Saturday, March 21, 2009

When the Fed goes all in, what should you do?

Last week's FOMC's decision shocked the crowd as the Fed literately went all in. To me personally, the real shock is that I now realize that the economy/financial system are in much worse shape than most people thought.

While the long-term negative consequence of the Fed's aggressive move seems relatively straightforward, I see no one has a clear idea or certain about its short- and intermediate term "positive" impact on both economy and stock markets, which I think is one of the major reason why the market acted pretty weak after the FOMC decision, especially on the Friday. Until that part of the picture gets clearer, I will refrain from actively initiating sizable swing positions from the long side. On the other hand, swing-shorting the market at this stage is also very dangerous undertaking, considering some of the remarkable strengths of the latest rally, AND the fact that there are a few more tricks up the sleeve of the US government (next week's bank rescue plan, the final actions on M2M and uptick rules, etc.). You don't fight the Fed, when it is turning into a crazy, red-eyed, and mouth-foaming bull. A prudent bear should patiently wait until the bulls exhaust all their ammunition and exuberance.

TA wise, both long- and intermediate term trends (monthly and weekly charts) for all major index are still solidly down, their short-term trend (daily charts), on the other hand, is mildly bullish. If the market continues to pullback early next week, I will build up some long positions for the second leg of the rally, but I will be quick on taking profits if the major indices fail to break last week's highs, which are some very important resistances. Another miserably failed attempt to overtake those key technical levels could spell big trouble for bulls.

1. AAPL: ST-L1 if it breaks 104 with volume, IT around 110, stop just below 100; ST-S1 from 112-122, stop just above 122, IT=105; DT-S1 if it breaks 99.5 with volume, IT around 96.

2. BIDU: LT-S1 if it spikes towards 190/200, stop just above 200, IT around 160.

3. FAZ: ST-S1=40-47, stop just above 50, IT below 30.

4. GS: ST/MT-L1=85-93, CS just below 86, IT=100/105.

5. POT: ST-CTT between 71/73 and 80/82, tight stop just cross the boundaries.

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