Saturday 10 October 2009
Has POMO lost its magic, or will manipulation win again?
[POMO = Permanent Open Market Operations, the Fed lends money into the
banking system for the express purpose of supporting the stock market.]
[There a reason why Goldmand Sachs stock has been one of the strongest
performers, bottoming months before the general market.]
This artificail stimulation has born a substantial market rally since March
2009, revived certain government-bailout stocks that were on life support,
all while the US economy is languishing and the public have seen their
"wealth" dissipated. There is a disconnect between the stock market rally
and the dwindled worth of most people's 401ks/IRAs/portfolios. If the
economy is strugging, businesses barely surviving or going out of business,
how can there be such a robust stock market rally? The unprecented
running of the Fed printing presses pumping out fiat Federal Reserve
Dollars and the use of POMO seem to best answer why the government-
backed entities are feuling this otherwise enigmatic rise.
Rather than learn from the lessons of the irresponsible bank lending
practices involving the granting of mortgages to anyone who could fog a
mirror, and the use of derivatives by Lehman Bros, AIG ilk, the Fed has
taken pages from those practices and implemented their own form of
irresponsible financial largesse to make it look like the emporor really is
wearing clothes. The might of the Fed deep pockets is prompting most
everyone to look the other way. One day, the voice of someone saying
the obvious will prompt a stampede to avoid yet another calamity in the
making, and excuses will once again be forthcoming, "How could this
Fear, greed and denial is the short answer.
What does all of this have to do with charts? It is one of the few ways that
makes sense to explain the ongoing anomolies occuring in a no-supply-
hardly-any-demand rally. When the character of the internal structure of
the market keeps flashing warnings, and then rallies as if the warnings
were never given, it is very difficult to have conviction in something that
goes against technical "common sense," for lack of a better way of
Since the 23 September high on the daily chart, there were seven lower
closes during the next 8 trading days. The last three of those days were on
the highest volume of three consecutive down days since the March lows,
and price declined under the previous swing high established in August, all
red flags and signs of internal market weakness. The results?
The market produced a five day rally on declining volume and smaller
ranges, more signs of internal market weakness. Friday's close rallied to
the highs for the day and week. The only question is, will the POMO
influence carry the day next week, or will usually reliable warning signals
stop this weak rally, just under the previous resistance highs and allow the
market to undergo at least a "normal" market correction?
The high from 21 September is still the high for the cash market, but was
exceeded two days later in the futures with a failed probe. A horizontal line
drawn across the first high shows where the most important resistance is.
Price broke the up trend support channel line decisively, with a wide range
down on heavy volume, a sure sign of sellers winning an important battle at
a support area. While price has since rallied, it has not regained the
support trend line, also not a positive sign.
A few observations that are red flags can be made about Friday's activity.
The range is small, a sign that buyers were too weak to extend the range
higher, volume was lower, [the daily chart does not show full volume for the
day until the next trading day], and price closed right at the top of the range.
Is that important?
Normally, yes. Everything just described occurred just under resistance
where one would expect exactly this kind of market activity. The close right
on the top can mean exhaustion, a "stuffing"-type of close that leads to a
turn around after such a weak retest. Normally.
We show this "stuffing" close on a 60 minute chart. [The intra day chart
reflects day session trading only.] It can be seen that the last few small-
range rallies were also gaps up, and these gaps, occurring at the top of
a rally and not extending higher, can be exhaustion gaps, which fits right
in with the "stuffing" close. This is not "The Little Engine That Could," a
children's story where everyone hopes and cheers for the struggling little
engine to make it over the mountain top as it huffs and puffs. This is an
adult fairy tale that masks a scarier outcome resulting from all the
POMO-induced huffing and puffing that has failure written all over it.
The monthly trend is down. The daily trend is up, but...
...it is just a matter of time.
Charts tell a story. We just told ours. Maybe it should have started it with,
"Once upon a time..."
Disclosure: No Position