• Doug will be back tomorrow.

I'm on my way to Rio for some much needed sun and sand, but you'll be hearing from me.

Have a great evening!

• Have we finally reached a point where there is nothing left to gain from QE and ZIRP?

Release Date: December 16, 2008

The Federal Open Market Committee decided today to establish a target range for the federal funds rate of 0 to 1/4 percent.

Since the Committee's last meeting, labor market conditions have deteriorated, and the available data indicate that consumer spending, business investment, and industrial production have declined. Financial markets remain quite strained and credit conditions tight. Overall, the outlook for economic activity has weakened further.

This weekend marks the four-year anniversary of the Fed's decision to cut the Fed funds rate to essentially zero. How many of us thought then that we would still be locked at 0% four years later, with a fifth year of zero-interest-rate policy very likely?

So, does this policy actually work? Does it address the problem?

If you believe that low borrowing costs are the answer to every problem, then it does work. That has been a valid strategy in the past.

But if you believe a secular change has occurred and all the free money in the world can't turn back the hands of time, then the answer is no.

I'm not criticizing any particular school of thought, I'm just wondering at what point -- if ever -- we will admit that we're wrong. Are we capable of admitting that maybe we made a wrong turn, or do we keep on driving?

Have we finally reached a point where there is nothing left to gain from quantitative easing and ZIRP? Do we really want to pursue this on an indefinite basis?

Our role model here is Japan, which introduced quantitative easing more than 10 years ago. After the upcoming election, they'll unleash new methods to stimulate their economy. Is that where we are headed?

I'm not trying to force an opinion on anyone; I just believe that some healthy skepticism might be warranted here.

• A victory for Abe and his party could mean higher inflation and a weaker yen.

Yen destruction continues unabated as the U.S. dollar/Japanese yen exchange rate spikes to an eight-month high and the British pound/Japanese yen extends its year-to-date high.

As markets react to the polls in Japan, the result is becoming clear: Not only is Shinzo Abe going to win the upcoming election, his Liberal Democratic Party -- in conjunction with a smaller ally -- is going to dominate the lower house of Japan's legislature.

Abe has led from the outset, but last week the poll numbers showed a tightening race, with current Prime Minister Yoshihiko Noda closing within a few percentage points. Also, Abe's apparent popularity didn't necessarily translate to support for the LDP, according to polls. All that is changing, with Abe now sporting a commanding lead and the LDP poised to capture 300 of the 480 lower house seats.

With the help of the likeminded New Komeito Party, the LDP will control more than 320 seats -- enough to ram through legislation designed to create inflation and weaken the yen. That's why we are seeing a further surge; it's becoming apparent that Abe's reforms will see the light of day. Japan has fought deflation for the past 20 years, and Abe intends to create 2% inflation through a series of controversial measures of questionable legality. These include instructing the Bank of Japan to purchase construction bonds directly from the government, something that current Bank of Japan Governor Masaaki Shirakawa has decried. If Abe and the LDP can pull off a big victory this weekend, expect the dollar to rise to 84 yen.

• The Fed's 'new' stimulus was clearly anticipated.

The new Fed stimulus really only replaces Operation Twist; in other words, this shouldn't be viewed as a big deal. In fact, it's exactly what was expected. According to a Bloombergreport Tuesday:

The Federal Reserve will amplify record accommodation tomorrow by announcing $45 billion in monthly Treasury buying that will push its balance sheet almost to $4 trillion, according to a Bloomberg survey of economists.

Forty-eight of 49 economists predict the Federal Open Market Committee will purchase Treasuries to bolster an existing program to buy $40 billion in mortgage bonds each month. The panel pledged in October to continue that plan until the labor market improves "substantially."

That makes the bullish reaction interesting. Stocks rose, the euro jumped up, and iShares 20+ Treasury (TLT) broke down out of the double-top pattern I mentioned earlier. This is all based on an event that was clearly anticipated.

Why would markets move higher when there is no surprise? This could be considered a sentiment indicator. Obviously, some traders wanted to buy but held off until Bernanke told them what they expected to hear. I'm still bullish, but I don't see a moonshot based on today's Fed action; easing has a way of losing its effectiveness over time, as Bernanke has pointed out in the past.

Now that this is out of the way, we can return to our other major concern, the fiscal cliff.

• Sales of safe assets like Treasuries could provide additional fuel for a move.

Earlier I outlined a bullish scenario that the S&P 500's break of resistance, confirmed by the yen's continuing weakness, show a market that is ready to move to higher ground. Another ingredient is about to enter the mix is that long-term Treasuries, represented here by the iShares 20+ Treasury (TLT), appear ready to fall. A further drop in TLT's price would signal us that yet another asset class is shunning safety. If stocks really are about to take another leg up, sales of safe assets like Treasuries could provide additional fuel for the move.

TLT

Source: TradeStation

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TLT has a very technical chart. First, take note of the head and shoulders on the far left side of the chart, and the subsequent move lower. Don't you wish someone had told you about that back in early August?

Oh hey, someone did!

That article was written the morning after one of the most enjoyable events I've experienced since I've had the pleasure of joining forces with Real Money Pro, our meet and greet with subscribers! I still smile when I think about it. We have some great people reading our articles.

