Wednesday, June 22, 2011

Fed Spurs Selling

The only thing surprising about the selloff today is that it didn't happen sooner and more aggressively. The Fed cut all of its key economic projections -- growth, employment and inflation -- and didn't offer even a minor hint that some form of quantitative easing would be forthcoming. The market could have handled the weak economic forecasts if it felt that the Fed was going to be printing more money and keeping the dollar weak, but Ben Bernanke said that it will be a couple months before such a move is even considered.

Despite the poor news, we held up surprisingly well until the final 90 minutes of trading. We broke down and finished at the lows of the day. It didn't help that we were technically overbought after a vicious short-squeeze yesterday. The bulls already had their work cut out for them if they were going to build on the bounce, and the news flow just didn't support it.

The action recently has been exactly the sort of action you expect within downtrends. We had a very vicious spike to the upside that squeezed shorts and caught underinvested longs by surprise, and then a fairly quick failure on poor news flow.

The primary thing to keep in mind is that despite the strength on Tuesday, the market remains in a downtrend. Strength should be treated with suspicion.

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