It is obvious that the FED's weekly POMO activity is preventing the markets from falling. We will see if they can maintain this ruse until the November elections?

Regards - VHF

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Weekly Forecast

Graham Summers

September 27, 2010

Last week I forecast that we would see a reversal in stocks. The market did indeed show signs of breaking down on Wednesday and Thursday, however, the Fed’s juice managed to keep stocks afloat and closing in the green for the week.

All told, the Fed injected more than $10 billion into the market directly via its three Permanent Open Market Operations (POMO) pumps. However, Bailout Ben wasn’t content with mere open market juicing, so he pumped another $10 billion into the system “behind the scenes.”

I’m going to address this activity in depth in tomorrow’s article, but for now I simply wanted to stress that more than $20 billion in Fed money pumps hit the market last week. This should clear up ANY questions as to why stocks are holding up, let alone rallying.

Another way of looking at this, is that the Fed is trashing the US Dollar to prop up stocks. Indeed, the US currency has broken down below both its 50- and its 200-DMAs. Even worse, it has broken critical support at 80, which has served as a MAJOR line of importance over the last 20 years (the Dollar has only broken below this line twice: once during the 2008 lows and during the 2009 QE-induced collapse).

This breakdown could turn out to be a bearish head-fake. However, if it is, the US Dollar needs to start rallying hard soon. Indeed, we are nearing a “death” cross pattern here: when the 50-DMA falls below the 200-DMA.

These patterns typically are harbingers of further weakness. Combined with the fact the Dollar is below 80 for only the third time in 20 years, this is a MAJOR warning that unless we get a reversal soon, the Dollar is in VERY serious trouble.

Indeed, we have the makings of a massive Head and Shoulders pattern here. As I write, we’re sitting just on the neckline of this pattern. Multiple closings below this line would confirm that the US Dollar is headed lower with a downside target around 71 or so. This would very likely mean stocks re-testing the April highs (1,220) and Gold exploding to $1,350 or even higher.

This is certainly one outcome, however, I don’t think it will prove to be the case. Stocks are overbought and the US Dollar is oversold. At the least we need to see a retrenchment or consolidation in the former and a bounce in the latter.

Big Picture: stocks have come up against MAJOR resistance at 1,150. This is occurring right as the S&P 500 reaches an overbought RSI reading (70) and on dwindling volume.

Furthermore, stocks have risen to test the upper trend-line of their trading channel dating back to early May 2010. This line, which coincides with long-term resistance at 1,150, adds to the likelihood of a reversal here.

The first line of support is 1,123 or so. We actually fell to test this last week, but Friday’s POMO-induced ramp job stopped the breakdown. So for now overhead resistance is 1,150 and support is 1,123 or so. A break above the one sets the stage for a rally to 1,170 or even 1,180… a breakdown below the other (1,123) and the next real line of support is 1,100 then 1,080.

We have POMOs this week on Tuesday and Thursday. In light of this, I think we might see a final impulse push in stocks above 1,150. However, this effort will fail and we’ll see a retrenchment back to 1,123 or so. And if we take out support a 1,123 on a closing basis then the rally is likely over and we’re heading back down in a major way.

When that happens selling pressure should pick up INTENSELY and stocks should absolutely collapse. This rally has occurred on nothing but fumes and short-covering. The only thing holding back the sellers is the Fed’s OBVIOUS intervention. But at some point, even this will prove irrelevant just as it did in 2008.