A Great Fake Out

Yesterday was a great fake out. While I was expecting lower prices, I had my eye on the wrong spot (a deeper retracement) and the market never got there.

Futures look like they've been forming a falling wedge in the overnight session. However, it would not surprise me to see another marginal high in the cash S&P before it rolls over and tests lower prices.

I do think it's possible that yesterday's 1345 lows could get tested, though it's equally possible that the market only corrects itself with a shallow retracement into the 1353-1355 area before heading to the long-awaited 1380-1400 sell zone.

There is marked divergence in NYSE advancers vs July 13. Financials do not seem to be confirming the rally. New 52 week high/low difference readings are strongly diverging from July 6th. None of this prevents a rally to 1380-1400, but adds reasoning behind its description as a sell zone.

I took note of Bernanke's testimony yesterday, and found a Bloomberg story about it.

Bernanke Outlines Range of Options for Additional Easing

Federal Reserve Chairman Ben S. Bernanke outlined options to ease policy further in case the flagging economic recovery fails to lower unemployment.


Easing tools include further purchases of Treasuries and mortgage-backed securities, and altering the Fed’s language on the outlook for interest rates, Bernanke told the Senate Banking Committee in Washington yesterday. Another option is to use the so-called discount window for direct lending to banks.


“That’s a range of things that we could do,” Bernanke said. “Each one of them has costs and benefits, and that’s an important part of the calculation.”


We're in a deleveraging cycle that is nowhere near completion.  Bernanke is saying they can continue to do what is already having no effect, or they can directly lend to banks who are deleveraging and thus not lending and thus do not need the money.  The Fed is impotent when it comes to deflation.

We're in deflation.