If the sellers and short sellers go away, the indices have a natural tendency to rise. Retirement contributions and pension plans constantly fuel the indices along with bullish investors. Sellers are the kill-joy. Give them a knuckle sandwich every time they sell and they will go away. At least, that seems to be the strategy coming out of the Jackson Hole meeting.
Sellers certainly have their reasons to sell. The economy is slogging along at best and the economic news that has been used as rally fodder is all 'not as bad as we thought'. For instance, this week was very typical. The Irish banking system didn't collapse yet. Greece didn't default yet. China's growth is only slightly slowing. The US suffered 450k new unemployment claims and that's down from 453k. Congress extended long-term unemployment benefits. Congress passed some new bogus tax credit program for small businesses. Only 1 in 7 Americans lives in poverty. It could have been 1 in 6. Only 40 million Americans receive food stamps. It could have been 60 million. Only 20% of Americans live with no health insurance. It could be 30%. Health insurance premiums are only going up 15% or so for most Americans. It could have been 25%. Home foreclosures hit a record. They could have hit a higher record. To subsidize the pitiful housing market that we have, Fannie and Freddie are costing tax payers half a trillion. They could be costing a trillion. And, we have now only closed 125 banks this year. See! The 'recovery' is taking shape!
It is easy to see why sellers are nervous. So to combat any selling and to foment the illusion of a Dow rally, the Fed is acting to intervene and manipulate the indices higher in the morning and at the end of the day. The Fed is also heavy into their 'quantitative easy' policy of buying Treasury bills and notes on the open market. This simply means they are artificially keeping interest rates lower than they would normally be.
Why would we suspect the Fed is involved in index manipulation? One, the Fed IS the market. Two, they buying is perfectly coordinated and timed to terminate sell attacks and transform them into rallies. Three, whomever is manipulating the markets is doing so with a lot of money. Four, the rally is supported with 'less bad' economic news.
What do we learn from the charts below? Obviously, we know we should buy every dip. The difficulty is every dip is only about 20 minutes in duration. The Fornicating Fed pattern seeks to blow up selling before it can really do any harm. We also know we should watch the close of the previous day. If the Dow closed with a strong rally, wait 5 minutes or so after the market opens the next day, watch for the dip, and start buying 18 minutes into the dip. If the Dow closed the previous day with a 20 minute sell off, buy at the open the next day. Don't get me wrong. The economy and the stock casino is an outright joke and con. It is completely manipulate and contrived. However, we just need to understand the new rules and learn how to take advantage of them. Besides, aren't you glad we don't have to pay attention to corporate earnings or economic data anymore? Let's take a look at Chart 3. The indices finished with a little rally at the end. What we want to do Monday is wait 5 minutes, let 18 minutes of selling run its course, and then start buying 2 minutes ahead of the inevitable Fed buy program that should kick in, oh..., at about 9:55AM. Make the Fornicating Fed work for us!
For extra help, I circled the 'magic moments' in Chart 3 to help pinpoint the timing of the trend turns.
Chart 1 - DIA 10-minute bars, intraday from Aug. 30 - Sept. 3, 2010
Chart 3 - DIA 10-minute bars, intraday Sept. 13 - Sept. 17, 2010
All charts courtesy StockCharts.com