Tuesday, August 21, 2007

Friday's Rally

I wanted to provide an update on the S&P megaphone chart I had posted last week along with a few comments about Thursday's turnaround and Friday's continuation of that rally. Not because I have anything to say about my prior post but because it gives me an opportunity to question many people's belief that everything they read or hear from the media is true.

Most in the media would have you believe the Friday rally was because of the Fed's Friday morning actions. That is absolutely false and I can prove it using three separate markets: the stock market, the futures market and the options market. Too many people associate correlation with causation and no one is worse than the financial media. And no one is better at manipulating the media than professionals in the equity markets. Some were saying Friday morning that the day's rally would be the biggest in history as they gleefully cheered the Fed's Friday morning statement. Well, on a percentage basis, it doesn't even register. In fact, the markets have not regained their Friday opening price. The entire day's action was determined by pre-open futures action.

And, what caused the rally that started Thursday at 1pm? Well, we had a market condition unfold that has had a 100% probability of a rally over the last two-ish years. And while not 100% over a longer period of time, it's still an extremely high percentage move higher. In addition to that condition being filled, we hit five major technical support areas: the 200 day moving average, the 23% Fibonacci retracement from the 2000 and 2007 peak, the March 2007 lows, the 10% correction level and the bottom of the updated megaphone pattern. The Fed had absolutely nothing to do with the subsequent rally. Who does it benefit to condition the public and media that the Fed is going to save the stock market as money is transferred from strong to weak hands? If the markets were so enthused about Friday's Fed involvement, why did financial stocks crater on Monday?

posted by TimingLogic at 9:03 AM

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