The Fed Crashes Wall Street’s Party

By Monday, February 25, 2013

250213_PC_leongIt was fairly obvious the party on Wall Street wasn’t going to last forever, given the rapid advance in stocks this year, based on my technical analysis.

The same thing happened in February and March of 2012, when the key stock indices retrenched, following strong gains in January. For instance, the Russell 2000 was up 9.8%, or an annualized 73% return, on Tuesday. My technical analysis indicated that the rally would be short-lived; it was just a matter of when, not if. (Read “Alert: Bulls Should Be Careful Despite an Impressive January.”) With the selling in the market, the gains in the NASDAQ and Dow Jones Industrial Average in February have disappeared.

The question now: is the market in a correction mode? I think it’s a bit early to say, but there are clearly more bears running to the Street and exiting positions, as my technical analysis indicates.

Triggering this current bout of selling was news on Wednesday that the Federal Reserve questioned its $85.0 billion in monthly bond purchases, suggesting instead that quantitative easing may need to be reduced or stopped to avoid facing losses.

The reaction in the stock market was negative, as the Dow broke below 14,000 and the NASDAQ fell south of 3,200. The Dow has now twice failed to hold above 14,000, so there appears to be some topping action in the index, based on my technical analysis. Selling in blue chips would be a red flag. A plus is that the Dow Jones Transportation Index has managed to follow the Dow higher, which confirms the upward direction of the market, based on my technical analysis.

And while the S&P 500 initially held at 1,500, the index breached 1,500 on Thursday after an intraday decline to 1499.28. Of course, I am concerned with the potential topping at 1,500, which previously occurred in 2000 and 2007; so we may be looking at a third multi-year top, based on my technical analysis.

 spx-500-large-cap-index

Chart courtesy of www.StockCharts.com

Just take a look at the Chicago Board Options Exchange (CBOE) Volatility Index (VIX) that’s based on the S&P 500.The reading of the VIX, which is also widely known as the “fear factor,” surged to over 15 on Thursday, which is well below its highs in 1990 as shown on the chart above. The lower VIX reading means that the market is relaxed and unconcerned about the current market climate; but you need to remain alert, as investor mistakes occur when you are too confident.

 vix-volatility-index-new-methodology

Chart courtesy of www.StockCharts.com

The selling also spread to the commodities, including gold, silver, copper, and oil. The April gold was sideswiped, and is now extremely bearish after breaking below its 200-day moving average (MA) of $1,668 and 50-day MA of $1,666, based on my technical analysis. Making the situation even more precarious is the surfacing of a bearish “death cross” on the gold chart, as my technical analysis indicates.

The lower, horizontal, blue support line in the chart below will show if gold can hold.

gold-spot-price-eod

Chart courtesy of www.StockCharts.com

At this juncture, I advise adopting a wait-and-see approach. Do not chase stocks on the downside until there’s evidence of emerging buying support. You can also use put options as a hedge.

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About the Author, Browse George Leong's Articles

George Leong is a senior editor at Lombardi Financial. He has been involved in analyzing the stock markets for two decades, employing both fundamental and technical analysis. His overall market timing and trading knowledge are extensive in the areas of small-cap research and option trading. George is the editor of several of Lombardi Financial’s popular financial newsletters, including Red-Hot Small-Caps, Lombardi’s Special Situations, Judgment Day Profit Letter, Pennies to Millions, and 100% Letter. He is also the editor-in-chief of a... Read Full Bio »