We’re all familiar “good news is good” and “bad news is good.”  Are you ready for “good news is bad?”  In a sign that things are becoming curiouser and curiouser, slightly better than expected employment numbers and flash PMI have sent the market down this morning.  Bullard, a non-voting Fe governor, made things worse by pronouncing QE3 iffy.

While the dip is slightly stronger than we expected, this is the back test of the neckline and .886 Fib (at 1404.64) we were expecting.

We’re flirting with breaking the wedge.  If this should happen, look for support at 1404.64.  If that level fails, then it’s likely down to the channel midline around 1390.

continued…

Right now, I’m watching for a either a bounce or a decisive push down through that 1404.64 level — my signal to abandon longs and resume a short position.  The rising wedge has clearly been violated, and that’s our warning signal.  But it’s normal for a perfectly formed wedge to get pushed around a bit as it unfolds.  I’ll keep an eye on the price levels.

The only thing that slightly concerns me about this morning’s move is that it’s formed a very misshapen H&S pattern.  It’s so skewed, I don’t take it terribly seriously.  But, it’s something to be aware of.

The dollar certainly isn’t turning tail.  It’s barely moved since this morning’s news.

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As an aside, Thomson Reuters reports this morning that the spread between the lowest investment grade and highest rated AAA municipal bonds touched a 12 month low of 175 bps.  Minutes after I saw this report, I noticed that Spanish banking authorities plan to impose losses on shareholders and junior bondholders at banks that receive government aid — a move that will wipe out the positions of an estimated 120,000 retail customers who were sold these instruments as an alternative to regular savings accounts.

I don’t talk about fixed income very often (in this environment, it’s more like fixed no-income.)  But, I caution any bond buyer to carefully examine the credit quality of their holdings.  It’s bad enough that a rise in interest rates will wipe you out.  You don’t really want to be on the hook for an unanticipated credit event, too.

Speaking of rising rates…if you own a bunch of bonds, have your broker calculate the duration of your portfolio and consider whether you’re properly positioned relative to your individual risk tolerance.  Duration is simply a measure of the price sensitivity of a fixed-income instrument to changes in interest rates. In general, the longer the bond — the greater the potential loss in a rising rate environment.

Unless you know you can and will hold your bonds to maturity, this matters.  There are some unscrupulous brokers who push longer-term munis because it’s easier to hide big (several percent) markups.  This is on top of the markup his muni desk already made.  If you’re ever unsure, get the details from him and then call another broker and get an offer for the same bond.  Don’t be surprised if the spread is 5% or more.

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UPDATE:  12:30 PM

Nothing new to report, really.  SPX is still hugging our threshold, starting to look very wedgey on the 15-min chart.  But, we’ll watch it closely.  Lately, these wedges have been failing at an abnormally high rate.

This is a good time to remind everyone that the picture remains extremely muddled.  I am uncomfortably uncertain about the path forward, as we’re still teetering on a precipice. I am trying to provide some directional guidance for those who are in the market or want to play some swings — not because I have high confidence in my calls at the moment.  If we catch our balance, there’s a clear path to 1433 or even 1451 — on mere QE3 talk alone.  If not, the path down could be long and fast.

My gut is that Bernanke won’t actually announce it until we experience some sort of financial shock.  It doesn’t help that the S&P 500 is down only 10% from its all-time high.  I have no numbers to back this up, but I believe the wealth effect from the market is one of the few bright spots in the macroeconomic picture at the present time.

Thus, the Fed is right to be afraid of a serious crash.  They will prevent it if at all possible.  But, they can’t control everything — such as the market’s reaction to the fiscal cliff.  Like the credit downgrading last year, this could do some serious damage.

So, I think the Fed will likely not actually institute another round of QE until the market finally decides to price the fiscal cliff in and takes a big dump.  This will give the Fed all the cover it needs, and Bernanke can correctly blame it all on the politicians.  And, it’s the time at which QE3 would (theoretically) do the most good.

It won’t actually do any good — other than propping up the market and the financial system a while longer.  Very little of the funds are making their way into the real economy — the construction workers, teachers, Walmart employees to whom a lower long bond rate is about as helpful as a raise for Congress.

More later.

UPDATE:  1:15 PM

SPX just broke 1404.  We should see a bounce at 1400; if not, the next major support is at 1390-1392.  For the Dow, it’s 12,960 – 12,990.  COMP is 3040, then 3015.  NYA is 8000, then 7906.

The dollar doesn’t seem to believe a sell-off is imminent, and it’s normally a reliable guide.  80.83 seems to be achievable in the short run, though staying in the little wedge would help a lot.

The daily RSI, however, is flashing a big, fat warning.

The EURUSD is holding up just fine, and seems intent on completing the Bat Pattern we talked about yesterday at 1.2617.

The gold bugs certainly aren’t worried about QE3 being off the table.  GC is still trading near its highs of the day, up 32.80 at 1673.

UPDATE:  3:15 PM

1400 held and we’re back to 1404 — in an apparent break out of the falling wedge.  Unless you’re a gambler, though, best stay away until things are more clear.  We have positive divergence  up through the 60-min chart, but that’s hardly a guarantee in an environment where normally very reliable patterns are failing left and right.

The dollar and the euro have to make a move by tomorrow morning at the latest.  The 60-min charts show things coming to a head.

The daily RSI’s indicate very strong support for DX and resistance for EURUSD.

Could we still get a rising market with such a development?  Probably not.  But, look at the support coming up for SPX’s daily RSI.  That’s three different channel lines — just 3 pts away.

A bounce for SPX isn’t exactly compatible with a bounce for the dollar and a plunge in the euro.

One scenario that might make sense [SPITBALL ALERT] is a gap up in equities that allows Fib tags all around:  SPX to 1433, DX to 80.83 and EURUSD to 1.2617.  These would be followed by reversals all around, and the RSI’s get reset to EOD values that make sense given where the charts are now.

The other scenario is that SPX drifts on down to its channel midline at 1390 while DX and euro reverse short of their targets.  But, take a look at NYA.  It looks like a back test to me.

Guess we’ll find out soon enough.  GLTA.