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Is the Fed Serious, or Is It Simply Trying to Scare Speculators?


Is the Fed going to eliminate QE3 soon, or is it just trying to slow the market?

Now, however, responsibility and prudence dictate that it's time to give the bears a bit more airtime. As of yesterday, we cannot ignore the fact that we do have the potential of a completed ABC rally off the November lows. While I still prefer the more bullish outlook, which suggests a fourth wave correction and fifth wave rally still to come, there is another fact I can't ignore: every rally leg since October 2011 counts better as a corrective rally. And that means if this current rally follows that same pattern, it could be entirely complete.

So: here we are with the market having now completed three clear advancing waves (shown below as the black ABC). That means we have to at least consider, and remain aware of, the possibility that this is all she wrote for the intermediate term, and the market could embark on a much deeper correction than I'm currently anticipating. The daily chart (not shown) shows a bearish reversal bar, and down volume vs. up volume was strong yesterday -- and those warnings must be respected, and both typically argue for lower prices over the coming sessions.

Click to enlarge

Let's also take a look at the Philadelphia Bank Index (INDEXDJX:BKX), which I've been using as a leading indicator for a long time now. BKX actually warned of this turn in advance, when it made a new low last Friday. I noted the warning (before it happened) in Friday's update, but was uncertain how to interpret it immediately.

The BKX chart also presents another potential issue for bulls: This leg can now be counted as a complete five wave rally, which would suggest a deep correction is forthcoming. Quite frankly, that last bit of wave structure is an absolute mess and nearly impossible to interpret cleanly, which leaves enough wiggle room for the black alternate count. Nevertheless, this may be an early warning sign and needs to be watched carefully going forward.

Click to enlarge

Since the chart above runs as far back as Stockcharts will allow me to go with the 30-minute history, I've also drawn up an hourly chart highlighting some key longer-term support lines.

Click to enlarge

In conclusion, while we've been on alert for a turn over the past week, I've been loath to front-run anything in this market. Yesterday was the first clear warning shot from the bears, and while there's nothing yet to indicate this is a turn of intermediate magnitude -- and I presently remain in favor of a bullish intermediate resolution -- I would urge readers who didn't previously take profits in the target zone to be extremely cautious at this time. Targets were reached, "and there's always the next trade." Trade safe.

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No positions in stocks mentioned.
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