Implications of the Market Wedge Formation

Today was the lowest volume of the year. The Summer Rally usually comes on light summer volume, especially around this time which is the peak vacation period. The market is also treading water ahead of tomorrow's Fed pronouncements. The recent "leaks" over "dissent" inside the Fed & the trial balloon over a mortgage relief program have gotten the market to expect some sort of new direction. Perhaps as a consequence, the market has formed a bearish ending diagonal (ED) wedge pattern which reflects a psychology of compression pending some expected event. 

Chart from AllAboutTrends

The psychology of an ED is worth noting. We saw similar ED wedges right before the Bear Stearns bailout and the auto bailout during 2008. The compression comes from expecting something which changes the trend, in those cases from down to up (momentarily), and in this case from the growing fear of a double dip to a new round of stimulus. Usually the market rises into FOMC days, expecting a continuation of policy, and drops after when they got what they expected and nothing more. This reflects the pull of bull and bear. Tomorrow, however, the compression indicates that the market expects something new, and they may be sorely disappointed as the Fed's leaks do not mean they will act pre-emptively. Often a wedge will have a throw-over above trend before it reverses sharply down. Will the hope of a Fed change pull the final thrust out of the wedge?

The psychology of Goldman Sachs is also telling. The are worried that the Fed will delay the launch of QE2 tomorrow, and fear that would be a mistake because it is already priced in! It is QE2 or bust for stocks, ZH opines cleverly. They expect:

[A]n announcement that the proceeds from maturing or prepaid MBS will be reinvested in the bond market (most likely Treasuries). [T]he gradual tightening ... that is implied by the current policy of letting the balance sheet shrink is inconsistent with what we expect will be a significant downward revision in the forecasts of the FOMC as well as the Board staff since the last meeting

This compression also is showing up in Treasuries and the USD. The Dollar may have bottomed Friday, according to the STU, or will tomorrow; it sits in a sideways fourth wave, and a final little thrust down - which may coincide with tomorrow's stock rise into the FOMC announcement - would signal the end of the move down.

Comments

[Dsquare]

Three Cheers for Hungary!!! A big finger to the IMF and to their central bank!

"Now, the government of Viktor Orban, whose party won a landslide with more than two-thirds of the Hungarian parliament in April, has taken aim at the country's central bank, blaming it for keeping interest rates too high and thereby delaying the recovery. The government cut the salary of the Andras Simor, the governor of the central bank, by 75%. (If only we could have done that to Alan Greenspan or Ben Bernanke, just to make an example out of them for missing the two biggest asset bubbles in world history and thus guaranteeing our worst recession since the Great Depression.)"

Read more: http://www.businessinsider.com/hungarys-defiance-of-imf-and-european-authorities-scares-the-guardians-of-austerity-in-europe-2010-8?utm_source=feedburner&utm_medium=feed&utm_campaign=Feed%3A+businessinsider+%28Business+Insider%29#ixzz0wBRKgpks

[Michael]

Hey Vipul,

Don't miss this most exciting Company that is developing a NON-INVASIVE cancer screening test for Colorectal Cancer... the #2 killer of Americans over the age of 50!

http://www.nytimes.com/2010/08/10/health/10cancer.html?_r=1&ref=science

Exact Sciences (EXAS)

[Whitebear]

Keeping Hungary interest rate too high and it's a hurray for the Hungarian people? Are you out of your mind? I guess the people haven't learnt from their hyperinflation experience years ago.

[french lick]

kaboom?

[Hank Wernicki]

Tomorrow :

Gap Down

[twitter.com/DrBubb]

A "fall from grace" out of a 7-day Trading Box may be just ahead. /Chart: http://yfrog.com/mjzzzzg

In case you are interested, the Trading Box was formed right after the Cardinal Climax, as described by Arch Crawford, and mentioned also in this "3 experts" market discussion.
/Podcast: http://tinyurl.com/GER-Doldrums

[Daniel - Taz]

Well its possible that the diametric here in OZ that I have been running with has terminated.

If we can get a few more points of downside here in OZ we will have the fastest drop since the July low.

I am targetting the July 2009 lows - the speed of the drop will tell me whether it is an X wave to be followed by one last phase in a complex correction (Wave-B) or if Wave-C has kicked off.

The late rally in the US was led by the bear sectors so more downside should come through shortly.

Taz

[Hank Wernicki]

ES Down 8 points !!!

[Lemon McMurphy]

Hank can you post charts with your calls?

[Hank Wernicki]

Kaboom !

[Hank Wernicki]

here's the chart lemon

http://www.elliottfractals.com/TRADE____SPX_8_11_10.jpg