterday around 1440 SPX. Obviously QE3 was announced in the afternoon and 1440 was broken with a lot of confidence. I'd like to see that confirmed with a weekly close today over 1450, but I'm now no longer seriously considering the possibility of a major top in equities in 2012, and am writing off all the huge bear patterns that have formed over the last three years on many instruments and indices as a huge bear trap. I'll be expanding on that with various charts in the next few days but it what it is, and we are where we are. The trend is now most likely up well into 2013.
What was also interesting yesterday was that the QE announced was relatively small, with the unsterilised part being the MBS purchases at $40bn per month, and that it is open-ended, to be continued until the Fed board consider that either it is no longer needed, or that continuation poses an unnacceptable inflationary risk. QE1 and QE2 both had clear end dates, and equities rose into those dates and tanked as they finished. This is a potentially very important change and may have a significant impact on the bull/bear seasonality of recent years.
We won't be seeing a straight spike into infinity however, there will be advances and declines within the overall trend, and I think we are are most likely close to a short term decline now. On the daily SPX chart we saw the second spike yesterday well over the upper bollinger band. The advance is therefore very stretched now, and we are likely to see SPX back within the daily bollinger bands within two or three days. We are also now close to main rising channel resistance from the June low on SPX in the 1470 area and I would expect significant resistance there:
On the 60min chart TLT broke channel support and made a lower low, which is bearish. However the new low was marginal and would need to be followed through with a more confident low to remain bearish. There is clear positive divergence on the 60min RSI however and we might well see a strong bounce here if yesterday's low is not followed through quickly:
I've marked the important levels and targets on the chart, and in terms of shaping government and Fed policies over the next few years, this is in my view the most important chart to be watching at the moment as we see which way bonds break. 30yr Treasury yields are at 3% now, up from a low of 2.5% this year. If the possible double-bottom here were to play out, the target yield would be over 7%, and a break above channel resistance at 4.5% here would confirm that the more than 30 years old bull market in bonds is over. As current government and Fed policies are all built on the assumption that low interest rates will last indefinitely, that would be a huge shift in the policy landscape that might well end quantitative easing and force fiscal austerity across the developed world. Watch this space:
Last comment for today is that I'd like to mention that there is one analyst/blogger I follow that has totally nailed the move from the lows this summer, and is also expecting equities to run quite a bit higher over the next few months. That analyst is Pug from Pug Stock Market Analysis. Way to go mate. Kudos.
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