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Federal Reserve Watch: All Eyes on Most Important Chart in the World


No matter how you invest, few instruments will be indifferent or immune once the FOMC has its say and markets begin to assess the implications of its decision.

I posted a longer article on the topic of a possible and widely underappreciated stealth US Treasuries rally in the making last week; this is – recommended reading, even if only to balance the "bondpocalyptic" froth that has built up since talk of the Fed tapering large-scale asset purchases began in May. I wanted to circle back around to the topic as we enter the pre-FOMC and pre-taper week.

For the most part, the Fed has been very quiet for a very long time about what it might do at its upcoming policy meeting. No matter, though; that vacuum is all too eagerly filled by the near-unanimous consensus of the elite coterie of economists and analysts paid to speculate about it that the "serially overoptimistic" Fed will taper at September's FOMC meeting on September 17 and September 18.

Estimates of how much the taper will amount to and whether it will be all US Treasuries, all mortgage-backed securities, or some amalgam thereof are the arcane details being argued now. The figure most often thrown around after early September's raft of macro data is a reduction of monthly US Treasury purchases by $10 billion, taking them down to $35 billion and thereby easing the Fed's monthly "pressure on the accelerator" from $85 billion to $75 billion.

But whether the FOMC does taper or not -- and if it does, to what degree -- are questions easily asked and answered, as relentlessly demonstrated over the last four months.

It's difficult to believe that the FOMC will disappoint such broad taper expectations. Deciding against a reduction, coming in too hot (over $20 billion) or too cold (from no reduction to $5 billion) would only further muddle and obfuscate its intentions in a time when it is desperately attempting to offer forward guidance with unprecedented transparency. The Fed knows, however much it postures behind white papers that provide intellectual justification for its unconventional actions, that its effectiveness relies solely on its credibility -- a credibility that has been challenged more in the last four months than in the previous six years.

Take all this under thoughtful consideration. For someone who actively invests in their portfolio or trades around price, the far more important question in all of this is: What will bonds do? That question gets much less play; it certainly does not get much play from the Fed, although the Fed is obsessed with that very question in private. The answer isn't likely to be as simple and intuitive (taper = bond sell-off; no taper = bond rally) as commonly suggested.

When it comes down to it, a single chart matters going into this. It is -- at least for this moment in time -- justifiably called "the most important chart in the world."

Click to enlarge

Housing, sentiment, capital flows, and the direction of the US dollar -- so much is either entirely bound up in or largely affected by what happens here next.

Will the 10-year hold its rising trend-line?

Will the hammer candlestick it has created thus far on the month grow into a larger reversal post-FOMC?

Will the dense field of Fibonacci cluster support (gray horizontal lines, denoted by the blue rectangle) hold as it did in the opening days of September?

No matter how you invest or what you trade, few instruments will be indifferent or immune once the FOMC has its say and markets begin to assess and reassess the implications of its decision. September 18′s announcement may spark that stealth US Treasuries rally that the proverbial "blood in the streets" seems to portend... or it might not.

Whether the world knows it or not, there's a lot riding on the fate of that little white diagonal line come Wednesday.

This article by Andrew Kassen was originally published on See It Market.
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