This post is perhaps a little outdated, but I write here to figure things out for myself, rather than to impress you, fictitious reader (FR) with my brilliance, and this is an unclosed loop that began with a post 10 days back, so now I’m gonna close it. First, a couple charts, courtesy of the fine folks at FreeStockCharts (and some very old-skool manipulation on Mr. U’s part, ah well…)

$SPY 2009 daily chartThis is a daily chart of the good ol’ $SPY for 2009. Hopefully it looks familiar enough to anyone reading this (and if you’re trading without charts, uh, why?), showing the infamous V. I add a single trendline to show you just how momentous this week’s action may have been to coming weeks’ action. A broken intermediate-term trendline, with a backtest point at a flat 5-day moving average, does not look easy for bulls.

As you can perhaps guess from the two arrows, I’m interested in a couple particular moments as they relate to government and its ability to create and destroy tape. The dates are February 10–the day Geithner gave his first stress test speech–and May 4, the date the stress test “results” were released.

Now, you may or may not remember the action immediately preceding February 10 (arrow #1), and what happened on that day. I remember it quite vividly, because February 5, 6, and 9 saw some real buying strength. On diminishing volume, granted, but I could “feel” the market wanting to rally. (And set myself up, painfully enough, accordingly, but that’s another story.) And then, on February 10, after some light morning selling, Geithner stepped up to the mic at 11 a.m., and literally as he opened his mouth, the market started to drop. Hard. And didn’t quit for another month, is the short version of the story.

Then, over the weekend of March 7-8, Citibank said they’d had a couple of good months, the market was even more deeply oversold, and we were off to the races, punctuated by a series of very cheery announcements from the financial industry, the second-derivative news, and the stress test progress, particularly some leaks (strategic or otherwise) in the final few days before May 4 (arrow #2), when the results were originally meant to appear, or May 7, when the results actually did come out. That week began with a fresh breakout, and ended with the rally high thus far, all, I would venture to say, stress-test related.

You can probably see where I’m going with this: I would venture to say that, in some form, the very same stress tests “caused” a fat drop and an equally sharp rip right back up. The government position, if you followed along, didn’t really change: They said the tests would be relatively low-stress, meant to reassure above all, and the results were apparently ugly but not too ugly, but regardless and in the meantime the market kep about what they meant. Somehow, against this policy, the market managed to convince itself 1) that banks would be nationalized when they failed their tests (with plenty of punditology backing them up in the 24/7 squawk boxes, and the government promising it wouldn’t happen) and 2) that the stress tests were a government sham, and a way of avoiding nationalization.  What I find fascinating is that policy got blamed for two contradictory versions of the story, while the market merely mean-reverted, basically ignoring version #2. To clarify: if the banks were to be nationalized, a plummet in share value makes sense, as shareholders feared being wiped out. But if the stress tests were too weak, and th$SPY 2009 daily chart, stress-free editione government was wallpapering over deep cracks in the system, the market should have dropped farther. In terms of sticking to message, the government has been far less schizophrenic than the market.

But I really wrote this to commit a TA cardinal sin, and offer you this second chart. It’s just like the first, but a stress-free edition–it jumps from Feb 10 to May 4. Strap on your tin-foil beanies, and note just how smoothly February 9 would lead us into May 4-8. If you omit the we-hate-Geithner’s-beady-eyed-voice day, you could draw a damn trendline right up it. And why is everyone now watching 875 so carefully? Government be damned: Eliminate the market schizophrenia of February, March, and April, and you have a range-bound market oscillating around it. (As an aside, I cannot imagine a clearer picture of just how important current support is than what this chart shows. Too bad it’s fabricated!)

I have one more trick up my sleeve. If you follow me on twitter–and, y’know, why wouldn’t you? I do–you have heard me grumble and moan over the lack of consolidation all the way up this “rally”, and the ripping behavior and leadership the financials have shown throughout. If I had no more than one sentence to deflate the rally excitement, that would be it: the financials are still dragging the market around by its peroxide-free roots, despite being deeply broken, and demonstrating a most convincing failure of leadership on every economic front possible.

$XLF 2009 daily chartYou could perhaps guess what the next trick is. At left, the same 2009 complete daily chart for $XLF. Note a similar break of the simple rally trendline the last couple days. Note the positions of the market at the stress-test inflection points of February 10 and May 4-8.

In keeping with the above summary of rally-hype deflation, I present you with a similarly mangled chart. The trendline has been broken and its backtesting is in line with a break, but note how far above their early-February level the financials still hang. Either February was too low already, or in May we’ve overshot–in other words, the financials market has spent much of this year overreacting to the$XLF 2009 daily chart stress-free stress tests, in both directions, relative to the S&P. I am not alone in saying we’re overdue for a correction; reasonably, the longer overdue the correction, the more severely participants might react to it, having lost the habit and/or settled into greed; the breaking of the trendline tells me it’s coming, and the big blank space above the February line says it’s got easy room to fall.

Not that this sort of nonsense technical analysis carries any real significance. My broader point is that any reaction to government “intervention” you might read in the tape is disortion, not commentary. We’ve had at least a two-phase reaction to essentially the same government activity. Plenty of other factors have played in the traffic as well, naturally, the most obvious of which is just good ol’ time. I believe Phase 3 is now underway. No doubt traders will yelp about the government having caused it, too.