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Fed Day: Does the Wooly Bully Still Have Fangs?

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The tape is used to fool traders, for often when stocks look the weakest on the tape, they are the strongest as accumulation is taking place. At other times when they are booming and very active and appear the strongest, they are really the weakest, because the insiders are selling when everybody is enthusiastic and buying.
-W.D. Gann

Momentum markets by their very nature ultimately become completely dominated in their later stages by (yes, you guessed it) momentum.

In other words, as time goes on, they become based puely on the premise of following the leader and the greater fool theory.

That’s what makes them more dangerous as they grow over time: once a genuine institution shows up to sell, the market can buckle. This is especially true in a low-volume market that is promulgated by programs, algorithms, HFTs banging the SPY (NYSEARCA:SPY) and other ETFs back and forth without generating anything other than an illusion of liquidity.

This doesn’t stop players from talking their books about buying stocks because they are good values. What do you expect institutions who are the hand-maidens to performance considerations to say?

I don’t believe stocks are being bought because they are considered good values here.

In fact, in 2009, the indices never became ‘good values’ based on historical precedents of value that were seen at other secular bear market lows like 1974 and 1982.

This is an advance that at every stage and setback has been backstopped by a new-fangled Fed program. It is not a natural market.

That’s what makes the beginning of the end of the Fed’s asset purchasing programs today so historic, even if it is perceived as just a token taper.

Are market participants on the verge of finding out if Hoofy has any fangs without the Fed?

The bulls are hoping that May was a sell-the-rumor (of Fed taper) and September will be a buy-the-news. That may be the case, at least in the short-term, or it just may be what Mr. Market wants us to believe.

In other words, for example, if the S&P 500 (INDEXSP:.INX) offsets Monday’s tail, as noted in yesterday’s report, we could see a spike that satisfies a nominal new high -- perhaps a high to the illusive 1739 level. This is a full revolution of 360 degrees in price up from the big 2007 top at 1576.

If that should play out, it will dovetail with a ramp up into quarter-end window dressing and serve money managers nicely. That doesn’t mean that such a ramp must last until September 30 -- there could be players that cut and run ahead of the pack, selling into the institutions that must chase performance.

A daily Dow Jones Industrial Average (INDEXDJX:.DJI) chart for 2013 exemplifies why the notion of a spike to a nominal new high could be a selling climax, a third drive to a culminating high.

Going into the May top, there was a clear-cut channel defining a strongly trending market. The break off the May high into late June snapped the lower rail of the channel.

There are two important things to observe:

1) Following the break of the channel off the May top, the DJIA rebounded to backtest the lower rail of the rising channel for the first half of the year. This backtest defined the August high.

2) The ensuing decline saw the break of a second lower channel which was created by paralleling a line off the June low. Higher prices from here look to test a cluster of resistance formed by a backtest of the lower rail of the second channel as well as a trendline connecting the May and August peaks.

Conclusion. The DJIA carved out an N/R 7 Day (the narrowest range in 7 days) going into today’s important Fed meeting. Head’s up for a possible Spike & Reversal pattern ala the May high.

Today looks like it could be a wild and wooly FOMC Cha Cha day where the 3rd Cha becomes the directional move du jour.

When you are in the market on either side, it is but human nature for you to hope that it will go your way, and you, therefore, give greater weight to any event that seems to indicate a favorable move to your side. When you are out of the market, you are able to see things as they really are, and judge the market without a distorted view with hope and fear eliminated.
-W.D. Gann

Form Reading Section

On Monday, we pointed to the sell-side setup in Facebook (NASDAQ:FB).

Tuesday, we sent a note pointing to a long side play in FB.

FB satisfied our 42.50-ish target.

1) The early upthrust in FB suggested an attack of initial resistance at around 43.75.

2) A pullback played out from this level.

3) This first pullback looked like a failure (point A) but instead hooked back to the topside.

4) Once FB regained the Opening Range Breakout (ORB), it implied a trend day would play out. This occurred following the first pullback and coincided with an explosion through the 43.75 initial resistance.

5) Typically, an intraday run like this will see a measured move which targeted around 44.40-44.60. The important thing to notice is that once this objective was satisfied, FB got a second wind lifting it to a test of its record highs.

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POSITION:  No positions in stocks mentioned.