Stock Market still under extreme pressure--25 year look--Chart

The chart below spans twenty five years for the S and P 500. Each bar is one month.

I have been writing for two weeks about the downside range expansion in the market (see previous posts). The range expansion is still in force. Last time, I mentioned that the market rarely closes lower 7 days in a row and it was due for a rally from the 741 area. The rallies which usually last two days came and went like the weather in Amarillo.

I want to issue a major note of caution here. The formation above could be signaling a market capitulation. Think about it like flushing a toilet. You know what goes down the toilet=, but then the bowl fills right back up. My guess is, if flushed it will be a great opportunity. Markets rarely capitulate, however, when everyone is looking for it.

A look at this long term pattern shows that the market is extremely vulnerable. The fundamental news, especially the size of budget deficit continues to weigh on the market. The only question now is do we go down slow or fast.

For today, the S and P will find good support on any thrust under 732. So don't get nutty with the short positions.

This will be the third straight week down and sixth out of the last seven. This indicates the market is due for a good rally soon. But from what level? New shorts at this level don't make much sense.

clipped from charts.barchart.com

Subscribe to All American Investor via Email

Follow us on Twitter

Bob DeMarco is a citizen journalist, blogger, and Caregiver. In addition to being an experienced writer he taught at the University of Georgia , managed on Wall Street at Bear Stearns, was CEO of IP Group, and is a mentor. Bob currently resides in Delray Beach, FL where he cares for his mother, Dorothy, who suffers from Alzheimer's disease. Bob has written more than 500 articles with more than 11,000 links to his work on the Internet. His content has been syndicated on Reuters, the Wall Street Journal, Fox News, Pluck, BlogCritics, and a growing list of newspaper websites (15). Bob is actively seeking writing assignments and syndication.

More from All American Investor

Ray Dalio on the current state of affairs in the market

Homebuyer Credit Won’t Stabilize Market, Analysts Say

Roubini Predicts U.S. Losses May Reach $3.6 Trillion

Six Errors on the Path to the Financial Crisis

Who Caused the Financial Crisis?

Option ARM--The Toxic Mortgage

Debt Binge--The Perfect Financial Storm

Bold Endeavors: How Our Government Built America, and Why It Must Rebuild Now

Will the Fed Try to 'Rig' the Long Term Treasury Market?

It appears that Fed policy makers are exploring the purchase of longer-dated Treasury securities in an effort to push up their price and bring down their yield. This reminded me immediately of the Treasuries effort to manipulate the price of gold in the late 1970s. In an attempt to do this, the Treasury started periodic sales of gold. As I recall, they started selling gold into the market around $175 an ounce. They finally gave up when gold reached well into the $400s. They sold not a single ounce as gold soared up and over $800. My point here is simple--you cannot 'rig' the markets no matter how hard you try. Eventually the rubber band breaks and most times the resulting equal and opposite reaction is chaos.

Subscribe to All American Investor via Email

My guess is that the only thing the Fed will accomplish is to bring wild and crazy swings into the Treasury market. In other words, volatility. In the late 1970s and early 80s it was not unusual to see the long bonds move 2 or more points in a day. The daily trading ranges often exceeded 3 points. Around the same time it was not unusual to see short term rates, treasury bills, move in trading ranges greater than one percent a week. So far interest rates have been relatively tame.

It seems that nothing much changes. The "new new" thing here is to use taxpayer money or federal balance sheet leverage to cure the "sick patient". Will this work, I doubt it. My guess is we take our medicine and eventually things smooth out and then we get on a rehab program. All of this takes time. There are no overnight solutions. You can take your three antibiotic pills a day for ten days and soon enough you will be feeling better. But guess what, if you take all 30 in a single day they won't work and worse, you'll suffer from a very nasty and negative reaction.

It should be apparent that Federal regulators are running out of bullets. My suggestion is we get these guys into the Economics 101 course to revisit the laws of supply and demand. In my opinion, understanding the supply/demand equation is the real long term answer to our current economic woes.

Bernanke Risks ‘Very Unstable’ Market as He Weighs Buying Bonds