Fed up

I suppose it's inevitable. The Fed was bound to stick their nose in the market and mess things up cuz it's been so long since they've done anything. They wouldn't want us to start thinking that they aren't really doing anything so they HAD to do SOMETHING. My general feeling is that they are stuck between a rock and a hard place. If they sit back and do nothing everyone will blame them for sitting idly by while the market fell in on itself. Of course, they have to know that when lowering the discount rate doesn't stop this "credit crisis" (the headline CNBC has been blaring across the screen everyday for the last 3 weeks), they will be blamed for either not reacting soon enough or for doing the wrong thing. Bernanke has the worst job ever. Plain and simple. It will be interesting to see if they will step forward in the next few weeks and lower the fed funds rate or not. I really think Bernanke wants to raise this rate, has wanted to for months, but knows he can't do that right now.

So looking at this pull back I have to ask myself a couple questions. First off, is this just a pull back similar to others we've seen in the last 18 months? Or, is this a major correction that will bring us all the way down to our long term support lines? Let's go to the charts.

Here is the S&P 500. A very concerning aspect of this chart should be the fact that it has retraced 100% from the lows in March (granted this was just intra-day movement, but still, that's a major correction. None of the recent pull backs have retraced so far.


Looking at the trading on Thursday I can't help but think that someone got word about what the Fed was planning on doing Friday. The movement this week certainly established a down trend that will probably continue despite the support the Fed's actions created - messing up my bearish set ups!

The Dow hasn't retraced as much as the S&P and I've already discussed the weakness I see there. This week completed the broadening formation and the support line is holding as resistance, for now. I'm going to put an Elliott wave count on the chart below just for kicks and giggles. I'm no Elliottician but it looks pretty clear to me.


If you put some Fibonacci's on waves 1 and 3 you'll see that 3 barely surpassed its expected move and 5 hit exactly where it should have, almost to the dollar. Cool stuff. But hey, it's all just a random walk anyway, right?

I think the most interesting part of the current pull back is what bonds are doing. This pull back is either a HUGE overreaction or it's more significant than those others we've seen recently. The chart below is an index tracking the interest rate of the 90 day T-bill which should follow stock prices. I've highlighted in blue the "not-a-correction" it did during the summer of '06 and in green the reaction post Feb 27th of this year - which trended opposite the broad market. The recent movement can't even be compared to those times. In fact it really hasn't moved this fast since the strong movement that start back in the fall of '05.


So what does this all mean? Well, I think it means that the bear market will continue for a little while. I think the Fed's actions won't stop the down slide, just slow it up a bit. I think it's going to create a bunch of bear flags on the short term to say the very least. It confirms what I said on July 27th.

I got stopped out of my spread on PCU and my trend trade call on GNK this week. My watch list for next week includes ICE, AZO, MA, and CEG.

PS - I have made a new rule. No more splitting the bid/ask on my option trades. Many times I've given up a buck trying to squeeze out an extra nickel or dime. On Weds this hurt me when I tried to enter an OTM put on the head and shoulders break out on ICE. I split the bid/ask and didn't get filled. I would have been up almost 400% on Thursday and even though it closed near the Weds low on Friday I would still be up 70% in the trade due to the increase in implied volatility. For that reason my trades are going in at the quoted price, I'm just sick of missing good trades cuz I had to pick the change up off the floor. TOS is now allowing the conditional orders fill at a limit at the bid/ask - hooray for those geniuses there!