Desperate People

The Fed is so scared of this chart that it panicked. It did nothing. It kept the pedal to the metal.

It is openly targeting this chart, seeking to make it rise as high as possible in the belief that eventually a wealth effect will occur and trickle down to the economy in the form of higher spending, higher employment, and higher borrowing.

It's insane.

Instead the disconnect is growing wider and wider. Few ask what is so wrong that the markets can't be allowed to go down. The answer is everything. When everything is connected to the same endless flow of liquidity, if the flow stops it's all over. Should that happen, the previous chart of money velocity will go negative and the Fed will find itself in a black hole of falling prices and debt liquidation.

Some say the Fed is already in a black hole. I tend to agree. A day such as yesterday delivers a severe blow to such views, but perversely strengthens them.

The imperative is to keep things simple and set emotions aside. What's done is done. Notice that price tested both upper trend lines and stopped. The next two trading days are key.

There are a total of three Fibonacci extension targets (one is not shown) surrounding the 1772-1778 area. The "largest" target is drawn from the October 2011 lows of 1074.77 which appears to be the fulcrum of the entire rally since 2009 -- it appears to divide the rally into two distinct legs. Each leg is equal (1:1) at 1778.

Obviously the market could top at current levels, having just completed what appears to be a rsing wedge. However, with the exception of total volume and 52-week new highs, yesterday was strong. A/Ds were especially robust, and UVOL/DVOL finally broke out. Ticks were strong too, but may have been signalling stops getting triggered. (Bernanke loves to inflict pain on the unbelievers, and you can bet he deliberately wrong-footed them in order to maximize the Fed's communication sledgehammer, their only tool besides asset purchases, which Ben admitted yet again yesterday. So yesterday had a feeling of short covering desperation to match the Fed's own desperation.)

There could be a larger triangle in formation which could see a retest of 1650, but until 1560.33 goes, dips should probably be bought. There are higher targets, and they are valid.

The Fed is desperate. And desperate people are dangerous.