So, the past week had witnessed a fast retracement to the halfway point of the major indices trading range for the year. It was almost technically perfect, peaking between the yearly highs made at the end of QE2 (the Magical Mystery Rally) and the panicky lows set a few weeks ago at SPX 1100 when the government tried to slit its own wrists.

During the five day, low volume bounce, many market participants actually thought that the long-standing trendine break, the massive internal technical breakdown in the broad breadth of stocks and the shellacking of many momentum favorites would all simply go away because Uncle Ben said that “maybe” he would be making things “all better”. “Just follow the near-term market” is the near-term gambling mantra of the youngsters who’ve heard about Bear markets but never actually experienced one. Or two.

Someone even asked for my firing from IBC because I was not bullish enough. Don’t worry, my feelings weren’t hurt as I am used to criticisms when all the market has is “hope”. I actually received death threats when I turned to the darkside in the year 2000. “The market doesn’t need analysis like that” I was told. And if I persisted I was a “dead man”. Reality eventually settles-in even though the stock market is one of the most proficient and consistent liars in world history.

I will not run through the litany of negatives as you know them well. The hope is that the FED prints another trillion dollars for the market to enjoy. But the last $600 billion will be completely given back as those gains have evaporated to money heaven, unless you bought Treasury Bonds. It’s been one helluva way to wash good money down the drain. Remember, we are Japan and you already enjoy rates testing their crash lows. They are going lower and you will get a 2.5% mortgage perhaps next year, if you qualify. If you live on the interest, screw you.

I hope you are not surprised that the government is now suing banks for the billions we just allowed them to make acting as a middle-man for the QE’s, plus a little extra. Those who needed to know, knew for weeks, maybe months that this was coming. Just look at the charts. The only way for the property mess to be realistically resolved is legally as Lawmakers won’t touch it with a ten-foot pole. They know who butters their bread…

Perhaps the “Day of Reckoning” has come as Europe is imploding and we have yet to tell them that “everything’s gonna be alright”. It sure looks more and more like my prediction that we give back all of QE2, near SPX 1050 will become a reality. Perhaps I am being conservative. After all, the lower markets go the more QE will come soon after, right?

After the speedy market recovery to the halfway point between the yearly high and the recent low, I hope that my cautious warning to “not get bagged” was heeded.

The market is thin this holiday eve and the news is not good. Did anyone actually think that any August economic number would be anything but miserable? The stock market crashed 20% and the government almost put a cap it its own skull. Most everything except for grocery shopping ground to a halt.

And now the government wants to sue the banks for billions? The billions that the FED just allowed them to make risk-free? Don’t even get me started on the housing market and MBS! Nobody wants to do the only thing that will work, debt restructure.

It seems as if there is a Sword of Damocles hanging over the economy and the market but it is being somewhat balanced by the expectation and hope of further monetary stimulus, better known at QE3. We all know how every dip was bought with $5-7 billion coming into the marketplace every day and few are willing to be against it. But this time I bet the stimulus will not be so “asset friendly”. Continue to be forewarned.

And my friend, Dr. Fly says the “urinal shadows” are visible. nuf said… 

Once again, the movement in liquid financial assets have proven that it is a FED-owned and controlled marketplace. Gosh, it is really simple. No QE, market goes downy. More QE or just the PROMISE of more, means market goes uppy. Duh.

I was expecting the market to break to new lows and then set up a “Wyckoff Spring”. That would have cemented an overwhelming bearishness that had to be bet against. But instead the lows were simply tested a few trading days after they were made. Historically, for a double bottom to be “good”, it should happen over a longer time period and should be marginally broken. But that historical setup was wrong. We never even touched the low before blasting higher.

Here are some stats. Since Jackson Hole and the lows made at 10:30am last Friday to 10:30am Wednesday:

Dow up 781 points/7.1%
SPX up 89 points/7.8%
Nasdaq up 226 points/9.47%
Russell 2000 up 75 points/11.3%
Transports up 545 points/12.8%

Ladies and Gentlemen, these gains have come in less than three trading days and the only thing that has changed AT ALL is that QE will be revisited during the next FED meeting. THAT IS ALL. So last year’s playbook has come into play once again with this year continuing to mirror last year. The dogs are drooling…

If my market forecast were based solely on technicals I would say that what we have witnessed is a classic Bear Market Rally or a Dead Cat Bounce. And a further observation would be that equity correlations are at record highs, with down 90% days followed by up 90% days, one after the other. Those kinds of extreme technical readings used to portend some future market movement. It no longer does. So all we have is where “natural” supply and demand resides.

Historically the September/October timeframe is a weak one for the markets. But last year the market rallied sharply thanks to the promise of QE2. Then came $5-7 billion a day pumped into the marketplace. Now there is simply speculation on what QE3 will look like. The bottom line is that we are currently in neither a Bull nor a Bear market; we are in the process of establishing a new trading range and we have just reached the halfway point between our yearly highs and our recent lows–and now that we’ve rallied big for a few days, people want to know what to buy NOW. My advice: we are at one of those natural resitance points so don’t chase. The hope of more QE, a Flag Waving Holiday and month end markup time has all rolled up into one tight rally. Don’t get bagged…

Now that Irene has rolled through our hearts, TV’s and basements, it’s time to move on to more important events. No need to worry about highways that have evolved to oceans or the erosion of the fabulous Jersey Shore.

And please, you needn’t concern yourselves with my reversion to the Stone Age thanks to the absence of  modern conviniences like  electricity. My family is ready to be Naturalists. We have hunted and killed our meat. Told stories around the bonfire. Dug latrines. Had the kids collect wild nuts and berries like Euell Gibbons. I am currently hijacking the data feed of one of my neighbors who has wi-fi thanks to a NG generator. No, none of that is important to me, for I am obsessed.

My obsession is with the markets and how they interpret perception and reality. And these past one and a half days have seen a master at work. Regardless of what I think about moral hazard and the criminals of the banking complex, Dr. Bernanke has again put forth a masterful stroke. Without having to spend a dime or promise anything, he simply Jawboned some hope of future action towards more QE. Instead of black or white, he proposed grey and the market bought it hook, line and sinker. Usually the market hates uncertainty. But getting a flat “no” to more QE would be most unwelcome. Getting a “yes” right now would be politically untenable. But a maybe keeps hope alive and we got a maybe. That buys time and gives traders and speculators the cover they need to keep the “hope-ramp” alive.

I am unable to see my magic board that gives me the big, broad picture of everything that has occurred today becaue of my time travel to the Stone Age, but it appears to be a classic one-way, risk-on movement into equities of all types. In just one and a half days the major indices have almost made back half of what was lost in the August drubbing. Most everyone who bought a stock, ever, is pounding his/her chest in victory as the “shorts” run for cover. It is the new normal of very high volume to the downside and thinner and thinner volume as the markets work their way back to the midpoint of the new trading range. But don’t forget that it is the MONTH END the big, bad event is out of the way and it is Markup time.

It once again appears that the market is following the script mirroring last year almost to a tee. Before J-Hole in 2010, the markets traded in a range with a bias to the downside all summer. Once QE2 was suggested, the following Monday was a huge gap higher. This year is virtually the same except this year it was done a day or two early.

But we have seen the game of 100 SPX points up and down each week combined with extreme technical readings for weeks. And many will attribute this rally to stronger than expected economic numbers. Just wait until the August numbers are released as they will scare even the most ardent economic bulls because business literally froze for most of the month even though it was hot outside. 

Use the halfway point between the yearly highs and the recent lows in the major indices as your milestone.

YAHOO BREAKOUT #3

YAHOO BREAKOUT #2