Don’t Fear the Taper

Tepper - Billionaire

David Tepper was right.  There are only so many places in this world in which one can invest.  That will be true even if the Fed tapers back their $85 billion per month rolling bank bailout.

Tepper’s comments on May 14 helped spark a rally from 1633 to 1687 over the following week — at which point investors decided that it might matter after all.  SPX plunged to 1598 over the next two weeks.

Through yesterday, SPX had recovered a Fibonacci .618 of those losses — despite Bernanke’s apparent confirmation that tapering is coming sooner or later, and President Obama’s apparent announcement that Bernanke’s time is up, and despite turmoil in practically every other market around the world.

Tapir - Fearsome Ungulate

With the FOMC statement only 5 hours away, should we fear the taper?  Much of the market’s gains over the past 4 years have come from Fed intervention.  So, simple logic would suggest that the withdrawal of the mechanism that blew the bubble would at least allow the bubble to deflate a bit.

But, where would money go?  It’s not as though there’s an alternate universe with vast stores of undiscovered,  undervalued assets.  That’s the trouble with QE — the money has gone everywhere, and overpriced just about everything.

Even if the Fed disappoints today, money will eventually come back to the markets — at whatever price that may be.  If I were David Tepper, with a $15 billion hedge fund and $7 billion of my own to manage, I would probably view the world the same way.

But, those of us with slightly smaller balance sheets would do well to get out of the way – or even short the market.  It was true when Lehman and AIG went broke.  It was true when S&P downgraded the USofA as SPX was completing an analog.  It was true when SPX completed Harmonic Patterns in April [here] and September [here] of 2012… you get the picture.

UPDATE:  9:34 AM

We remain short from 1653.50 yesterday based solely on the tag of the .618 retracement (of the drop from 1687 to 1598) which happened to intersect with several other channel lines.

SPX completed the Inverted Head & Shoulders Pattern (in red, above) we’ve been expecting by finally closing above the neckline yesterday.  The pattern targets 1673 — near the 1.618 extension of the red harmonic grid and the .886 of the white.

It’s not unusual for IH&S Patterns to backtest their necklines, which in this case is down around 1642 — also the location of the small purple channel’s midline and the next lower Fib line on the white pattern: the .500 at 1642.71.

BTW, several members are fondly remembering Sep 14, 2012 when — the day after the FOMC announced QE3 — SPX ran up and completed a Bat Pattern at the .886 retracement of 1576 to 666.  In addition to raining on Bernanke’s parade, it provided a fabulous shorting opportunity [see: The World According to Ben.]

While a disappointing FOMC release could certainly send the market into a tailspin, there is no comparable harmonic pattern currently in the works other than the aforementioned .618 tag.  Markets often reverse at the .618, but corrective waves more frequently reverse at the .786 or even the .886 Fib levels.

UPDATE:  10:26 AM

Speaking of Fibs, SPX just arrived at the .618 of its drop from 1654.19 to 1646.94 — also backtesting the top of the grey channel.  This, or the .786 at 1652.64, would be a natural place for a reversal of the bounce from 1646.

Of course, there’s no guarantee that the drop to 1646 wasn’t the full extent of the drop.  A push back through 1654.19 would be cause to revert to a long position.

A quick hat tip to Airyk, who asked about the potential Butterfly Pattern at the 1.272 extension on the red grid at 1659.  Please note it would coincide with the white .707 Fib (1661.12.)  What’s even cooler, though, is that it happens to intersect with the purple TL from the 1994/2002 lows at…drumroll please…2pm EDT (as in when the FOMC statement is released.)

 

With a few hours left to go, we’ll resume yesterday’s discussion about the big picture — including a quick look at DX and EURUSD.  I’ll announce on this page when they’re posted.

BTW, one interesting scenario I’m looking at is a drop to the white .382.

It would make for a nice C=A corrective wave — without busting the rising white channel — for the bulls, and would set up a Bat Pattern down to the .886 at 1633.06 (the bottom of the small purple channel) for the bears.

It’s even pretty darned close to the large purple channel .25 line.  Something for everyone!

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