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September 15, 2008

Acute Risks!!
by Mike Paulenoff

Tuesday likely will be another pivotal day for equities, with Goldman Sachs earnings due out before the opening bell, and at 2:15 PM ET, the FOMC decision. Some people already are calling for a rate cut of 50 bps (to 1.50%) in order, I suspect, to allay investor fears in the aftermath of the Fed refusing to throw more money at companies with ugly balance sheets and bad debts.

My sense is that in the absence of a solution to the AIG problem, and the inability of the market to embrace Goldman's quarterly results early tomorrow morning, a FED rate cut is VERY risky indeed, because it will take the market about 10 minutes to send a message to Washington that the credibility and confidence in the Federal Reserve (shall we say) just is not what it used to be. And THAT will put a major hurt on the financial markets that will make what has happened recently look like a minor sell-off. I hope I am wrong, but the enclosed monthly chart of the SPX exhibits an ominous structure indeed.

The very big picture of the cash SPX has a very ominous look indeed. Is it possible, or likely, that the gigantic "M" formation could press or plunge its way towards a retest of the bottom of the "M" at 2002 low of 786.60? At this juncture, with the price structure ominously poised to attack critical long-term support at 1174 -- the 50% pullback level of the entire upleg from October 2002 to October 2007 -- the idea of a plunge to much lower levels does not seem to be such an outlier, does it? We certainly have the financial, fundamental, and psychological set-up to perpetuate such a panic.

Be that at it may, a sustained breach of 1174 could trigger a washout, the likes of which could surprise the market historiansŠmyself included.

From my perspective, the next 24 hours are frought with acute risks, which is why we are long the QIDs (ultrashort QQQQs), and long both the GLD (gold ETF), and the GDX (Gold Miners ETF) in our MPTrader.com model portfolio.

All of the action in the QID for the past week has carved out a sideways congestion-digestion pattern in the aftermath of the powerful upleg off of the August 15 low at 38.27, which should resolve itself to the upside to complete the Aug-Sept upleg. The current upleg looks like it has unfinished business on the upside into the 52.50 next target zone. Only a decline that breaks beneath 46.80/70 will begin to compromise the still developing constructive pattern in the QIDs.

As for the GLD, Monday was the second consecutive up-day in the GLD, which closed at the high amidst a powerful RSI momentum double bottom low in Aug-Sept. This represents a very powerful bottom formation that should propel the GLD towards its major breakdown point in the vicinity of 84.00-85.00 in the upcoming hours/days. I entered late, but from a technical perspective the pattern is unambiguously positive. The only issue is the depth of the next pullback and from what level it starts.

Mike Paulenoff
www.mptrader.com

Mike Paulenoff is author of the MPTrader.com (www.mptrader.com), a real-time diary of his technical analysis and trading alerts on ETFs covering metals, energy, equity indices, currencies, Treasuries, and specific industries and international regions.

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Copyright © 2007-2009 Mike Paulenoff

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