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The Ben and Mario Bazooka Show
August 2, 2012 08:40 AM
WAITING ON CENTRAL BANK ACTIONS
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Mystery’s flashing amber
Go green when you answer
But the red on the rest of the questionnaire
It seems like the entire investment world is waiting for the Ben and Mario Show, for the central bank heads of the U.S. and Europe to pull the trigger on the reflation bazooka... or to at least pull the Reflation Rabbit out of a hat.
But the Fed news came and went on Wednesday with no action from Bernanke. The FOMC statement did little to encourage the animal spirits which have been betting that it’s only a matter of time before Bernanke must pull the trigger. Instead, it was more lip service about being vigilant and ready to act if necessary. As I like to say, Paris Hilton is also ready to act.
Perhaps Ben did not want to take center stage away from Draghi today. Could the Fed be playing it close to the vest, keeping their fingers crossed hoping for good employment numbers on Friday?
If so, it’s quite the gamble with the
) diving below a Bowtie of its 200 and 50 day moving averages. In the process, the RUT all but gave back last week's rally.
Money managers often try to ‘hide out’ in the ‘thick’ big caps, so the action in the RUT may be a bearish leading indicator.
Moreover, Wednesday’s distribution day in the RUT follows what looks like downside continuation from Gapfill on Friday after it broke below the bottom rail of a rising channel (a week ago Monday) containing price since the June low.
But for now, Bernanke is unwilling to try to kick start the economy with more stimulants. Why is he hesitating?
Maybe he’s more scared that additional Fed maneuvers won’t have any real effect than he is scared of the Deflation Dragon.
And maybe he’s more scared that new twisting will have no economic effect, leaving the institution of the Fed to do the watusi in front of Congress. The last thing Bernanke wants is the point of recognition where the Fed is seen to no longer have any effective tools.
If Bernanke actually unleashed QE3 and the market didn’t rally or worse, sold off -- the jaw bone would come undone. Maybe in his heart, Bernanke knows more QE will suck any last lingering strength out of the consumer by jacking up food and energy prices. Maybe the Fed is afraid of the law of diminishing returns.
Perhaps the Fed is scared that the 3rd time may not be the charm if they invoke QE3. After all, QE2 and Operation Twist have done little for the economy. The Fed doesn’t want to look like a toothless paper tiger.
With the Fed failing to act now, all eyes are on Draghi today and then later this month on Jackson Hole, but that is close to the election. Fed action that close to the Presidential election would give the perception that the Fed is a political pawn. The Fed cherishes its claim to be a nonpolitical entity. Ben is in a box.
I can’t help thinking that the Fed is hoisted on its own petard like Frankenstein with a bolt through his neck -- the only fragment left connecting the brain to the body. Has the experiment in QE detached the market from the economy with a monstrous result?
Has the EU experiment resulted in a creature that will create a global depression?
Is Draghi’s statement that the ECB will do whatever it takes nothing more than rhetorical science fiction?
Can a dead monetary union walking with such disparate parts and cultures be cobbled back to life without a fiscal heart?
Like Mary Shelley, the author of Frankenstein, who dreamt about a scientist who created life and was horrified by what he had made, are some members of the FOMC actually horrified by its actions over the last 12 years?
) shows a potentially bullish Plus One/Minus Two buy setup on its dailies, I can’t help but wonder if Friday’s square-out at 1385 is going to end up being as significant as the April 2/1422 square-out on the S&P.
Click to enlarge
To recap, back in April we wrote that we believed the time/price square-out could be the high for the year. This was a powerful vibration with April 2 being 90 degrees from the number 1422, which vectors the all-time 1576 high. 1422 is 1 revolution of 360 degrees down from 1576. In addition, 1576 and 1422 align with the first week of July. The importance of the recent spike to close at 1385 is that this number is opposite the key April 2 date.
Let’s put the pieces together. My takeaway is that April/May was a key time period being 1440 degrees (Fibonacci fractal) in time from the pre-crash pivot high in May 2008. At the same time, 2012 is 144 Fibonacci months from the 2000 top. August 2000 was a test failure of that years spring top. Is this August a repeat?
