Dan Norcini on QE3

Ever since talk began surfacing of the ending of QE2 this month, the stock market has rolled over on the technical price charts. The more convinced that the markets have become that the Fed was going to take away the fun and games, the further the equity markets have dropped. It has now reached a point where the stock market is threatening to take out a critical support level. Should it do so, consumer confidence, already reeling from high foreclosure rates, falling property values, soaring gasoline, food and other energy prices, and a lackluster jobs situation, would immediately plummet.

The one thing that has helped to keep some of the population from becoming completely depressed has been the fact that they could look at their 401K programs and still see that those were in the plus column for the year. In other words, while the rest of the world was seemingly going to economic hell, at least they were making a bit of money on their retirement accounts.

Take away this last refuge of happiness, and the mood of the public will grow foul and fester, not to mention that of Wall Street and the many brokerage houses which do not generally make money during bear markets in equities.

Look at the weekly chart of the S&P (note – I use the emini S&P for charting purposes) and you will see the rising 50 week moving average along with a critical horizontal support level that comes in near the 1250 level. That is also the level near which the S&P began the new year of 2011. If it falls below that level, all gains from the year are gone and losses begin to then mount. That is when the general public will lose its last refuge of consolation.

I mentioned last week that if 1300 were to give way on the weekly chart, it would bode ill for the broad equity markets going forward. That level is still a key level but as of now the S&P is trading below it and cannot seem to recapture its footing above it. The momentum is growing to the downside on the charts and if we continue to get economic data that disappoints and reinforces the growing perception that the economy is in serious danger of rolling over, a very strong possibility exists for a move lower in the S&P to the 1250 level.

If this level gives way allowing the market to fall down towards the 50 week moving average which currently comes in near the 1225 level, expect a chorus of voices clamoring, nay, demanding further stimulus from the Fed. Those voices will firstly come from the Democrats whose election fortunes next year are directly linked to the welfare (or lack thereof) of the US economy. It will also come from the doves on the FOMC. Lastly it will come from many in the financial community who are more willing to take their chances on a falling Dollar than a falling stock market.

If the Fed hearkens to those voices, and I have no reason to doubt at this time that they will not, expect the US Dollar to not only take out critical chart support near 73 – 72.50, but to continue sinking lower. The result will be to push gold sharply higher and into new all time highs.