Weekly Bear: Here’s How To Predict When The Market’s Magic Hand Will Appear

The Wall Street Journal and other major media outlets reported late Thursday that the stock market reversed from crash to rally because the Fed had changed its tune on interest rate policy. The rationale was that traders started buying because the Fed will no longer stick to a schedule of ¼ point increases in the Fed Funds rate every 3 months. Instead it will take a “wait and see approach.”

As the Journal’s Nick Timiraos reported, the massive intraday rally was all the Journal’s doing.

“But as they push up their benchmark, they are becoming less sure how fast they will need to act or how far they will need to go, and they want to assess how the economy is holding up under moves they have already made.

How they manage this new, less-predictable approach will depend in large part on the performance of the economy and markets in the weeks ahead.

On Thursday, the Dow Jones Industrial Average tumbled as much as 785 points before paring those losses. The rebound accelerated late in the session after The Wall Street Journal reported on the Fed’s evolving thinking on rates.

Aside from my usual LOL when reading Journal’s typical self-serving nonsense, as a technician I saw immediately why the market rallied when it did and where it did.

And you already know why the rally was so sharp. The market’s current trading range has been crossed so many times in the past year, and especially in recent weeks, that it has become “thin.” It’s almost as if there are no bids or offers within the range. So the market races back and forth between the extremes like a raving lunatic.

When The Going Gets Rough, The Magic Hand Shows Up!

Aside from speed of the movements, the market reversed exactly where the charts suggested it would, at the bottom of the range, where strong support was indicated. Does the Fed have a chartist in house to time the releases of news that will assist the market in turning where it should? We’ll never know, but I’ve been watching this stuff for a long, long time. When the going gets rough, it always seems that the magic hand is nearby to change the market’s direction.

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Eventually however, the market must do its thing. And the evidence that I track still says that this market is going a lot lower for a lot longer. Do not be distracted by all the nonsense about whether the Fed will slow its rate increases. The only thing that matters is the Fed’s bloodletting of the financial system under its program of balance sheet “normalization.” Until it reverses that policy and restarts some form of QE, stocks will remain under pressure.

Should We Now Buy Puts On Breakdowns?

So is it time to start chasing breakdowns with our SPY put plays? Maybe, although I still like the tactical approach of buying puts when the market rallies to obvius resistance levels like it did this week, when it rose to 2800.

If I did buy SPY puts on a breakdown through support, which here on Friday would be 2610, I’d be sure to have a mental stop just above that level. And I’d again sell half when the SPY or SPX reached a key support level. Along with timing, prudent trade management with well planned entries and stops, are the keys to growing your trading account.

Good trading!

Lee

2 Responses to “Weekly Bear: Here’s How To Predict When The Market’s Magic Hand Will Appear”

  1. Lee’s analyses of the effect of the past expansion and now the shrinking of US and Eurozone Balance Sheets are really fascinating. I’ve been following it for months now, and all his predictions are beginning to come to fruition. I have never been able to work out just how the QE that has taken place in US and Europe worked its way through the finance system. Lee’s explanations of how it works, and the manipulations that are going on to catch the ‘ordinary’ investor on the hop all make sense. Invaluable guidance from Lee, thanks for it and keep it coming!

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