QE is like free beer

We have recorded the first negative lunar green period of the year. The Nasdaq lost 59 points. Is this the start of a prolonged downturn in the stock markets?
The current lunar red period will probably give us good clues going forward.

Let’s take a look at the S&P 500 chart (click for larger image):

S&P 500

The S&P remains within a beautiful trend channel since late last year. The lower trend line got touched twice in the recent weeks, and each time we got a swift recovery.
To put this period of weakness behind us the S&P now needs to climb above 1650 and show some follow through.

But I wouldn’t bury this correction just yet.
A third test of the lower trendline would be a bad omen, and probably see the S&P drop to 1550 fast.
This means market is likely to show its hand this week or next.
I hold some 1600 put options, just in case.

If the support at 1600 holds, then we can set sights on 1750 in July.


As chart of the week I have chosen the long term bonds (TLT):


A short term buy signal is setting up here, as my Earl2 indicator is turning up from oversold level. So, look for an upward bounce in bonds, no matter what Ben Bernanke comes out to tell us this week.
But that will only set up for another long term shorting opportunity imo. Because we are approaching the point where more QE will turn against itself. The problem is that after a while the QE itself becomes seen as a risk factor in the market. Investors start wondering when the QE rug will be pulled from under them, and start getting out while they still can.
That’s why QE is like free beer. When it is first announced it lifts the mood of all participants, and soon you have dance and party. But then you reach the point where more free beer only leads to bigger headaches (if not upset stomachs).
That’s what is seen in Japan already. Their latest batch of record QE has driven up interest rates rather than down, because Japanese banks have used the opportunity to sell 10% of their bonds. (see: http://www.reuters.com/article/2013/06/16/us-japan-economy-bonds-analysis-idUSBRE95F0H720130616)

Good luck,

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By Dan

Author of LunaticTrader and Reversal Levels method. Stock market forecasts based on proprietary indicators, seasonal patterns and moon cycles.

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