All Signs Still Point to Down - John Rothe | Portfolio Manager, Quant, Tech Geek, And Sometime Superhero To My Kids

All Signs Still Point to Down

Today’s stock market actions will be rather important to the longer term trend of the market. There is a longer term downward pattern beginning to emerge. A few big test lie in front of us. The first is to break out of the down trend. The more failed breaks above the trend line, the harder it is for the market to move upwards. The reasoning is simple: traders uses these trendlines as a guide to buy of sell the market. The stronger the trend, the more aggressive traders will be with their trades.

spx924-artais fund

After a break above the trendline, the next target will be the 200 day moving average. If we can trade above the moving average, then traders will feel much more comfortable with the state of the market.

One big event to watch out for is this Friday’s Jackson Hole (the annual gathering of central bankers in Wyoming) meeting. Market watchers have been hoping that Fed chair, Ben Bernanke will announce, or at the very least, hint at QE3.  However, the markets may be in for a big let down. According to CNBC:

“First, the Fed just took substantial action at its meeting earlier this month, all but promising to keep interest rates low for as long as two years. The unprecedented pledge, along with heightened concern over a recession , has helped push down treasury yields .

Second, just because it happened last year, markets should not to expect it to happen again. It is somewhat rare for the Fed Chairman’s Jackson Hole speech to be used to signal major policy changes—more likely he’d use it to signal a change in the outlook. But again, since the Fed fairly severely downgraded the outlook in its recent policy statement, Bernanke should be expected to hew pretty closely to that outlook.

It’s also rare for a Fed chairman, especially one this consensus-oriented, to get too far out front of his committee. The August policy statement clearly showed a willingness of the committee to conduct additional asset purchases.

Third, the recent policy change at the Fed sparked stiff opposition. Three FOMC voting members, all district bank presidents, voted against the policy, the first such explicit opposition in 20 years. At least two other Fed presidents are known to oppose QE3 at this time.”

We might just end up hearing a reworded version of the Fed’s last meeting –  something the markets will probably not like.

Comments are closed.