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The Big Ben Support Level
Has Ben Bernanke created his own personal support level on the S&P 500? Twice when the market seemed on the edge of disaster, the Fed chairman put in a bottom near 1270 – once with a 75 basis point interest rate cut, and more recently with a plan to pump $200 billion worth of liquidity into the financial system.
Isn't it funny how Bernanke's intercessions keep occurring at the same price level? Take note of the S&P 500; when things were looking grim in January, and the markets were about to be thrown off of a cliff, our hero Big Ben came riding to the rescue and reversed the markets with an inter-meeting, 75 basis point cut in the Fed Funds rate. On that day, the S&P 500 bottomed out near 1270 and launched higher, rallying for more than a week before fading prior to reaching the big figure of 1400. Despite a subsequent 50 basis point rate cut eight days later, the S&P 500 gradually slid back, closing just above 1270 on March 10. Just when it looked like the market was about to fall off the cliff again, struggling to contain a crisis of confidence in credit markets, Big Ben rode to the rescue once more – at the exact same level. It was announced on the morning of March 11 that the Fed will for the first time lend Treasuries in exchange for debt that includes mortgage-backed securities. The S&P's roared higher by 47 points in response to the plan, a huge rally represented by the last candle on the chart (see figure 1).
Figure 1: S&P 500 bounces hard twice off of support at 1275. Source: Stockcharts.com
Here are some of the highlights from the emails I've received from you:
All of this begs the question, is Ben Bernanke secretly a technical analyst? Has he determined that the S&P's must be maintained above 1270? Or is it all a coincidence? We know that he'd never admit to creating support, even if it was true, because the Fed Chairman can't afford to be seen as catering to the equity markets. In fact, one could easily make the case that it is the bond markets, not the equity markets that are the main beneficiaries of Big Ben's recent heroics. It sure is a funny coincidence, but it is a coincidence nonetheless.
What is Ben's Plan?
The Federal Reserve has taken what some consider its boldest action in decades, by accepting $200 billion of housing debt as collateral to prevent an implosion of the mortgage finance industry and head off a full-blown economic crisis. The Bank of England, the European Central Bank, and the Bank of Canada also pitched in to halt the downward spiral in the credit markets, expanding on liquidity tactics first used late last year. These steps indicate the Fed is increasingly concerned about the investor exodus from mortgage debt, which in turn threatens to deepen the housing contraction and further damage the economy. The plan is aimed at countering a decline in liquidity in financial markets around the world, after signs of increasing stress in mortgage securities. So the Fed is actually buying the unwanted mortgage debt in return for high quality U.S. Treasuries, letting the banks and others who hold them off the hook. One could say that the Fed is bailing out Wall Street, and that's true – but the alternative is an economic disaster that drags all of us down. It's all in a day's work for Big Ben.
What About The Dollar?
Big Ben may be a hero to the stock market, but he is a villain to the U.S. Dollar, and as usual, the U.S. currency has come up on the short end of the stick. Essentially, the Fed is creating cash out of thin air in order to bail out the credit markets. By adding to the supply of money without creating anything of actual value, the Fed is lessening the value of every dollar that is already out there, including the ones in your wallet and bank account. This has the unfortunate side effect of making nearly everything more expensive; nobody wants our dollars anymore, so we need to spend more of them to get a barrel of oil or an ounce of gold in return. Yes, increased demand from other countries is part of that equation too, but rest assured that countries with strong currencies are feeling the pain to a lesser degree than countries with weak currencies. The bottom line is we are all going to continue to suffer for the misdeeds of those greedy souls who loaned money to people who they knew would never be able to afford to repay the loans and for the ratings companies who inexplicably labeled the securities created from this folly as high quality investments. So while the stock markets reacted to the bailout with gusto and celebrated with a 416 point rally in the Dow Jones Industrial Average, the U.S. Dollar Index responded by crashing to yet another new low before attempting a feeble bounce higher (see figure 2).
Figure 2: The U.S. Dollar Index continues to reach new lows. Source: FX Street
The Fed has made it clear that they stand ready to take further action as necessary, so expect more help for the banks and brokers, and more harm for the U.S. Dollar. Traders who have been taking the Fed's policies into account when making their decisions are being rewarded handsomely, and can rest assured that saving the greenback is not on the Fed's list of things to do. In a restaurant here in Washington, I heard a large group having an animated discussion over dinner about the price of oil, which climbed above $110 for the first time on Wednesday of last week, and about the cost of filling a fuel tank with gas. They are worried about energy prices, but nobody seems concerned about the dollar – as if the two were somehow unrelated. Understand that as long as the dollar keeps falling, the cost of everything that you buy with dollars will keep rising. Will Big Ben eventually ride to the rescue and save our currency? So far, every action that he has taken has had the opposite effect. In fact, if Bernanke and the Fed have any concern at all about the state of the U.S. Dollar, they have done a remarkable job of hiding it.
Emails of the Week
Here is just a sampling of the emails I'm receiving in the aftermath of our series on the candidates' economic views and programs. Thanks again to everybody who participated.
Comment 1) Bravo Edward!!! I really applaud your efforts to help us understand the candidates' programs and your high level of professionalism and intelligence! I never miss an article you write....keep up the great work!
Comment 2) I just wanted you to know I think that your analysis was not biased, was fair and accurate. Keep up the good work.
Ed Ponsi) Thank you both for your kind comments, I really do appreciate it.
Have a question about Forex trading? Send an email to eponsi@tradingacademy.com and we may use your question in an upcoming newsletter. Until next time, best of luck to you in trading.
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Ed Ponsi is a globally recognized name as a lecturer and teacher and is the former Chief Trading Instructor for Forex Capital Markets. An experienced professional trader and money manager, Ed has advised hedge funds, institutional traders, and individuals of all levels of skill and experience. Ed has appeared on CNBC, CNN International and TheStreet.com, and has recently written his first book for Wiley Finance, "Forex Patterns and Probabilities" (which you can purchase through 