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Jeff Cooper: Can the Fed Pull a Houdini When the Helicopter Ride Ends?


The Fed has been on an excellent monetary adventure for 6 years. What could possible go wrong on the way out?

There are two opposing non-conspiracy camps on what has been the longest dollar rally in more than 40 years:

1) Dollar strength is a sign that a strong recovery is taking hold in the US.

2) Deflation is breaking out throughout the world and fear is driving money into the dollar.

As a fellow trader said over a month ago, "when currencies trade like social media stocks, it's not good for an über-leveraged financial system."

Currencies are all relative because for the most part nothing backs them up, other than perhaps the credibility and status of the country in question.

Let's say the dollar is ramping because of deflationary fears. What happens if a great deflation wave hits with the US being the greatest debtor nation in history? This is a stark contrast to the US being the greatest creditor nation in the world at the time of the Great Depression.

Because the debt level is so great, theoretically, if deflation hits, the severity will be great.

This may in part explain the Fed's excellent zero interest rate monetary adventure of the last 6 years. They have been expecting (maybe hoping and praying?) for a strong economic recovery to bail  them out. They are all in. Maybe they buy into the idea that escape velocity is front and center in the economy. If so, that should be a better show than an Houdini escape act.

Ditto their own exit strategy.

Being 'all in', at the first whiff of deflation, the Fed has no choice but to ask for a 'marker' and push more chips into the pot.

This is a battle royale, nothing less than a war. And while the US conquered all of Europe in 4 years in World War II, recent military episodes haven't been going so swimmingly.

Do you get the feeling that government is too serious a business to be left to politicians?

What will happen when push comes to shove?

I don't know.

However, I fear that it will be an ugly day if the Fed backtracks on QE.

All any central bank has is their credibility and half that word, credit, is wearing as thin as their ability to stimulate economic growth.

In a word, what happens when the jig is up and players refuse to ante up for the emperor's undergarments when it's full monte time?

As horrendous as the debacle in 2008 was, it was relatively short-lived. The SPX recaptured prior highs in April 2013, 6 years after the 2007 peak.

It took 25 years for the SPX to set new highs following the 1929 peak.

So the question arises, has the market's rise been smoke on the water? If so, is there another debacle knocking on the door?

Interestingly, the SPX is 540 degrees in time from April 2013, mirroring the 540 degree time frame from gold's waterfall failure.

540 degrees is a true square as it represents a 6 sided square or cube (90 degrees X 6).

Since that time, gold has had its ups and downs but has not really snapped the climatic low made in late June 2013.

September saw the biggest monthly decline in gold since September 2011 as it succumbed to a dollar rally that went asymptotic in September.

Let's take a second look at the gold chart from yesterday's report.

On Monday, in the largest one-day rally in two months, gold rebounded from just above major swing lows -- just as the SPX turned tail on Thursday from ABOVE what most players probably expected would be a full on test of the August lows before any meaningful rally.

Checking the junior gold miners index Market Vectors Junior Gold Miners ETF (GDXJ), we can see what looks like bullish Train Tracks.

An upside gap today/Wednesday in GDXJ that holds could install an Island Bottom.

Note that the pattern is coming from what looks like the lower rail of an important channel. It looks like there is a clear shot to the 35 strike on a trading basis.

Strategy. The first Minus 1/Plus 2 daily sell set rejected stocks on Monday as the SPX set an opening spike high as expected on a 'Pinocchio' of the key 1971 level (90 degrees up from Thursday's 1926 low).

Decline through gapfill perpetuated downside acceleration. Short-term follow through targets SPX 1950ish (195 SPY).

Form Reading Section

Twitter: @JeffCooperLive

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