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What's Left in the Fed Toolbox?

One debate that will go on this week centers on the Fed. One question traders are asking, "Is the Fed out of bullets?" All signs point out that the government's stimulus plans as well as the Fed's activity have done nothing to stimulate the economy. The housing market is bad despite mortgage rates below 5%. Unemployment is high and expected to rise. Money has been made available to banks, but individuals and businesses have not been able to get credit.

Politics have played a major role in the downturn in the economy in my opinion. Instead of shoring up the economy and employment, the administration chose to fight for healthcare and financial reform. U.S. citizens are now worried that a tax hike is coming to pay for this legislation. Uncertainty over the healthcare plan is making it difficult for businesses to know their costs. This uncertainty is most likely preventing companies from hiring. At this time Congress is trying to decide whether to extend Bush's tax cuts. A failure to do so will amount to a tax hike.

The November elections are also a concern for investors. Most seem to be taking a wait and see attitude because of the uncertainty over which party will gain control of the House and Senate.

I tried not to mention "uncertainty" but I had to at some point since the Fed and other central banks are using this word. This brings me to one of the only things I am "certain" about this week, and that is the Fed and its central bank colleagues will meet in Jackson Hole, WY on Thursday and Friday.

Dr. Bernanke will be giving a speech at the conference, but there is an ongoing debate as to whether he is going to be accommodating to the attendees by toning down his commentary or whether he is going to give a revised outlook for the economy. A hard commentary is likely to be a market mover, but some traders feel that holding back in his assessment of the economy will send a signal that the recovery is slowing at a much faster pace than originally estimated.

Before Bernanke speaks, traders will have had the chance to react to Existing Home Sales, Durable Goods and New Home Sales Reports. He will have the opportunity to speak before Friday's GDP - Second Estimate, however. The report is expected to show a drop from 2.4% to 1.3%. Since Bernanke is already on record saying the economy has cooled, by reiterating this assessment one day before the report, he may take a little steam out of a weak number. In other words, it may turn out to be a sell the rumor, buy the fact situation.

Recap

The September E-mini S&P 500 finished the week near its low, but slightly above a key 50% price level at 1065.25. The weekly chart indicates the market still has more room to the downside with 1050.50 the next likely target. A test of this level could attract strong buying power.

December Gold had a strong run this week before profit-taking and the stronger Dollar weakened the market on Friday. Closing above a .618 level at $1228.00 kept the move intact but a break could be coming especially if equity markets rally. A failure to hold the .618 level could trigger a break to $1215.00 early in the week.

December Crude Oil closed under a key Fibonacci level at 76.45, indicating further downside is likely next week. Concerns over a weakening global economy is threatening demand for energy, leading to speculation that demand will drop.

Talk of a bubble forming in the September Treasury Bonds did not discourage buying in this debt instrument this week, but the daily closing price reversal top indicates a possible short-term top. If confirmed on Monday, look for this pattern to trigger a two to three day break to possibly 130'20.

The September Japanese Yen is still consolidating inside of the 1.1805 to 1.1579 range. The market appears to be forming a resistance zone as government and Bank of Japan officials try to decide the effect of the high priced Yen on the economy and whether to intervene. This market is expected to remain inside of a tight range until this decision is reached. This decision has the potential to exert a tremendous amount of influence on the market which is likely to lead to high volatility next week. In particular, a breakout to the downside could produce some tremendous gains as longs will no doubt scramble to get out of their positions.

The U.S. Dollar traded higher across the board under light trading conditions on Friday. Trader sentiment continued to remain locked around risk aversion as uncertainty over the strength of the global economy prevailed.

The September British Pound broke minor 50% support at 1.5560 and an uptrending long-term Gann angle at 1.5549. This move tripped stops and caused a soft break into a .618 support level at 1.5457 before settling into a range.

It was reported this week that U.K. retail sales were stronger than expected, but this news wasn't enough to sustain the rally. Concerns about inflation and the effects of new taxes and spending cuts on the economy continue to weigh on investors. Earlier in the week, the Bank of England minutes showed that the Monetary Policy Committee voted 8 to 1 to support this month's interest rate decision. The minutes also showed that inflation was discussed as well as a rate hike. The BoE seems to believe that inflation will fall back below the target rate of 2%, if left alone, by 2012. The central bank is basing this assessment on its evaluation of data which it interprets to mean that the current high inflation rate has been caused by temporary events.

The September Euro reaffirmed its downtrend when it broke a swing bottom at 1.2732. A new main top on the daily chart was formed at 1.2921. The next objective is the major retracement zone at 1.2605 to 1.2433. This area represents a retracement of the 1.1876 to 1.3334 range.

Talk surrounding the strength of the Euro Zone recovery helped pressure the Euro but the most bearish influence was comments from European Central Bank council member Weber who said he thought the ECB should wait until the first quarter next year before considering an exit strategy. This ignited a huge sell-off in the Euro as traders read the comments to mean the Euro Zone economy was not as strong as perceived.

Flight to safety selling is driving the September Swiss Franc lower. Former tops on the weekly chart are providing some light resistance, but the daily chart suggests the market should continue to remain underpinned. A series of bottoms at .9376, .9402 and .9421 are major support. The trend will remain up on the daily chart until these levels are violated.

The September Canadian Dollar is still ping-ponging between retracement levels at .9737 to .9456. Continue to play these levels until the market breaks out in either direction. The Canadian economy appears to be stuck because of the influence of the weakening U.S. economy. Uncertainty about future growth is cooling off the Canadian economy, leading to speculation that the Bank of Canada will leave interest rates at 0.75%.

Election concerns and the dumping of risky assets pressured the September Australian Dollar early in the session before it stabilized. The trend is down but the chart indicates there is room to break to .8644 over the near-term if sellers step back in after the week-end.

Polls are showing the election is too close to call with several analysts calling for a hung parliament. Taxes, spending cuts and the environment are key issues to be decided with this election.

The trend is down in the September New Zealand Dollar. 7191 is the new main top on the daily chart. A trade through this level will turn the main trend up. Downside momentum is slowing today, but could pick up again if sellers show up. The chart indicates room to break to the .6977 level.

The September Dollar Index finished the week on its high. Overall the shift in sentiment toward risk aversion triggered this week's rally. Early next week the Dollar should react to U.S. housing data. At the end of the week, the GDP Second Estimate should have a huge influence on the direction of the Greenback. The consensus is calling for growth of 1.3% versus 2.4% previously.

 

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