Is the Fed magic finally waning?

ANNOUNCEMENT

I will be speaking at the London Money Show next Friday 7 November.  My four-hour presentation is: “Trading Currencies in a QE World” and I will be outlining my tramline trading methods and then covering some currency crosses.

If you are in London then, I will be pleased to meet you!

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With the dust settling after yesterday’s Fed ‘non-news’, I believe market action is finally indicating the start of a sea change in sentiment.  So maybe now can I say Bad news = Bad?

There were no surprises from the Fed, but all markets sold off.  Stocks, currencies, gold and even T-Bonds were hit by selling.  Surely, with stocks down, gold at least should have been bid.  It rallied initially (and stopped me out at break even on my short), but then was hit hard with a $20 swoon in minutes.

What does this concerted action tell me?  Simply that all markets are sniffing a withdrawal of liquidity up ahead – and savvy traders are cashing out before this news hits the headlines.  Yes, cashing out in all markets as they sense that  QE tapering is a dead cert for sometime next year – and a consequent liquidity crunch.

But my take is this:  With long-term interest rates likely to move sharply higher into next year (and confound the Fed), funds will move out of shares and into safer Treasuries as they will offer a real return over inflation, which will continue to decline possibly into deflation.

So yesterday could well mark the end of the greatest reflation rally in history.

The key action to watch is a concerted rally and then a sharp decline in all markets.

This action is confirming that markets have been driven higher on waves of liquidity – not necessarily because of strong fundamentals.  My theme remains this: When the rate of liquidity increase starts to fall, watch out below.  I sense we are at the start of this process.

One key market to watch is the Treasuries.  I can make a good case that yields will now start rising again and I will be looking to short T-Bonds in the next few days.  I have taken all profits on my long T-Bond trade.

GBP/USD

Here are my working tramlines on the daily.  We have a small tramline break from yesterday’s action.  If the market can decline to the pink zone, the selling should intensify with a rapid move down to the 1.56 area.

I remain short.

DOW

If yesterday’s high is the major top I have been waiting for, then I expect to see a five wave down move.

My 15-min tramlines are tentative so far, but a rally to where the Fib 38% meets the tramline should be a great candidate for the w2 up.  W1 was last night’s low.

But an immediate break of that low would signal the downtrend had started in earnest.

I am looking to short on rallies.

Here’s to Halloween being scary (for the bulls!).