The Fed announced the start of the third wave of quantitative easing since 2008 on Thursday, much to the surprise of anyone, including myself, who thought another big round of money printing was unlikely with the SPX testing four year highs and oil testing $100 per barrel. SPX broke up on the announcement through strong pivot resistance in the 1440 area and the possible double-tops that were forming there were killed off. SPX has now taken the bullish path I was describing in my post of 19th August, which you can see here.
In terms of resistance levels above on SPX, there is some resistance at 1500, but the main target is now the 2000 tech bubble high and the July 2007 high at 1553 (the first top of the 2007 double-top), and I’m expecting that to be tested in early 2013. I’ve shown this below on a seven year reversal patterns SPX chart:
Where will this all end? Who can say? A test of strong resistance at the 2007 highs on SPX from here now looks very likely, and we’ll see how the technicals look when we get there. It’s worth adding that the only country that has tried this mix of deficit spending / stimulus and money printing / quantitative easing in the past over a long period is Japan, and there the result has been economic stagnation, a very weak stock market and the effective bankruptcy of the state. Perhaps the results will be better than that in the US. So far at least the experience on equities has been been better than the Japanese experience. Here’s a monthly log scale chart showing the Nikkei since 1980, with the bubble high there in 1990, since when the Nikkei has fallen slightly over 76%:
QE3 isn’t just good news for equities of course. On the increasing expectation of QE in recent weeks gold broke up from the descending triangle that had formed there since the 2011 high, and the pattern target there is 2050, with an 84% chance of making that target according to Bulkowski‘s pattern performance statistics. Bulkowski, the best known author on trading chart patterns, says that a descending triangle that breaks up is a very strong contender for his favorite pattern to trade. As gold is also a widely recognized alternative store of value that can’t be printed by central banks, the fundamentals there also look increasingly good compared to the increasingly debased paper currency alternatives, and I’m expecting that 2050 target to be made and exceeded:
In the short term both equities and gold look very overbought. SPX is hitting some resistance in the 1470s and gold has a strong resistance level around 1800. We may well see a significant retracement on both very soon and those would be dips well worth buying.