Did Greenspan Save the Markets?
I've been lurking on this tread since August 27. The intraday technical analysis that day converted me into a bear.
The following is an article I wrote this weekend. Food for thought.
Did Greenspan Save the Markets?
The 1/4% cut in Fed rates on October 15th couldn't have come at a more fortuitous time. The DOW was hovering at 8056, and threatening to break fragile support. Had this support broken, the markets could easily have intensified the frequency of their oscillations, with a decidedly negative bias. Instead, an almost divinely-inspired intervention, with a timing that seemed based on the intrinsic energy of the market itself, transformed this doomsayer of defeat and dispair into a harbinger of hope and stability.
The result was instantaneous. Within 30 minutes the DOW was up 250 points, by the next morning it was up a staggering 500 points. The DOW's overhead resistance of 8180 was transformed by the stroke of a pen into an additional barrier against the abyss below 7400. Sell signals vanished, and the mighty bull regained its crown.
What prompted the decision and the timing of the announcement? Was it an economic disaster lurking in the background, and known only to a few privy individuals. If so, that disaster has yet to make a public appearance. Or was the decision made at the September FOMC to lower rates 1/2 point, 1/4 immediately and 1/4 later based on technical analysis. I find it much easier to believe that the telephone conference that afternoon concerned itself with the timing of the implementation of a previous decision, rather than reaching the decision in the first place. If so, what are the implications?
First, a closer look at the technical indicators at 3:00 on that Thursday. On the 60-minute chart, the Dow had just left the top Bollinger with a black candlestick, and was forming a new black candlestick slicing through the middle Bollinger. Stochastics were just turning down. Prudent bears had their fingers poised on the trigger, delirious bears might have already jumped into the fray. The DOW had just formed a double short-term top at 8100, and was 50 points below it. Another 30 points down would have confirmed the sell signals, and the computer-generated sell programs would have taken it from there.
Granted, it is the nature of support and resistance points that prices bounce off of them. They work until they don't. The timing of the announcement seemed more premeditated, as though its main purpose was to ensure that the support held. The previous cut was met with a five-minute temper tantrum by the DOW, then business as usual. This one was far more effective.
Many analysts are calling for Fed rates to fall to 3 1/2%. If so, this gives the Fed six more silver bullets to use. The Fed does not want a crash. I believe they will use those bullets in an attempt to keep the DOW in the 8000's. The ideal scenario would be to keep it in that range until the fundamentals catch up with the averages, instead of letting the averages decline to the fundamentals. This could well mean a return to the period of 1966 to 1982, when the DOW stayed around 1000 for 12 years.
Another implication if this was a premeditated intervention is that the Fed has declared war on the bears. Japan and Hong Kong did it openly. The citadel of free markets cannot be so brazen, but those six bullets will be saved until they can do the most damage to speculative bears.
Beware, the Plunge Protection Team does exist, and it is loaded for bear.
Robert |