So, the square-out in the April/spring timeframe confirmed by the across the board selling in a broad array of stocks put the big-picture defense team on the field. Despite the rebound from the early June test of the 200 dma by the S&P, many glamours and former leaders remain waterlogged -- names like
) (which we used as a short on Monday/Tuesday) and
Click to enlarge
Check out the weekly Train Tracks sell signal in April on CMG. It is also worth noting that the crash in CMG occurred from a third lower high. Note the little false ‘pinocchio’ in CMG above its 50 dma just a day before the Earnings Gap.
We also focused on April as a likely spot to conclude a multi-year test of the highs by using the cycles from 1937 and 1962 (900 months and 600 months ago, respectively). So April was a good place to look for a test. A good spot to look for that test to play out price-wise was a cycle in price down from the 1576 high, which we know is 1422. This was the S&P high in April.
A good place to find a last gasp, test of the test, might be 90 degrees in time from the April high, or early July. In early July, the monthlies turned back up on the S&P, defining a high.
While the S&P has been able to recapture the July 1363 high, “souping” back below 1363 with authority could indicate a false breakout last week, a possible short squeeze courtesy of Draghi.
This key 1363 level ties to a 50% retrace of the recent swing from last week's low to this week's high. Moreover, a 50% retrace from the June low to this week's 1392 high gives 1329 S&P.
1329 was last week's low. If for some reason Draghi doesn’t deliver ‘whatever it takes’ and/or Friday’s jobs numbers are even more dismal than is being discounted. and the S&P violates 1329. we’d be left with a bearish outside down reversal week. This would probably confirm fears that the 1385 square-out is as formidable as the one in April. indicating a test of a test failure of the highs.
The T-Rex in the ointment is that going into the weekend, we are 90 degrees from the key May 1 pivot high. Remember, this was the peak in the
Dow Jones Industrial Average
). Is it possible that this time frame marks yet another swing low if the indices get smacked around into the weekend? Anything is possible, but turning points can be accelerations as well as highs or lows, so caution is warranted on a stab back below the 1360 level that in turn leads to a weekly reversal below 1329.
Importantly, the 200-day moving average on the S&P has been rising since the June test and is now at 1320-ish. A second break of the 200 dma in August could result in a blood bath.
Remember, the first mouse gets the squeeze (the first undercut of the 200 dma in this instance) and the second mouse gets the cheese. A second break below the 200 dma on the S&P arguably signifies that a 5th of a 5th wave ended and the market has embarked on a big 3rd drive down in the secular bear market. The first drive down was the decline into October 2002. The second drive down was the decline into 2008/2009.
While the DJIA/S&P look like they are holding, the action in the RUT and the
) are troubling. Like the RUT, the Transports knifed below its 50/200 day moving averages on Wednesday, setting up what looks like a Friday weekly close below these key moving averages. Moreover, it is now looking increasingly doubtful that the Transports will be able to close above their May high even if the DJIA did, and fail to negate a Dow Theory Sell Signal issued months ago. Last Friday, both the RUT and Dow Transports had recaptured their 50/200 dma’s. Now, short of another miraculous turnaround, they are set to relinquish them into this weekend.
Fast moves come from false moves and false signals. Last week's late surge of strength that saw the S&P probe its July high and the RUT/Transports recapture key levels may have been a false move, wiping out strategic shorts. That may serve to weaken the market's underpinnings going into Draghi and the jobs numbers, leaving the market in a precarious position.
The lack of action from the Fed on Wednesday probably indicates that there is no offense for them here, and that the most that can be expected is defense. But at this point, sold-out/stopped-out bears are armed with torches and pitchforks, and another break of the S&P 200 dma may embolden this angry crowd.
Yesterday’s report noted the picture perfect set up in
) on an up-opening to $618.
We stated that $618 is 8 revolutions up from the 2008 low, with the 644 top looking like a parabolic 90-degree overthrow.
See yesterday's Square of 9 on Apple again:
Click to enlarge
AAPL reversed immediately off $618, falling to $603, and in the process left another Topping Tail similar to the one on July 10.
A 3rd reversal ‘tail’ would carve out a Charlie’s Angels sell setup and could lead to a snap of what is now a 3-point rising trendline. As you may recall, the last swing low in AAPL tested a rising short-term trendline. Now the stock has a 3-point trendline that roughly coincides with the 50-day moving average. This looks like the key level for AAPL if lower prices play out from here as a break of the 3-point trend line coupled with a break of the 50 dma probably confirms the idea that a return-rally test of the highs has played out.
No positions in stocks mentioned.
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JEFF COOPER TRADER
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