I am not a great options fan, but with the savage decline yesterday in US stock indexes – along with most other global indexes – following the new Fed chairman’s comments before Congress, I am asking if the new Fed broom has introduced a call option strategy in the market.
Much was made of the Yellen Put between 2009 and 2017, whereby the Fed almost guaranteed stocks would rise forever and ever with no decline larger than a few percent. That was when dips were teed up for buying – and how that strategy worked! Except that it only worked for a few leading equities; mainly in the tech sector with the infamous FAANG Gang leading the way.
We now have a new regime at the Fed, but the consensus is that Powell will not deviate one iota from that of the previous era – as will most of the Fed people, Powell is a strict Keynsian money-printer (in his time at the Fed, he did not vote once against the majority dovish stance).
So why did shares fall off a cliff yesterday if he stands ready to do what it takes to prevent a sell-off and invoke the Yellen Put?
The answer is this: the market is speaking. Market-driven short term interest rates are climbing (as I have repeatedly pointed out here for months as a warning sign) and the tide has turned. The Fed is basically out of ammo – and the market knows it. A savage bear market will not bring out the big guns because they are now spiked. The Fed is already committed to selling off their mountain of bonds starting this year so that avenue is closed.
The current obsession with how many Fed rate hikes will occur this year reminds me of the ancient theological conundrum of how many angels can be fitted on the head of a pin. Yes, that riddle exercised a great many philosophers back then. I often wonder what theri conclusion was, if any. But one thing you can be sure of is this: the Fed will follow what the market decides. The Fed follows, never leads.
Yesterday saw a massive 550 point swing down in the Dow after Powell’s comments – a complete indictment of the Fed’s new-found inability to prevent a collapse if the market so desires. We now have the Powell Call operating. Selling stock index calls will be the preferred strategy, rather than the previous one of selling puts.
This morning’s MSM headlines on yesterday’s declines was revealing – they couldn’t some up with anything more relevant than the drop was due to Powell’s testimony – but he only repeated what Yellen had outlined earlier. No surprises at all.
But I have a different interpretation – the Elliott waves were playing out as I had forecast. A few hours before his appearance, I sent VIP Traders Club members this Special Alert:
I now have a good example of a five down in the Dow that should lead to a three up as follows
Odds are good we are currently in wave c and I have targets marked. Because of the huge mom div at wave 5 low, we can expect a fairly decent bounce.
My best guess is the 50% to around 25,580 area. That will be wave purple 2 high leading to wave 3 of 3 of 3 down – a very explosive move. perhaps the Italian election results this weekend will kick it off?
If without a position, I advise shorting on this current wave up.
In fact, the market moved up precisely to my target area at 25,580 and then began the savage decline, as I had forecast. Note that I did not need to digest what Powell was saying at all. He could have spoken in Double Dutch for all I cared. That is the power of Elliott wave analysis.
The dollar continues its rally phase
In a recent post, I managed to call the low in the US dollar and it has moved up sharply since then. One currency market I am avidly following is the Chinese Yuan cross. I believe there will be a dollar squeeze this year as US interest rates rise and in addition, China GDP will disappoint to the downside with exports missing targets. That will put enormous pressure on the currency and encourage much capital flight out of the country and into the dollar.
The yuan has been very strong in recent years as demand for China’s goods flourished but I believe we are in for a hefty snap-back. Here is the daily
I have good tramlines and of note is the ‘overshoot’ of the lower tramline that indicates selling exhaustion with an oversold momentum reading. This is a great set-up for a low risk trade. Here is a close-up
The blue trendline is along term major line of now support. And the pattern at the lows is a lovely textbook five-wave wedge with wave 5 placing a textbook kiss on the blue trendline and the resulting Scalded Cat Bounce (see my text, pp 83 – 84, 143) we are currently enjoying.
The market is poised to move sharply above the upper pink wedge line to test the wave 4 and 2 highs.
This is a classic setup for a major reversal.
Crude oil declines in a third wave, also as forecast
Crude oil has been in a major bull market for two years off the sub-$30 lows to the recent $66.60 high. Club members rode most of that but in recent weeks, I have turned bearish and managed to take a short position early in the decline. Here is the daily:
I have shown my Crude Wedge before but not, the market has broken out of it – first in an overshoot to the high and now below it as it traces out five waves down. The recent rally to the $64 area placed a kiss on the lower Wedge line (which was also the Fibonacci 62% retrace off the high) and now we are in the Scalded Cat Bounce down phase.
My major target is at the start of the Wedge at the $44 – $46 area.
Many markets are in major new trends and several are in third waves of several degrees. These moves are the most explosive in the book. They take no prisoners. This is an ideal time to grow trading accounts in leaps and bounds.
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