Last week closed on a fairly positive note after yet another credit crisis (this time a British bank) sent premarket futures plunging: the bulls smelled blood in the streets and swooped in to pick up cheap shares. The indices managed to close the day slightly in the green, with the S&P and DJIA posting minor breakouts. We should see muted action on Monday, however, as money stays on the sidelines until Tuesday at 2:15 pm, EST, when the Fed makes its highly anticipated announcement. Our prediction: the Fed lowers 25 bps, but then eliminates any wording about being "ready to step in" if inflation is noted...in other words, the Fed takes a doveish stance. The knee-jerk reaction is likely then to be to the downside, but only briefly as confidence in the overall economy returns to the markets and we get a healthy bullish ramp test the recent highs.
The chart above shows the S&P proxy (SPY) ready to breakout of an IH&S pattern, with a healthy OBV confirmation; which is to say, the volume for the right shoulder is higher than that for the left shoulder...which is precisely what we want to see in this pattern. I'd look for a confirmed breakout by the end of the week. But is the lower trendline of the right shoulder is violated on any close, then all bets are off.
We recommend going lightly into Tuesday and managing any open positions with hard stop-losses.
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