As expected Bernanke again confirmed that QE2 will cease at the and of June. The market immediately sold off on the news and the dollar rallied. No big surprise there as we’ve been expecting another bout of deflation, which surprisingly has already begun even though QE2 hasn’t ended yet. As soon as the liquidity spigot is turned off the deflationary forces are going to clamp down hard on the global economy. I expect July is going to be a tough month for all asset markets. I also expect Bernanke is going to be singing a different tune by the middle of August. By then I have no doubt he’ll be in a panic to get QE3 underway even though QE2 did nothing to resuscitate the economy. On the contrary all it accomplished was to spike inflation which poisoned the economy and is the main reason we are heading back into recession.
The first level of resistance that has the potential to turn the market back down comes in at 1300. For all practical purposes that level was tested and rejected today.
The next resistance level, if the S&P can get through 1300 would be at the 50 day moving average. I haven’t the slightest clue which level will turn the market back down but unless this is one of the longest daily cycles and shortest intermediate cycles in history then this decline is far from done. (I really doubt the daily and intermediate cycle are going to warp to that degree)
I will continue to wait for a penetration of the 1258 pivot before adding short positions back into the model portfolio.
Also as expected the dollar reversed and close back above the 10 day moving average on confirmation that QE2 would come to an end.
We knew there was a possibility that gold would reverse on the Fed meeting, and it appears that may be what has happened. The marginal break of the recent high and reversal after the Fed meeting has now set up a potential 2b reversal (see terminology document).
I know it’s tough to sit and do nothing for weeks on end but if it’s any consolation there is going to be an incredible buying opportunity late next month or in early August. As long as one doesn’t do something stupid and can get to that opportunity with their capital intact we should easily recover all of the lost profits from missing the silver top.
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