On Monday, the very critical S&P price area of 1620 probed, but once again Bernanke stepped in to save the day. The importance of the number will elevate further with today’s probe. The importance of a close below 1620 now will increase in credibility once it happens. It should end this upward move as it is a clear trend reversal which is probably why the Federal Reserve is defending it so vehemently. The bonds serve as the source of funds for the Federal Reserve to purchase stocks. The early morning saw a vibrant high energy unyielding rally that provided the source of funds to save the S&P Monday afternoon. The asset buying of US treasuries by the Federal Reserve last for literally minutes before they take the funds to buy stocks. This is now their primary objective.
Tuesday’s highs on the S&P should mark another lower high price area. Therefore we are showing declining tops but need to close below 1620. This market is probed, pushed, manipulated and slaughtered but has yet to have its defining close that is so important. Sometimes you wonder if all these theatrics are meant to lead up to Friday’s unemployment news. The bonds are not able to secure a rally and maintain.
A close below 1620 represents a complete reversal of all the fortunes of the last 3 weeks of trading. The next major reversal point would be a close below 1590. The Fed has created a situation from which they cannot extricate themselves gracefully. I know this sounds like a broken record as the Fed has always been notorious for creating situations that they cannot keep under control. We could see a 20% correction before summer’s end or perhaps even 30% to 40%. The bulls are getting their legs badly injured. Even the bonds today are undergoing problems with levitation. It has dawned on me that today’s S&P decline would probably be much worse if the Fed wasn’t still draining assets from bonds and trying to save the stock market. The bonds should have moved above 141 1/2 by Wednesday as that was still a minimum rally point.
As of Thursday, the bonds had a blow off to the 142 1/2 price area. This was never challenged the rest of the day. Instead the bonds served once again for the source of funds for the Fed to prop up the S&P. The bonds should be able to close above 141 1/2 as the first stepping stone but now a second stepping stone at 142 1/2 is also important.
The most important feature not occurring Friday was a plus 1000 tick. The S&P rallied significantly but once again the internals did not share the bullish view to any great extent. We should have seen several high readings particularly in the morning that exceeded plus 1000. Therefore this market is a dichotomy of the true rally being somewhat suspect. We saw the S&P have a rally that pushed above 1640. This was fueled by the news of the unemployment, or at least the illusion of the unemployment report. Those trading bonds and those trading stocks had a different opinion of the news today. Bonds underwent lower lows throughout the day against a backdrop that suggested the Federal Reserve was continuing their Treasury buying unabated. The stocks did not share the same opinion as we saw a very diverse price movement between the two different markets.