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Dollar Churn- Equity Addiction- Ponzi Shell Game: Welcome To QE2

A roller-coaster period of trade, ahead of and then directly after the FOMC Minutes of the last meeting were issued, left global markets looking volatile, a little exposed, and in desperate need of volume to soothe the brow of both bullish and bearish participants. 
With global yield starvation in full swing, and two, three, five, and ten year Treasury yields at all time lows yet still being bought, the paranoid feeling that something is just not right is all-enveloping. 
Like a crack-addicted drug user lining up to get the next adrenalin fix that will allow reality to take a break, the equity exchanges are now at the beck and call of the U.S. Federal Reserve and their mandate of creating a second quantitative easing program (QE2) at their November 3rd meeting.
Whatever the opinion of whether that will be good, bad, or indifferent, and regardless of the fact that QE1 did not create too much outside of resentment and anger, the thirst to tap into a market that has risk guaranteed by the Fed is compelling enough to drive equities and commodities higher.

On the flip side of the QE2-addicted equity and commodity market is the Usd, whose value is getting ground into the dirt at each Permanent Open Market Operation auction that drip feeds the Treasury drug into the veins of the Primary Dealers who, instead of lending to the wider market, are taking Discount Window loans from the Fed at zero to 0.25% rates, and re-lending the notes back to the Treasury.

The shell game has no pea; sleight of hand is obscuring the fact that all that is being achieved is a short-term fix at massive dollar cost, which is likely to have no long-term gain whatsoever.  In the mean-time, the market will be free to gorge on cheap dollars and will continue to ramp equities and commodities higher, and hold the dollar lower, until the very last drop of QE2 is priced in.

The kicker will be when the release does confirm or deny the levels of QE2, because at that time there will be huge outside pressure to see instant results from whatever the Fed does. This market is priced for perfection, and anything less will create a wall of short-sided equity and commodity trade that could easily wipe out the 8% September gains, and then some going into year-end.

Forex traders will be looking to the three main regional markets open and closes to generate price action, and will understand that short-dollar trades will only hold so long as equity markets stays above 1150 on the S/P 500. The barren equity exchange floors are testament to the fact that attention is all on the Fed crack-addict line, and the drip feeding of QE2 sound-bites that will sustain this ponzi-like scheme through until November 3rd.

Volatile, sporadic, violent reactions to tests of support on equity and commodity trade are in-line with central bank jawboning whenever the markets are in danger of dropping. Take a look, the short side of equities has been overloaded since the beginning of September, and insider selling is at 1000:1 ratios of seller to buyer levels, yet still, a sound-bite from the Fed is all it takes to ramp things higher.

Take care, bank early and often, and keep an eye on 4-hour chart momentum reads (RSI or Stochastic) that are struggling to break away from the Neutral area. The markets need volume if the next leg lower on the dollar is to happen, otherwise the churning around 77.00 on the dollar index will continue.


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Disclosure: N/A