Wild thing, I think you move me
But I gotta know for sure
Come on and hold me tight
Oh you move me
--Wild Thing, Chip Taylor

Given the financial market’s turbulence over the past few weeks due to a rapid rise in bond yields and the CDO debacle, all eyes will be on the Fed today as it releases its statement.

In much the same way as Rome awaits a puff of white smoke from the Vatican to herald that the Cardinals have elected a new Pope, likewise bulls will be looking for doves to be released by the FOMC on Thursday. Bulls will be looking for a puff of white smoke from the Fed to fog over the nervousness in the troubled CDO market.

With over 50 trillion dollars in derivatives unmarked to the market, only a fool would venture to say “issues “have been absorbed. Then again, why should this time be any different? Every concern in the last few years have been well-absorbed. However, the difference this time may be a manifestation of fear, a change in psychology, a realization that loans were made that never should have been made and that excess leverage was employed.

In a word, the music may have stopped but that doesn’t mean that the Street will stop dancing immediately. Depending upon what the Fed says today, bulls may get a second wind – they may run, but they may run on fumes. They may run although it may be more Memorex then real. But price is price.

All eyes will be on the Fed statement. Any change in the wording will be dissected and magnified – although the meaning may be up for grabs.

Nevertheless the Street never met an excuse for a rally that it didn’t like.

Yesterday, I stated that Wednesday should either be a big downer or a reversal day – maybe both. I went on to say that an early move lower would set up a reversal in front of FOMC doves to be released on Thursday and that the first hour would be the key.

Although the monthly chart did not turn down and the S&P stopped shy of an idealized target of 1478, my script pretty much played out on Wednesday.

The hook was set on a first hour low as stocks got hammered and gapped lower from the get go. Did y'all see how the hook was baited just after Tuesday’s close as the S&P futures got crushed? On no news. Isn’t it special that someone painted this Rembrandt after everyone’s paints and brushes (read stocks and options) had been put away?

There was no news to account for the heavy sell-off in the futures after the close on Tuesday. Isn’t it special how the financial media failed to mention it?

Tuesday’s post-close plunge did its job. It painted an ugly tone for Wednesday's open, didn’t it? Many traders jumped at the opportunity to unload inventory thinking someone might have known something – that another shoe was about to drop in the derivative market – or, in the case of the current CDO fiasco, you never know – it could be an Imelda’s closet full of shoes.

I can’t prove it of course, but it sure felt orchestrated based on the ensuing price action on Wednesday. And, in this age of financial genetic engineering and the PPT (see yesterday’s article), who can be blamed for being a tad cynical? It sure seems like someone was in the wings waiting to scoop up stocks that were puked-up on Wednesday’s open.

Be that as it may, the set-up for reversal was about as picture perfect as they come:

• It was the seventh day down and often markets pivot on sevens.
• On Monday and Tuesday the markets rallied early and fizzled – been there done that.
• In front of Thursday’s FOMC statement, a first hour low on Wednesday that undercut the June lows and knifed back through those prior lows triggered what I call a Soup Nazi Buy Signal – as in no soup for those chasing a continuation play to the downside.
• Finally, a move that undercuts the June low would mimic the pattern at the March low and put in a possible “C leg” down.
  
  
  On Wednesday, the S&P did make a first hour low (A), knifed back up through the June low at 1490ish. Note how the Pullback at (B) held this key level and the S&P built on the reversal into the bell.
  
  
  Read The Number of Change, Reversal and Panic here...

It’s been a one-month choppy high-level trading range. Is it consolidation or distribution? Is there a swan or a goose ahead?

Interestingly counting from the initial reversal in the S&P on May 23rd the current formation will be seven weeks old going into the first week of July, the seventh month of this - a year ending in seven, seven years from the 2000 high.

Would you believe that from the March 5th S&P closing low of 1373.95 to the June 4th closing high of 1539.20, a range of approximately 165 points, that so far in the month of June, the major swings have traced out a symmetrical 160 point move!

Chaos, random walk – call it what you will, but underneath the turbulent surface of this thing we call the market, an order - although never seamless - and patterns - although never perfect - are at work. It will be interesting to see how the market behaves now that an echo of the March correction has been carved out, a big W, as in Wild Thing.