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Fannie, Freddie - Mac Attack

The Federal Reserve bailout of the distressed Freddie Mac and Fannie Mae unleashed a Mac Attack on markets worldwide with around a 3 percent pop Monday. Can the pop turn into a lengthy rally, similar to the rally that occurred after the Bear Stearns bailout? Has this the potential to signal the end of the dreadful run of news and the beginning of a new sustainable uptrend? The short answer -- no. The charts suggests this Mac takeaway is more a burp than a trend changing experience.

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The key feature in a bear market is the strength of resistance and the untested stability of support. Let's use Japan's Nikkei 225 Average as an example.

The Nikkei has these bear characteristics. With every potential rally, traders look for the location of resistance and its strength. A weekly chart provides the best view of this information.

Strong resistance is located near 14,500. This level acted as a support level in June and July 2006. The market plunged to this level and then rebounded. This level acted as the strong resistance level that capped the March Bear Stearns rally. This has become known as the B.S. rally for obvious reasons. The rally also failed to significantly penetrate the value of the long term Guppy Multiple Moving Averages (GMMA). The long-term GMMA provides an indication of the behavior of investors. Wide separation in a downtrend shows selling strength.

This combination provided two resistance features and they remain in place to cap any Mac rally. The 14,500 resistance level is now equal to the upper edge of the long term GMMA, suggesting resistance is even stronger.

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The Nikkei includes another resistance factor. This is the downtrend line starting at the peak of the Bear Stearns rally. This is not a significant hurdle, but any Mac market pop must prove its credentials as a rally by moving above this level. In other regional markets, the downtrend line is a stronger hurdle.

Support is the next critical feature in a bear market. Genuine sustainable trend changes start from well defined and tested support level. The 12,000 level is an attractive round figure number that has acted as a resistance level in 2004 and 2005. It provided some support in March 2008 for the start of the Bear Stearns rally.

The optimists suggest that Monday's rebound from 12,163 is near enough to 12,000 to classify as a double bottom rebound. It has the potential characteristics of this trend reversal pattern, but generally a double bottom rebound develops much closer to the first low of the pattern. A rally from a higher second point indicates a slightly less reliable pattern.

The second feature of support in a bear market, is that support usually develops near old support levels. These are often located at the bottom of well defied historical trading band. The relevant Nikkei trading band is between 11,000 and 12,000. There is a higher probability a genuine market recovery will develop from within this type of consolidation band. This break below the upper level of trading bands is also observed in markets such as Shanghai. The Nikkei style features are found in the Singapore, Taiwan, Hong Kong and Korean markets.

This Mac attack has the character of a snack rather than a meal. A successful break towards a bull market means moving above resistance near 14,500. This will signal the development of a more sustainable trend.


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