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Charts to Watch If Fed Begins Second Phase of Quantitative Easing


The Fed seems to be telegraphing that something needs to be done to boost the economy and increase liquidity. Here, what to watch if QE II happens.

Editor's Note: For the full version of this article and a related video of the mentioned charts, click here.

The elephant in the room this week is the Fed meeting Tuesday and statements on what it might do with regard to quantitative easing. The Fed seems to be telegraphing that something needs to be done to boost the economy and increase liquidity.

Obviously any return to quantitative easing, or QE II (as quant easing I officially ended March 31), would likely impact gold (higher) and the dollar (lower), as well as the overall market (S&P 500), which rolled over shortly after QE I was phased out.

Until the recent up-surge, the S&P 500 chart had the makings of a head-and-shoulders top, with the peak in April and with the neckline at 1040. It broke the neckline at the start of July, went down toward 1,000 and held and turned up in a surprising way and hasn't stopped since, reaching a high last week of 1127.

If the SPX breaks above 1,132 and certainly above 1,151, which we can correlate with the prior high of the left shoulder, then we're going to see a total invalidation of the head-and-shoulders top. If the height of the right shoulder takes out the height of left shoulder, which is 1,152-51 and sustains up there, then I think you'll see the stock market take off.

What leads me to believe that it's more possible now than at any time in the last few weeks is that quantitative easing might be in full bloom as a policy prescription by the Fed right at the time the SPX is exceeding the right shoulder. So we may have a quantitative easing phase II that takes the SPX above the April highs at 1,222, projecting in a measured move (tacking on the distance from the head-and-shoulder bottom to top) of 1372.

In addition, there's a confluence of moving averages at this level that are all turning up.

Within the SPX, there's probably going to be some serious upside action in energy and on the industrial side, and also in utilities and the financials, the two we focus on in the video this week.

Around the same time there was a confluence of moving averages in the SPX, the Utilities Select Sector SPDR (XLU) had a concentration of moving averages and they're all now on the upside and going great guns. The XLU currently is consolidating and looks like it's turning up off of a pretty major base pattern. When these W-patterns pop out, they're pretty impressive. XLU has a big W-pattern, and the upside target on this is enormous.

In addition, it pays a relatively high dividend of 4% (while the SPX is yielding less than 2%). And within the XLU are names like Consolidated Edison (ED), Entergy Corporation (ETR), Exelon Corp. (EXC), Duke Energy Corporation (DUK), and Public Service Enterprise (PEG), all of which are paying 4-5% dividends.

So, a very impressive situation has developed in utilities, and if you tack on capital appreciation possibly, the utilities look like a home run here.

Taking a look at the financials, specifically the SPDR KBW Bank (KBE), which is the regional and money center bank ETF, we see the moving averages of the KBE are all clustered together just like the SPX was clustered together a few days ago, and broke out to the upside. This moving average confluence, plus Friday's low-high close, suggest that maybe we'll get a breakout to the upside in the KBE. The money center bank portion of the KBE is still grappling with what financial regulation means, and that's why I'm not in favor of buying the KBE at the moment. But I am in favor of buying some of its components, such as the regionals.

Let's start with a few money center bank charts. Bank of America (BAC) may be basing, or it may still be in a downtrend -- it's a tough call. But if I want to put my best foot forward, and put my capital somewhere where it has the best chance of success, Bank of America wouldn't be my first choice because it's a struggling chart. All the moving averages are pointing down, not a good sign, all bearing down on the 14.50-14.40 area, and it looks like it could have a problem. It may actually go down again. So, I don't want to get involved in this.

JPMorgan (JPM) looks better than Bank of America, with the moving averages pointed up. It looks like it made a significant low, and has pulled above resistance. But to me the pattern itself looks like it's going to have do more work, maybe come back and test the averages. While I know JPM will benefit from QE II just like it did from QE I where it got very cheap money, I'm not sure how Fin Reg will impact it.

Among the regionals, which are much less encumbered by Fin Reg than the money center banks, Regions Financial (RF) is one to watch. It's in a basing W formation with a confluence of moving averages, and looks like its consolidating for a move up to retest the highs at 8.75 to 9.00. The 200-day is starting to point up, and as long as RF stays above 6.75, it looks good.

Huntington Bancshares Inc. (HBAN) looks even better than Regions Financial. All the averages are clustered, with the 200-day still moving up. The pullback held the dominant trend line from January 2009 to March 2009. It's consolidated in the 6.25-6.00 area, and it should start a new upleg and go to new highs.

Finally, Fifth Third Bancorp (FITB), has an improved, and improving, near-term technical situation. Keep in mind it broke its 200-day momentarily for a few days, but came back and looks like it finished the correction. The correction is a very small percentage of the entire upmove, so proportionally this looks like a bull flag ready to take off, especially if it take out resistance in the 13.60-13.90 area.

So, there we have some of the regionals that look appealing on a technical basis now as we possibly go forward into quantitative easing phase II.
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