Darshan's Blog

Darshan's Daily Market Ponderings

How Politics Controls The Markets

Thursday 28th January, 2010

Morning all!

Right we have some very exciting conditions setting up on the market and if we play it right, the opportunity to bank some serious money is available. I'll explain all of that in a minute. First, there is lots to talk about and it all ties in to why I am thinking the market will do, what I think it will do.
To begin with - we had the FOMC providing us with their wisdom last night. The statement, as promised caused some serious volatility. However, if you had kept my levels in mind - you should have turned that into profit - bought at 10100 and been out at 10300 overnight.

So what did the Fed say, which initially spooked the market to drop a 100 points in seconds? The Fed reiterated it's stance to end the TAF scheme in February, the purchase of mortgage-backed securities in March and more importantly, made it clear (to Wall Street) that it was going to keep interest rates low for an 'extended period'. I have no idea how long an 'extended period' is but I am pretty sure it equates to 'Just enough time for the banks to recapitalise themselves and for the housing market to realise that the bond market does not care about what the Fed does with rates anymore, and ultimately therefore, just enough time for another bubble to go pop'.

I'm not the only one. Thomas Hoenig, the Kansis City Fed President was the lone dissenter in the FOMC and argued that they can't keep the low rate policy, considering that the economy had clearly begun to 'strengthen'. Okay so he's only half sane but still it's the thought that counts. Essentially, what he is citing is the NFP numbers that miraculously wowed the world in December - (If I had not said this would come back to bite them in January, I would laugh right now) and suggesting that inflation pressures could creep up. In reality what he should be saying is 'Stop providing free money to Wall Street!'. This voice of dissent is really important. Do not underestimate it. Hoenig's statement was enough to spike the US dollar up, instead of down. Why?

Well, it literally turned the last two years on it's head. For the first time, in a long time, someone in the FOMC is saying "Hey come on, let's grow up - we're going to create new bubbles.". The other sane supporter is ...the Treasury market. In particular the two-year note dived as the market bet that the Fed will actually raise rates or rather will have to raise rates by the end of this year. In other words, the market knows the Fed is stuck in between a rock and a hard place - it can say what it wants but it can't keep doing what it wants. In the end, the market will always decide what happens - someone in Government should let the people in charge, know that.

Talking about Government, While I was fast asleep - President Obama delivered another great speech. Americans rejoiced in clapping like happy seals whilst listening to Obama's first State of the Union address (I have a feeling that repetitive strain disorder from clapping will be the main reason for needing universal healthcare in the USA) and having just read what he said, I don't blame them. Obama talked about not accepting second-place for the USA - which obviously caused a series of high fives around the country. If anything the speech was a rallying cry for health-care reform and a nod to China to say "Hey remember, we're still number 1". With that he made job creation his number 1 priority in 2010. Which is interesting, because I thought it already was but hey we learn something new everyday. Either way, it again, caused the dollar to spike further overnight and for the market to be pumped up by the overnight squeeze monkey computers. All in all, I just want to know where the people calling for the death of the US dollar are? For months, I have been saying that they are wrong and so far it's true.

How does this all tie in with the markets?

So with the Fed and Obama saying what they're saying - we have absolutely perfect movements on the markets. It's all going to the plan outlined at the beginning of the week. You see we know that the market needs to get higher just a tad, so they can sell it. I said a bounce off the 10000-10100 area would take us towards 10400, well we hit 10100 and overnight we are sitting at 10300 on the Dow. It can still move down to 10100 today and be bought towards 10400. Similarly same situation with the SPX - it could go all the way to 1120 from here if it wants. So should we now celebrate? NO. This is the time to get your bear claws out and make some money or protect your irresponsible long positions - if you happen to have them.

Recall, that I suggested the reason we need this bounce, is not just technical BUT also because it allows the market to get to a level, where the bear flag on the daily can be formed. It also allows the 20 day EMA to cross down below the 50 Day EMA and what do we get - that's right - just enough room to drop up to 600 DOW points to fulfill the bear flag target. That should take us to support around 9700 at maximum and from there, we zoom up. Of course, as always the danger is that the bear trap will be sprung at 10000 and we zoom up from there instead. The only way to stay safe is to get short at 10400 or thereabouts, with a stop under 10500 - and then trail it all the way down once you are in profits. We have the opportunity to make a lot of money here over the next few weeks.

However, always bear in mind that the move down, when it comes will be quick and I anticipate it to be over by early next week, if not sooner. From there we should be in bear trap territory and that will be what allows the market to shoot up towards a maximum of 11250 on the Dow and 1200 on the SPX and 5800 on the FTSE 100. Why do they need to create this situation? Well like I said everything above ties in together.

With TAF being halted next month and asset purchases being wound in beginning March - they need to do something to keep the market up, so the big guys can offload all the crap. They can't plough more money in as freely as before, as there seems to be a very vocal backlash - so this a bear trap is the one way of doing it. Then they can allow the market to crash, create a situation where another stimulus plan can be voted in. Simple really hey? (From a technical point of view, it would also allow a kissback test to the underside of the broken trendline - which can hit price anywhere up to around 11250ish.

Welcome to your Government backed casino people. Everything is done for a reason and all we can do, is keep on top of the poker game. If this works out as planned - the the profits can be huge. Play it wrong and I think the next few months are going to be painful for many. Most of all the VIX is just beginning to take off again. The only way for that is up. The only way for the markets in the long term is down. In the meantime, it's all just politics.

With a UK election coming up, with Obama walking the popularity poll tightrope and even the immediate issue of Bernanke being reappointed as Fed Chairman today. That will no doubt be the cause for the market to rally to the upside targets. Of course, if he does not get voted in - then say bye bye markets. He is the sugar daddy. Without him, the banks would be crying. Shame really. Like I said, politics and money first - people second - that's how the markets work. Always keep that in mind.

Happy trading today!

Darshan

*The information contained on this website and from any communication related to the author s blog is for information purposes only. The analysis and the market recap do not hold out as providing any financial, legal, investment, or other advice. In addition, no suggestion or advice is offered regarding the nature, profitability, suitability, sustainability of any particular trading practice or investment strategy. The materials on this website do not constitute offer or advice and you should not rely on the information here to make or refrain from making any decision or take or refrain from taking any action. It is up to the visitors to make their own decisions, or to consult with a registered professional financial advisor.