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March 18, 2009

Things That Make you Go "Hmmmmm"

Well, that was a blast. Literally. I was all prepared to gloat about how exercising patience in my precious metals purchases was paying off. Silver was down 6% this morning and gold nearly 5%. I was watching GDX sink toward its trend line, and my mouth was even watering at the prospect of adding to my mining shares at lower prices. And then the Fed announced it will manufacture another $750B out of thin air to buy more mortgage paper. In other words, every dollar you think you own just became a little bit less of a dollar. You just got taxed without an act of Congress. You know, the Fed is not a government agency. Doesn't that mean it can be sued? Hmmmm.

What surprises me is that so many people were surprised by the Fed's action. I mean, what did they expect? We already know Berskanke has a propensity to print, and the Fed is already out of ammo with regard to interest rates. Of course, I didn't sit around yesterday prognosticating this specific action, but remember that the market usually uses the news to do what it wants to do, not necessarily what the news suggests it should do, and what it wanted to do was hit the SPX 805 pivot.

Speaking of acts of Congress, has anyone else noticed that this is the second time since Paulson's pitiful begging spree back in September that the Fed has announced a $750 billion spend? If the Fed can execute our dollars at will, why did these thugs bother to get Congress involved in the first place? Hmmmm.

Within minutes of the announcement of the continuation of hyperinflationary policy, gold and silver had erased their losses, and they didn't stop there. Both metals ended the day up nearly 3%. Looking at gold's chart, we see that a break of the trend line was averted with a resounding reversal:

gold chart

The miners also blew up any hope of a near-term trend line tag:

stock chart

You see once again why I have a huge core position in metals. In bull markets the surprises are to the upside. Tattoo that sentence to your forehead. Keep in mind that most of what I talk about when analyzing the precious metals charts are for my trading positions. I will hold my core position, which I built between 2004-2006, until gold and the Dow reach parity.

As for equities, they were already edging higher before the announcement, but went vertical after 2:15p. The S&P 500 has now tacked on 125 points since last Monday. I know we are numb to such swings these days, but think about the fact that those 125 points represent an 18% move. Remember how long we used to wait for an 18% rise in equities? One would feel mighty glum to catch such a move over several months, let alone a week.

In any case, I'm going to go out on a limb and say we get at least a correction of this rise directly from this point. First of all, the SPX came within 2 handles of the magic 805 pivot before easing lower into the close. Even though we did not see any SoS in the spyders, it would seem a natural point for a pull-back, especially to keep bear hopes alive. Second, the immediate post-FOMC reaction is almost always the wrong one. It would be quite normal to cough up the afternoon gains along with a few percent more in coming days. Finally, today's volume spike, despite being induced by the Fed, could be indicative of an ending play.

stock index chart

I actually put on a small short index position as the SPX approached 805. The play is for entertainment value and also just to help me keep a feel for the market. Sometimes the best way to know whether the water is hot or cold is to put your feet in it. I kept the trade small because I am more interested in picking up some long plays if the market tests the 730-740 area in conjunction with some BoW in the spyders. I am going to put a lot of emphasis on seeing that buying-on-weakness, though. Keep in mind that a test, and even a failure, of the March low is still possible within the current Elliott Wave setup. Furthermore, the fact that we only saw one significant BoW day near the low should be a bit worrisome to those of us who believe the major counter-trend wave may have commenced. Are the big boys really on board, yet? Hmmmm.


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