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How Will Equities React When QE Liquidity Hits This Week?

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While the market remains in a dangerous position, the Fed joins the game on November 14.

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MINYANVILLE ORIGINAL Liquidity is the main driver of prices in equities, since excess cash usually finds its way into assets, while a paucity of cash usually necessities the sale of assets. The QE-Infinity liquidity will start hitting the market this week -- the first MBS purchases are scheduled to settle on November 14, so now we'll finally see how this will impact the market. As noted on Friday, several markets are hovering near long-term support levels, but this zone is a key inflection point, and breakdowns of support here could easily lead the market into a rapid drop.

The chart below outlines several markets, and the bottom line is: Bulls need to make a "last stand" here or risk a panic sell-off.


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The S&P 500 (INDEXSP:.INX) chart below notes the potential air pocket beneath this price zone. This results from the overlapping summer price range -- markets can race rapidly through such ranges, so a failure of support here could drop SPX quickly into the 1320s.


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So... is there any reason for bulls to have any hope here? This is a dangerous position for the market, so while I'm not encouraging front-running, there are a few signals that bulls could capitalize on, which I'll outline below. It's a case of potential energy, but it's up to bulls to grab the ball and run with it.

In addition to this price support zone, there are a several reasons for bulls to feel all is not yet lost. The first is the fact that, as noted, the QE-Infinity liquidity (money printing) begins reaching the Primary Dealer accounts this week, and that usually translates into an inflationary reaction (equities up; dollar down). Notably, the potential does exist for a complete (or nearly complete) corrective fractal from the 1474 print high (noted below as the double-zigzag).


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Also interesting to note that the US dollar seems to be forming a rising wedge, which is usually a bearish pattern:


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Of further encouragement to equities bulls, the Dow Jones Industrials Bullish Percent Index (BPINDU) is very close to forming a bullish MACD crossover from an oversold position, though this cross hasn't quite happened yet.


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So there are some signs that bulls could find support here, but I would like to reiterate that this is a dangerous market for the inexperienced, and it's easy to fall into the trap of buying "the whole way down." Accordingly, the chart below outlines the bearish potential of this wave structure, and should serve as a warning to the over-eager. While an oversold rally could begin at the drop of a hat, it's simply not clear which direction the market will head from here, and the intermediate trend still remains down.


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Interesting to note the still-neutral position of the Dow Jones Transportation Average (INDEXDJX:DJT) (seen below), which continues meandering about within a large triangle. This further underscores the fact that the broad market is still undecided. It does seem to have clearly defined the triangle boundaries now, so is likely to run with the next breakout.


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In conclusion, I feel part of my job is to note potential turn zones, and the market has reached one. That being said, the intermediate trend is down, so this is by no means an "all clear" for bulls -- it's simply a zone where a reversal of trend is possible. With that in mind, the central bank liquidity pumps are due to start flowing this week. So while many traders are quite bearish, I'm not completely sold on the bearish outcome yet. But I'll let the market dictate its plans -- I am remaining quite cognizant of the fact that if support fails here, the market could easily experience a panic sell-off. Trade safe.

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No positions in stocks mentioned.
The information on this website solely reflects the analysis of or opinion about the performance of securities and financial markets by the writers whose articles appear on the site. The views expressed by the writers are not necessarily the views of Minyanville Media, Inc. or members of its management. Nothing contained on the website is intended to constitute a recommendation or advice addressed to an individual investor or category of investors to purchase, sell or hold any security, or to take any action with respect to the prospective movement of the securities markets or to solicit the purchase or sale of any security. Any investment decisions must be made by the reader either individually or in consultation with his or her investment professional. Minyanville writers and staff may trade or hold positions in securities that are discussed in articles appearing on the website. Writers of articles are required to disclose whether they have a position in any stock or fund discussed in an article, but are not permitted to disclose the size or direction of the position. Nothing on this website is intended to solicit business of any kind for a writer's business or fund. Minyanville management and staff as well as contributing writers will not respond to emails or other communications requesting investment advice.

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