Stock Market Viewpoint

Stock Market Viewpoint
Reading the Tea Leaves...

Friday, August 26, 2011

He speaks softly but carries a big stick 8/26/11

Stock Market Technical Analysis
Click on above image to enlarge

At the open today, the market started selling off from the VIX bouncing up from its 20 EMA and lower brown channel line.  As 9 am approached, the Bernanke speech text was pre-released and immediately it was revealed that he has no new plan to boost the economy and the DOW dropped 100 points in 2 minutes sending the VIX up to the 42 level where it reached the downhill channel shown with the thin red lines.  The very moment the VIX hit that line, and I mean the second it hit it, a neck snapping buy program was unleashed by Bernanke, Geithner, & team.  The market exploded one minute after it was in freefall.  The DOW ran 350 points to the high an hour and a half later.  I marked with a green dot the VIX high point where the program kicked in. 

The VIX fell quickly as the market jam was taking place but when the VIX got down to the brown channel line and the blue 20 EMA line, the markets stopped cold and couldn't get above that level the rest of the day.  This takes us right back to a replay of the big pivot point we had the night before last where once again if the VIX falls out of the brown channel and through the blue 20 EMA line the rally is on but if it bounces up from there the rally is off again. 

Such a buy program has happened many times this year but up until now everytime they have sent through anywhere from one to three 1m share block buys of the SPY (S&P 500 ETF) at a full $1 premium above the current trading price to mark the level the market would be jammed to.  In the first half of the summer, these marker trades the Fed would send out to signal how far they were going to jam the market up became larger, often 1m share blocks at $1.50 to $2 above the current trading price.  This was an amazing way the Fed communicated how much they were going to take the market higher.  Unfortunately, in late July the Fed still sent out premium market trades but all of a sudden the market jam did not follow and that started to create panic amongst professional traders and the market sold throughout the first week of August.  The general concensus has been that because of the budget battle the Fed was not free to spend the funds needed and was hoping that just the threat of jamming the market higher might get the shorts to cover and take the market up for them.  However, the shorts quickly realized the Fed had run out of funds to jam the market at pivot points and the bloodbath of August took place. 

This morning's market jam was a different tool that the Fed hasn't done since last summer - a synchronized to the second rocket launch rally of every stock (all pivot point market jams this year were presignaled by the premium SPY blocks sent through ahead of the SPY being jammed higher and then all other stocks followed gradually).  If this is going to be the Fed's new way of making the pivots go the upward direction, this could be a very powerful tool as now the shorters in the market (after getting scalded this morning) realized they've got to be careful because the Fed obviously has the ability to spend the funds again to make it happen.  This could be a game-changer for a heavy market if the funds are there to do it often enough.  That variable is yet to be seen. 

Looking at the chart we see that once again we are right back down to the lower channel line of the VIX and blue 20 EMA line, leaving us back in a volatile situation for the open on Monday.  It could go either way, super fast.  If the Fed could do a monster gap open which has been an occasional tool of theirs, then they could cause the shorts to really panic and the VIX could be driven down to the thirty level and possibly breakdown through the lower thin red declining channel line which could form an amazing multiday rally.  However, if the market opens even slightly down on Monday then once again the VIX will be bouncing up from the brown channel line and blue EMA and pointing the market in a downward direction instead.