The Fed Casts Its Ghostly Shadow
Source: Bob Kirtley, SK Options Trading (11/1/10)
"We're looking at a minimum initial QE2 package of ~$800 billion."
This week will see the opening of Ben Bernanke's Quantitative Easing box, out of which will jump a giant stimulus rabbit along with a few difficult-to-interpret actions lightly disguised as helpful aids and more commonly known as the product of the printing press. Mark Wednesday, 3rd November 2010, 18:15 GMT in your diary as this speech is the most important speech of this year.
QE2 as it is now called is here and the only unanswered question is just how much of it will be generated. This move has been well trailed to the market so their high level of expectancy is already priced into this move. Not to deliver would disappoint and send the markets into a tailspin. Not to deliver sufficient funds would also be a setback for the markets. And Ben believes that what he is doing is right, for him this is a real world opportunity to prove that his thesis, written many moons ago, was the work of pure genius. Putting his personal aspirations to one side we need to protect ourselves against the fall out of such actions that will be imposed on us like it or not.
As we see it, there are three possibilities. Firstly, he under shoots his target and the market groans. Secondly, he shoots to please the consensus and gets a fairly muted response. Thirdly, this is his finest hour and he over shoots with some unexpectedly large amounts of stimuli. He won't disappoint he will come in on the high side to allow sufficient dollars to be printed so that they can be readily available to everyone.
Our opinion, for what it is worth, is that we are looking at a minimum initial package of around $800 billion phased in over the next few months. This will be accompanied by words along the lines of; more can be added if required, we will do what it takes, we will respond as and when it's necessary. And the recovery is in place, jobless though it may be.
This week could be a rocky one but do not be pushed into selling your core holdings, stick with them, otherwise you could be presenting someone else with the opportunity of a lifetime.
Taking a quick peek at the chart for the USD, we can see that the cross of death signaled further deterioration of the dollar, however, the '77 level appears to be holding just prior to the launch of QE2. The technical indicators are in the neutral zone currently and could easily go either way. Should the '77 support level fail, and we think it will, the '72 level could be hit in short order.
Taking a quick look at the chart for gold prices we can see that following a short and fairly shallow pull back gold prices are once again poised to move higher. The MACD is also set to experience a crossover, when the black line crosses through the red line in an upward motion, which is usually positive for gold and could come during the next few trading sessions. The RSI is down to a more reasonable level at 60.14, which has taken the steam out of the overbought position, so it now has the room to follow gold prices north.
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