The big question in my mind here is whether there will now be a QE Infinity (QEX) rally. Earnings are poor, the economy is struggling, and the US approaches a close election with a possible major fiscal shock to follow at the end of the year if there is not a bipartisan agreement to either agree a long term plan to reduce the deficit (unlikely), or at least put back the decision and delay the fiscal cliff well into 2013 (more likely). Meanwhile all major US indices have now broken their support trendlines from the June low and while a bounce is likely soon, it may not last.
Should there be a QEX bounce? Obviously not. Printing money to boost the equities and the economy is neither a vote of confidence in the strength of that economy (or equities) by the Fed, nor a strategy that has led to sustained economic health in any economy historically as far as I am aware. Ben Bernanke’s strong personal record of failure as a vocal supporter of Greenspan’s disastrously bubble-inducing policy of intervening early in any downtrend and never intervening in an uptrend is equally not inspiring. However printing money does lead to a flight away from cash into assets more likely to hold their value and past periods of QE have triggered strong equity advances. We shall see whether this round of QE can produce a similar result.
What we do know is that major highs on US markets in the past have been signaled by strong topping patterns and we’re not seeing that here yet. There are also two strong support levels not far below on SPX, with rising support from the October low in the 1380 area and the 200 daily moving average at 1377. As long as those levels hold the assumption has to be that SPX is in an uptrend. If they break then that will no longer be the case, particularly as the uptrend on SPX since the October 2011 low has so far taken the form of a bearish rising wedge, so a break below support would look very ominous:
Meanwhile however, the Fed has a strong track record of producing outsize returns on equities against an unpromising economic backdrop, and it’s too soon to think that has now changed. On that basis I have a couple of speculative buys to suggest this week, both on Dow 30 component companies.
The first is of those is Dupont (DD). DD peaked in 2011 and declining resistance from that high is main resistance now, and the level of the high a few weeks ago. From that high DD formed a head and shoulders pattern within a broadening formation which has broken down hard into strong support at the intersection of both the support trendline for that broadening formation, and rising support from the 2011 low.
This support on DD may well hold and offers an excellent long entry with considerable upside and minimal downside. My entry level would be 45 and my stop at 44, as 44 would be a clear support break that would likely be followed through in the next few months and might be followed through immediately. On the upside declining resistance from the 2011 high is in the 52 area and broadening formation resistance slightly over 53:
The second recommend is longer term on Amazon (AMZN). AMZN has broken down from a rising wedge from the December 2011 low and I’m expecting more downside. The obvious target is the strong rising support trendline from the late 2008 low, currently slightly over 200. There is a decent support level around 208 that fits with that trendline and I’d be looking for a bounce from that area. AMZN is therefore a buy at 210 with a stop at 200, by which time main support would have broken. On the upside a conservative target would be 230, but I’d be expecting to hold until I saw clear signs of reversal:
Meanwhile equities are now looking oversold short term and I’m expecting at least a bounce soon. The AAPL decline I was predicting last week has almost reached my entry level at 585 and the SLV decline I was predicting the week before reached my entry level at 30.7 last Wednesday.