By Phil Davis of Phil’s Stock World
Yes, it’s a RISING channel!
That’s why we are long-term BULLISH but short-term BEARISH. As noted by TraderStewie (chart TraderStewie, click on to enlarge), this is a movie we’ve seen before, with the S&P making a power-move to the top of the channel, only to find resistance there.
If we break out over that channel (for more than a spike), I will be HAPPY to play a new channel higher but let’s just make sure we get there first! In this chart of the Equal Weight Index, each company is treated as 0.2% of the S&P to eliminate the distortions of runaway Momentum Stocks.
On our Big Chart (below), the S&P is already off to the races, over the 1,760 line (+10%) that marks the top of the range we’ve been following since early 2009. Overdue for a 10% correction is an understatement here!
It’s very hard to quantify where we should be as the Dollar has been diving – all the way from 84.96 in July to 79.06 last week. That’s a 5.8% drop in the currency, which is the measuring stick we use to put a PRICE (not a value) on the stock market. In early July, the S&P was at 1,600 and, wouldn’t you know it, 1,760 is EXACTLY 10% over that line (the Must Hold line on our Big Chart).
The Federal Reserve’s stance on QE makes its announcement tomorrow at 2pm so important. Its actions will determine whether or not the Dollar is bottoming here and, if the Fed is not looser than it has been, we are likley to see the Dollar move back over 80, most likely to 81, which is a 2.5% move up in the Dollar. There is is roughly a 2:1 relationship between the Dollar and the indices, so if the Dollar moves up 2.5%, I think we’re looking at a 5% pullback in stocks. Oil and other commodities might also begin to break down against a stronger Dollar.
As it stands, these are the last few POMO days of the month and the Fed has already blown through over $50Bn in October (out of $45Bn it is supposed to spend on Treasury Purchases). The Fed has nothing left to contribute in the last few days other than a couple of Billion they found in the couch cushions. We don’t get the new schedule until 3pm on Thursday, but yesterday’s $5Bn injection was essentially it for the week.