Back to the chart, notice how TLT rallied right back to the neckline of the head and shoulders (shaded yellow) before crashing back down again. That's tech analysis 101, a great trading setup to short TLT again.

The selloff in Treasuries was a precursor to a move higher in stocks, which took off just before TLT collapsed. Are we about to witness a similar event? This time, instead of a head-and-shoulders pattern, we have a bearish double top on the hard right edge of the chart. In other words, we could be looking at another round of liquidation of long-term Treasuries and that money has to go somewhere. The logical place for that money, based on the breakout of the S&P 500, is into stocks. Where is TLT headed next? Based on a simple measured move analysis, TLT likely ends up at $121.

• Penny-Lane-Royal Tea?

Rumor has it that at tonight's 121212 Hurricane Sandy benefit concert, Sir Paul McCartney will take the stage at Madison Square Garden with the surviving members of grunge pioneers Nirvana.

This is sure to throw the music world into a tizzy; purists will scream blasphemy at any attempt at a reunion, even for one song, as there can be no Nirvana without the late, legendary Kurt Cobain.

On the other hand, it's Paul, who would seem to be immune to any criticism due to his incredible body of work. He's a living legend and an elder statesman of rock and roll. You can be sure he'll handle this in a respectful manner. Here's the article that's causing all the buzz.



I say, go for it Paul. Blow the roof off the place! Rock and roll is about taking chances. It's not for the squeamish or the sanctimonious.

And for you purists out there, look at it this way -- at least it isn't PSY. Can you image a Gangnam-Style version of Smells Like Teen Spirit? Me neither.

• The price action on Apple (AAPL) is anything but encouraging for longs this morning.

The stock gapped higher by $7, but that gap filled rather quickly, within the first hour of trading. Early bargain hunters have been rebuffed and having burned their hands on the proverbial hot stove, they will be less likely to dive in again in the short term.

Apple 5 Minute

Source: TradeStation

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It's just another of the many technical reasons to dislike this stock. Remember, we are strictly talking about technicals and price action. This analysis has nothing to do with Apple TV, iPhone sales in China or any other fundamental aspect of the company. I haven't changed my longer-term outlook, which was presented in this article last week.

In fact, the events that have transpired since then have reinforced my belief. For example, in last week's article we examined the Marabozu candlestick pattern of Dec. 5. As it turns out, another bearish candle pattern formed immediately afterward. This pattern, known as the Dark Cloud Cover, shows that a nice rally on Dec. 6 was immediately squashed on Dec. 7.

Apple Daily

Source: TradeStation

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If you really want to understand candlestick patterns, just think about how it feels for the person in the trade. Imagine that you purchased AAPL at the lower end of that green candle on Dec. 6. You probably felt elation at your prescient market timing. Now imagine the disappointment that you felt as you watched the gains melt away the very next day. Like it or not, emotions play a role in this market and the emotion that was generated by this pattern was very negative, like snatching defeat from the jaws of victory. Coincidentally, that's the same feeling that was generated for those who bought Apple during the first 30 minutes of trading today.

In other words, those trading Apple from the long side keep getting burned. It's happening in a variety of time frames, as evidenced on both the 5-minute and the daily charts. Eventually, buyers are going to stop putting their hand on that stove. 

• That break of key support mentioned earlier is being confirmed in the currency market.

Specifically, the Japanese yen, which does well during times of tumult, is taking yet another beating this morning. The GB Pound/Japanese Yen currency pair reached a new year-to-date high today, indicating that bears are on the run. I recommended this trade on Nov 14, right here on Real Money Pro.

Just like the S&P continuous contract, the GBPJPY is sailing along its 10-day exponential moving average, seen here in blue.

GBPJPY

Source: TradeStation

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Shorting the yen has been a great trade, but I'm winding everything down, so no new positions for me. Today will be my last full day in the U.S. for a while and I don't want to fuss with Internet connectivity, etc. while I'm away. I'll close the remainder of this trade within the next 24 hours.

• On the S&P continuous contract.

In case you missed it yesterday, the S&P 500 continuous contract broke through a key level that has acted as both support and resistance for the past three months.

The area in question, roughly 1420 to 1425, has come into play numerous times on both sides of the market (arrows). Yesterday's move through that area occurred on above-average volume (shaded yellow). That area should act as support on a pullback.

Also, keep an eye on the 10-day exponential moving average (blue); this has acted as support since Nov. 20.

@SP Daily

Source: TradeStation

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• I'm very pleased to be back in Doug's chair this morning!

I'm even more pleased at Dr. Ash Tewari's prognosis, congratulations Doug!

Today's action features the Fed with a 12:30 p.m. ET announcement that interest rates will remain unchanged, followed by a Bernanke press conference at 2:15 p.m. Will the chairman hint at new stimulus measures?

Markets seem to be betting that additional measures are on the way, with more than 90% of participants in an industry survey expecting new action. Expect the Fed to match its monthly $40 billion in mortgage bond purchases with a similar or slightly larger amount of monthly Treasury purchases. These purchases will replace the $45 billion per month from Operation Twist, which is scheduled to end this month.No doubt Ben will also lecture on the perils of the fiscal cliff.