Once again it was the Fisher show, reiterating inflation concerns.  On Tuesday the market was holding up just fine until the one man wrecking crew appeared to spoil the party.  Today, he returned to take care of the few stragglers that remained.  "Hey, be sure to turn off the lights.. oh, and don’t let the door hit you in the ass on the way out.  Party’s over Bulls, party’s over." 

This exerpt taken from the Dallas Morning News:
http://www.dallasnews.com/sharedcontent/dws/bus/stories/DN-fisher_05bus.ART.State.Edition2.
1395847e.html

Dallas Federal Reserve Bank President Richard W. Fisher says record energy prices have pushed inflation to the top end of central bankers’ tolerance zone.

"We now face higher energy prices and businesses’ desire to pass the increased costs on to their customers," he said, and inflation shows little inclination to go in the other direction.

The irony is that the main culprit of higher inflation, surging oil prices, have plummeted in the last couple of days, but the market has failed to respond.  Although,… I suppose it isn’t too surprising considering that the Fed seems hell-bent on ratcheting up rates.  The million dollar question is at what price of oil is there no longer a risk of it leading to higher inflation and how does the Fed implement effective monetary policy in conjuction with oil prices, with which it has no control?  Additionally, to what extent will the government ease supply concerns in order to keep the inflationary pressures of oil at bay?

I’m no economist and certainly don’t play one on TV, but it seems the Fed needs to ease up and let its 11 consecutive rate hikes take affect.  Now that oil has had its hurricane fear induced run up, lets see where it settles out and how infllation responds.  We need to get out of this cycle of extremes beginning with the internet bubble of ’99 and HOPEFULLY not ending with a housing crash in the future.  Practice patience Fed, practice patience. 

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Both the Dow and S&P are in serious trouble with little in the way of support between here and Dow 10,000 and S&P 1150.  After yesterday’s bit of capitulation in the final minutes of trading we may see a bounce from here up to resistance, but getting back above resistance any time soon looks like an impossibility.  Those charts are ugly, REAL ugly.  If there is any bright spot at all, its that the Nasdaq, the S&P600 and the Russell 2000 all have support of their 200 day moving averages.

I’ll take a look at the charts this weekend in detail.

The resiliency of the market was once again on display last week, by narrowly avoiding a meltdown one more time, as key support levels held up.  The action throws us right back into the trading range we’ve been accustomed to.  As traders/investors, the real money is to be made during decisive breakouts or breakdowns, so its certainly been a difficult year to make consistent money in either direction.  As the stalemate between bulls and bears continues and those support and resistance lines get squeezed comes an increasing likelihood of a major move in either direction.  With last weeks move comes hope of a fourth quarter breakout, but lets not forget where we came from.  There is work to do.  The market sustained significant technical damage just several days ago and will need time to repair.  Lets take a look at some key resistance levels the market will face in the coming days.

You see the Nasdaq holding at what has shaped up to be a very strong level of support at 2100.  Potential areas of resistance would include the downward trend line at the top (2165) as well as the 50 day moving average (2150).  If it can clear those two levels, all eyes will be on the area around 2,200 which it ran up against at the end of last year and at the beginning of August this year.  My feeling is we get one, maybe two more days max of buying here before hitting a wall and would be surprised if the market went anywhere ahead of the next Fed meeting.  Nothing wrong with light volume selling – just creates more bullish chart patterns.

The Dow held at support of its upward trend, but faces tough resistance towards a run at Dow 11,000.  As that upward trend line pushes the Dow closer to resistance levels (top of the triangle formation), the trading range becomes narrower, forcing the Dow to make a significant move one way or the other.  This action is generally bullish leading to a greater likelihood of a break out rather than a breakdown, but it looks like the market will need to meander sideways for some time before we know the outcome.

The S&P also managed to hold on to life support there last week and actually managed to close above the 50 day moving average.  Yes, its an impressive move considering where we were last week, but with end of the quarter activity, you have to be a bit skeptical.  By the end of next week, we should get a much more accurate view of the health of this market, at least in the short term.

After two days of destruction, triggered by yet another Fed rate hike and the prospects of yet another potentially catastrophic hurricane, the tone of the market has changed dramatically.  Amazing how fast that happens isn’t it.  Just 48 hours ago the tone of the market was fairly positive and the indices looked healthy.  That was then.  With significant technical damage done and last lines of defense (key support lines) confronted, it doesn’t look good for the bulls.  Granted we’re probably due for a bounce at key support levels here (which I’ll discuss below), but the intensity of the selling is indicating this rally is in big trouble.  It would take a small miracle to bounce quickly from here and hold at these levels.  Stranger things have happened.  We find ourselves in a nearly identical situation as just a couple weeks ago when the market was in danger of heading for the toilet when inexplicably, the market rallied back above support levels despite the worst hurricane in history.  It’s often said that history repeats itself, but I don’t see that happening for a second time.  This market needed an easing of interest rates (or at the very least some discussion that it might happen in the near future) and didn’t get it.  Gold is rallying.  Most consumer related industries are broken, housing is cracking and semis are on their way.  Jeez.. and to think I’m an optimist.

You can see from the chart below that the naz is bearing down on key support around 2100.  I would expect some sort of bounce around this level initially, but if it can’t hold there look for support in the areas of 2075 (200 DMA) and finally 2050.  Although yesterday’s move can’t be considered a day of distribution, the selling was still well above average.  Ugly any way you look at it.

The Dow is also bearing down on its trend line (it actually broke through a bit) as sell volume surges.  If it can’t hold here, there is minor support at 10,200, but Dow 10,000 becomes a very real possibility.

While the S&P also plummeted below the first line of defense of the 50 day moving average, it still has support (just barely) of the intermediate trend line.  Expect a continuation of deterioration this morning below this key support level, but its important that the S&P close the day above this line today.  Note the increasing sell volume as institutions head for the exits.

"A market shrouded under the mystery umbrella of Greenspan and Co. gave way to certainty as the bulls roared ahead toward new highs on news that rates (for a moment) will stay in place. "

That’s not the most likely headline for tomorrow, but hey I’m an optimist. I believe that at this point, the upside potential of the market is far greater than the downside potential.  With one more trading day before the Fed decision, the major indices are in decent shape as both the Dow and S&P surged off support on Friday.  The Nasdaq looks a bit weaker, but all in all still looks fairly healthy.  Sure, much of the volume surge on Friday could be attributed to options expiration and S&P reshuffling, but the way the market escalated higher without turning back after lunch on Friday was impressive and the confirmed breakout of the market on September 6^th remains intact.  We await the Fed….. but with another hurricane bearing down, the uncertainty will remain.  Lets just pray that it spares the coast from another round of destruction.  Until next time….