How exciting the markets are...
Once again I have underestimated crowd sentiment and its ability to exaggerate movements. My thinking that people would rush in to defend the S&P500 1300 level support was wrong as in probably most people are looking to real support at 1270, however due to short covering I believe the a trend reversal to happen before touching actual support. From June 24 - 25 the S&P500 took a breather before todays fall going from 1314 to 1321 after the Fed's announcement. Unfortunately I was not able to follow the markets that day, but goes to show how reports or news sentiment can temporarily disrupt an established trends. It looks though as if I correctly said that on June 11th more bad news and pent up bearish sentiment may lead the s&p500 to 1270's range. Though I must admit I must improve my discipline as I would have covered a short earlier due to temporary whipsaws, and I would have missed out on the further drop.
Since I was not following the markets on the day of the Fed Announcement, I would have missed a chance to hedge on the whipsaw or trade a temporary counter trend.
I think its pretty obvious now that the Fed may be on a series of holds until they can get enough stronger data to use to warrant any increase in Fed Funds rates. Because of this the equity markets may stabilize in the short term (the third quarter), in the sense that the economy may possibly improving. As to what range and what time frame is appropriate will be hard to assess. Fundamentally the financial sector and many soft spots in the economy are still looming. this tied with strong spike in volume with todays drop in the equity markets makes worried that a bottom may not be found in the 1270's range. Fundamentals, technicals, and current sentiment does warrant further movements down along with the max chart on the s&p500 (which is still in a down trend). However, in the short term looking at the 2 year chart i find it hard that people would not defend such a clear line of support of around 1270. Its quite possible that through the third quarter that the s&p500 will stabilize and though its fate may be more unclear in the 4th quarter .
There is one thing i would like to note that i noticed on the day of the Fed, though it might mean absolutely nothing or maybe an interesting indicator.
The day the Fed rates, which I believe was on the 25th of June, the s&p500 rallied though the DOW remained negative. Due to the nature of the DOW, (it being price weighted and only 30 companies), I always feel the DOW is a better gage for sentiment or has move that are over-exaggerated than the actual fundamentals warrant. I was thinking that day, that the divergence in the two indexes could either mean a further drop or a reversal to the upside. It would seem that this in a bearish environment a divergence with the s&p500 to the upside with the DOW to the downside could indicate further movements to the downside. I should also note that volume for that day was not totally abnormal as it was still lower than the day of the 22nd when the s&p500 dropped from 1340 to 1320. Also, by examining the actually candle stick pattern for the day of the 25th would confirm bearish sentiment as there was a strong up shadow but eventually the index closed closer to its open (though the bulls won that day the bears seemed to be getting a foothold).
So maybe this may mean something or not, I obviously need to review many more charts and confirm this, though currently I'm lacking resources to do so, the main one being mostly time, though i think it would be a nice idea to entertain the next time i see it again.
Moving right a long let us talk about crude oil...
I can just imagine my dear friends who are currently trading oil. All's I can hope is that they are using their stops wisely, or more tightly should I say, as the past weeks have been a roller coaster.
It would seem that oil markets touched the new 140 range and retreated, I see this as quite natural before any new range is established. In part, a lot of it has to do with speculators taking back some gains, preparing for the second wind. I think tightened regulation of crude oil in the from US House of Reps will have only temporary or minimal effects on the price of oil. It is true speculators do push levels higher, but if prices stay in the range it is probably due to fundamental reasons. I still maintain that oil will reach into the 140's range and stay.
Though its possible that due to high inflation experienced by all nations, there will be forced slowed economic growth and demand from emerging nations may diminish temporarily. Though I am no expert in oil, its possible that inflation effects if its a real problem probably won't start to surface in late 4th quarter or into the next year. I know, currently by working in Vietnam, that Vietnam and its neighboring countries are experiencing exponential increases in inflation. I know the government has already taken measures to curb inflation which will naturally have to result in slowed growth, though interestingly the rate of FDI inflows are not seeming to diminish...
In inflation continues for EU, United States, Japan and Emerging Countries, Oil will definitely have to peak out temporarily.
About what I wrote about the dollar last time:
If oil does indeed continue to trend up and stay in a new range, above 140+, there should be strong inflationary pressures. Compounding this inflation could possibly no slow down in the commodities rallying as many staple commodities will still be demanded from emerging nations despite economic slow down. Due to fear of slow growth in the US along with Housing problems a series of holds from the Fed will be in place until the conditions stabilize. Once conditions stabilize the Feds will be able to focus on fighting inflation. This could happen in the late fourth quarter into the first quarter 09. I do not believe the Feds to be aggressive during election time. Though I believe the dollar to strengthen in the 4th quarter, earlier strength may be seen from political affects. After the elections, it is possible consumer sentiment maybe temporarily renewed and along with possible increase in fed funds rates if inflation is still a problem. With this should come a rally in the dollar...