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Technical Analysis: Are Investors Chasing Dreams Across the Sky?


Our current economy does not justify the trading we're seeing.

While the Fed remains accommodative and stipulates no end in sight to the negligible interest rates, the bond-buying quantitative easing of $85 billion per month is posing some serious questions. Yet, these questions are not only about whether or not the economy can sustain itself without the seemingly permanent printing press; they also involve Ben Bernanke's replacement, the timing, and whether or not he is going to begin the tapering of QE prior to the end of his second term (January 31, 2014).

The Street, investors, and economists all agree the market is not expanding and being supported by basic economics. With the first-quarter GDP numbers adjusted 40% lower (1.8% to 1.1%), the latest reading of 1.7% seemed rather impressive. Yet 2.8% to 3%, at this point, looks to be not in the cards for the latter half of 2013. Interestingly, investors found good in the malaise. Last week I spoke about a small consolidation before determining the next short-term direction. With last week's move, the probabilities lie with higher prices.

Click to enlarge

On Thursday (August 1), the S&P 500 Index (INDEXSP:.INX) broke above the recent consolidation (1,675-1,700) and sustained it in Friday's trading session, post-employment numbers. This technical posture shifts the short-term risk metrics into a better position as investors can now have some semblance of a stopping point for the risk-on trade. Better said, if investors wish to increase their exposure at this juncture and do not want to risk an 8% retracement back to the intermediate-term trend, the latest Floors & Ceilings pattern (bottom of the latest consolidation and top Fed-tapering day), is an easy risk/reward entry.

Interestingly, the lyrics to the '67 song by Jimmy Webb, recorded by 5th Dimension, mention chasing dreams across the sky. The market seems to be absent of, nor does it want to be working with, some pretense of rationale. For now, it appears to be okay to live in a fairytale. But remember this: Some fairytales have a giant ready to squash whatever hopes the benefactors are holding. This, by no mean, is meant to imply that you should not be involved with the story. It simply suggests if you're going to enter, keep your wits about you as you never know what lurks around the corner. The fall from these lofty heights can hurt more than you anticipate.

Hope this helps and finds you well.

Editor's Note: Read more at Tesseract Asset Management.

Twitter: @TAM_News
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No positions in stocks mentioned.

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