Securities Research Services

Monday, August 07, 2006

Fed Meeting Looms Large

On Friday all major indices gapped up and then sold off the remainder of the day. Late in the day buyers started to come back in, but this could have been daytraders taking profit on their short positions. This sets up an interesting situation. The tech sector is overbought and has now sold off at resistance. There has been no evidence of accumulation and ideally, this is a perfect short set up. The problem is, tomorrow the Fed meets and tomorrow's meeting is perhaps one of the most important events the market has had to look forward to in some time. The yield curve on long term bond rates has now firmly inverted, threatening a recession late next year. This puts some pressure on the Fed to pause. The question is, is the Fed interested in avoiding a recession, or do they have something else in mind, such as putting the brakes on the world economy to get oil prices back into line? If the Fed takes a pause tomorrow, as it is expected, then the oversold condition of the indices is likely to move up to even more oversold as prices rally in celebration. We will probably short such a rally, but will need to see what the charts look like after the dust settles. If the Fed raises rates again, it would probably be very bad for stocks and we could see a sharp down day, for as we mentioned, stocks are ripe for a slide already.

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