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Has Dust Settled After Fed Day? Not Just Yet

By Mike PaulenoffMarket OverviewJun 17, 2021 10:53AM ET
Has Dust Settled After Fed Day? Not Just Yet
By Mike Paulenoff   |  Jun 17, 2021 10:53AM ET
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I am going to look at a few markets (ES, Gold, DXY) that have reacted significantly to the Fed's "message" yesterday afternoon. What's the message? Here's my synopsis:
After pumping $8 trillion into the economy since March 2020 to provide the necessary stimulus to emerge from the pandemic lockdown, growth is relatively strong, inflation is finally above our 2% benchmark – though probably will prove to be a transient blip, but the labor market remains well below full employment.... So we think we might need to raise the Fed funds rate a measly 25 basis points at the end of 2022, and maybe another measly 25 basis points at the beginning of 2023. In the interim, nothing really will change.

If my synopsis of what the Fed said yesterday (remember, they didn't do anything) is reasonably on point. Then, we see a host of previously one-way markets reacting to "the news" with counter-trend moves that should prove to be a healthy refresher of their still powerful dominant trends.

In overnight action, the Emini S&P 500 rolled over into a nose-dive that marginally violated yesterday's post-Fed low at 4190.25, and pressed to a new corrective low at 4183, which was the exact measured target zone (4180/85) off of the Round Top Formation that we discussed yesterday afternoon. Now that the measured move has been satisfied, we have to see if ES can sustain strength off of 4183, and carve out a rally that exhibits bullish form, which will provide us with clues that the correction is over, and a new upleg has commenced.

In that we have seasonal and presidential cycle weakness (McClellan) theoretically ended between June 17 and June 24, the window for both a significant pullback low and powerful upside reversal is upon us. We have to look out for a severe oversold condition, signs of downside exhaustion, and then a potentially violent technical upside reversal to alert us to the end of the corrective period and the resumption of the still-dominant uptrend.

At the moment, based on the set up shown on my 4-hour chart, I am thinking that any ES bounce fails at or beneath 4220, and that ES rolls over one more time to violate 4183.00, pressing into the 4165 to 4150 lower target zone prior to completing a 2.2% to 2.5% correction off of the all-time high at 4258.25.

As for gold's reaction to the Fed, it wouldn't feel right or "natural" if gold prices withstood any mention of higher rates two years down the road, despite the fact that inflation is starting to percolate amid continued super-accommodative monetary (and fiscal) policy.

Nah. Just the mere mention of higher rates "eventually" is enough to trigger algo sell programs that unwind weeks of gold upside in a matter of hours. The last 24 hours is more of the same. August gold has declined from 1870 to 1795.70, or about 4% in a matter of hours in reaction to the suggestion from Jay Powell that rates might have to uptick 25 to 50 basis points perhaps at the end of 2022, but more likely at the beginning of 2023.

It would be laughable if actual investment capital wasn't being destroyed by the knee-jerk manipulation of the algos and the big banks. Perhaps this cabal of manipulation against the precious metals that has been ongoing for decades will have its final days come the end of June with the implementation of the new Basil III accords? We will discuss that in the upcoming days, but for now, let's notice that August Gold is down $61.40 (-3.3%) at the moment, and has sliced beneath the 100 DMA (1800.40), and has pressed into key Fibonacci support representing the 50% to 62% retracement of the entire prior upleg from the 3/08 low at 1678.20 to the 6/01 high at 1919.20.

Bottom Line: If the March-June advance is the initiation of a new bull phase in the aftermath of the August 2020 to March 2021 correction, then August gold selling pressure should exhibit exhaustion, and turn up from somewhere at or above $1,750.

Of course, the extent of the correction and the timing of the next upturn could be very much dependent on the counter-trend rally of the US Dollar, shown on my Weekly Chart of DXY. From the look of the current set up, DXY is heading still-higher, to challenge resistance at 92.40 to 93.40 prior to my expectation of a downside pivot reversal and resumption of the dominant downtrend.

From a bigger picture perspective, current strength in DXY represents an oversold bounce off of multi-year support at 88-90, within a still-dominant and powerful downtrend off of the March 2020 high at 102.00. That dominant downtrend do not exhibit completion, which if accurate, means that after this counter-trend bounce runs its course, DXY will roll over into a nosedive that break 88-89, unleashing a torrent of Dollar selling that could drive it to 82 to 80 in the weeks and months thereafter.

If such a big picture scenario unfolds, gold will enjoy powerful tailwinds from U.S. dollar weakness.
Has Dust Settled After Fed Day? Not Just Yet

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Has Dust Settled After Fed Day? Not Just Yet

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Comments (3)
Chris Sundo
Chris Sundo Jun 17, 2021 8:30PM ET
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Would be nice to get a little more confirmation of relativity or relatedness: ie. in the words 'Bottom Line: If the March-June advance (in the SPY and Q's presumably) is the initiation of a new bull phase in the aftermath of the August 2020 to March 2021 correction, then August gold selling'
Casino Crypt
CasinoCrypt Jun 17, 2021 6:58PM ET
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Gold has failed as backup for volatility and fudged economics. Never, since 1945, has there been such a defined convergence of so much risk as is the case now. When you look at the experimentation going on to resolve the toxic loans from 2008 era , you wonder what true asset is there to counter it now.
William Bailey
William Bailey Jun 17, 2021 5:25PM ET
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Funny thing you mentioned … 8 trillion in nearly free credit-bucks pumped into the economy. Well , that means real GDP in 2020 was likely 15 trillion ( same as 2007) , not 20.6 trillion , and the rest of the GDP was generated from spending stimulus. Additionally, the markets didnt just benefit from the artificially jacked GDP , nope, a huge portion of that stimulus/tax cuts went directly to the markets without corporations lifting a finger to make REAL sales!! I suspect the equivelent GDP needed to capitalize the stock market where it is now woukd be 32-35 trillion over the last 12 months. My question is , where will we get a 35 trillion GDP needed to keep driving the markets upward as the stimulus disapates and cryoto gobbles up any liquidity the Fed creates ….??? Margin!!! Boom!! Done
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