As we speculated earlier in the week, the FRNY has, for the third week in a row, announced on Thursday that the next day (Friday) it will be conducting permanent open market operations on Agency securities (Fannie/Freddie).  The amount of Agency POMO is usually about $1.5B, less than regular POMO.  However, this will make an unprecedented five days in a row (including Monday and Tuesday’s scheduled operations) of liquidity dissemination that can be leveraged 100 times or more in the markets.  With $7.5 B yesterday, $7.00 B today, we could easily see $30 B of leveragable capital hit the markets by Tuesday.  Clearly, the FRNY is coming out with guns blazing and we should have a volatile week into Wednesday’s FOMC Announcement.  If ever there were a time for short term methods, it’s now.

With Fannie and Freddie’s bad loans about to be swept under the carpet, all should be back to normal soon!

http://www.federalreserve.gov/pubs/heloctips/default.htm

1.  Read the notice your lender sends you.

Your home equity line of credit (HELOC) lender must provide you a written notice if they have frozen or reduced your HELOC. Your lender must send the notice to you no later than 3 business days after the freeze or reduction. The notice also must include information about any other changes to your HELOC.

2.  Call your lender.

Even if you have a good payment record, if your home’s value has fallen, your lender may freeze or reduce your HELOC. Contact your lender if you have questions or concerns about a freeze or reduction.

3.  Learn why your lender froze or reduced your HELOC.

A freeze or reduction notice should include specific reasons for the action. The most common reasons for a HELOC freeze or reduction are

• a decline in the value of your home, or
• a change in your financial circumstances.

Understanding your lender’s reasoning may help if you want to take steps to have your credit line reinstated to its original amount. For example, a lender may not be aware that you made significant home improvements that increased your home’s value. Or, if your financial circumstances changed for the worse and that change resulted in a lower credit score, investigate ways to rebuild your credit. For more information see, Building a Better Credit Report.

4.  Ask your lender how to have your HELOC reinstated.

Your lender must reinstate your credit privileges when the conditions permitting the freeze or reduction no longer exist. You may need to put in writing your request to have your line of credit reinstated. Once your lender receives your written request, they must promptly investigate and determine whether your HELOC can be reinstated.

5.  Remember that your lender can impose fees for reinstating your HELOC.

Your lender may charge you fees to cover the costs for an appraisal and credit report when they consider your request for reinstating your HELOC. Your lender cannot, however, charge you a fee to reinstate your credit line once the condition that caused them to freeze or reduce your HELOC no longer exists. For more information see, What You Should Know about Home Equity Lines of Credit.

and is now in the potential bullish reversal area.  If the ES can get below 991.00, 986 is the next target and we would expect value longs to provide support between 984 to 986.  Recall that yesterday’s point of control at 991.00 had strong support and bulls were able to reverse price from it.  A break below signals a reversal from the bullish sentiment that has carried the week and has seen the major points of control hold.  This could be merely long covering ahead of tomorrow’s report, so we don’t want to read too much into it.  As we’ve entered our bearish intraday area, the day trading plan is we’ll be looking for shorts unless and until 1000.50 is exceeded, looking for longs above 1,002.

The Precise Take – Markets positioning ahead of crucial five day stretch

Yesterday:  Examining yesterday’s price action in the ES, we had an early test of the next lower [market profile] value area and bounced within a tick of its point of control at 991.00 (green line by yesterday’s low in the support and resistance chart on page 3).   This area was rejected and the ES was able to test its opening area into the late afternoon, but then reverted to the 998.50 point of control.  When markets continue to reject lower value areas in favor of higher ones, this is bullish.  The only thing bearish was the inability of the ES to rally in the close after the $7.248 B in permanent open market operations (POMO) capital that had been released by the Federal Reserve Bank of New York (FRNY) earlier in the day.  Yesterday, we wrote

“With equities overextended, having had no meaningful pullback since the July rally began, the close today will be an excellent test of whether or not it can continue, or whether the continued capital infusions by the FRNY are in vain (at least temporarily).”

Big picture:  The FRNY announced the upcoming schedule for its POMO operations and there are now two scheduled next week for Monday and Tuesday, sandwiched conveniently between the Employment Situation (NFP) report tomorrow and Wednesday’s FOMC announcement.  In addition, we have the closely watched 10 year and 30 year auctions on Tuesday and Wednesday, respectively.  Demand on the long end of the curve is most important to the Treasury as it is trying to average up the maturity of its obligations.  Tepid to poor demand can send yields soaring, which it wants to avoid at all costs.

The next five days of trading into next Wednesday are exceptionally important and will probably decide the fate of this rally.  Though we lean strongly toward an equities correction to keep long term yields in check (temporarily), the FRNY is shouting loudly that, bonds be damned, it will get its S&P 1200.  Can we have both?  We don’t see how.  So, we see four possibilities:

(1) Equities and bonds both finally correct off a poor NFP report tomorrow.

(2) NFP doesn’t generate much volatility (like last month) and both equities and bonds tread water into the FOMC Announcement.

(3) Over the next few days, there is another material spurt up in equities with a return in the 30 Year bond to lows in the 112 area, and then a double bottom in bonds into the FOMC Announcement that then sees equities correct and bonds begin a multi-week rally.  This requires a move of 4 ½ big bond points and, for this to occur, we need to see a strong move through support at 114’30 (swing low) from tomorrow’s NFP report (which would have to greatly exceed expectations), with the FOMC Announcement generating the bullish news for bonds (and bearish for equities).  If Bernanke wants to kill the stock rally, all he has to do is hint at tightening.

 (4) Equities continue to break to new highs after the FOMC Announcement, long term yields break to new highs above 5%, and gold priced in US Dollars breaks 1,000 convincingly.

With 4 so damaging to the Treasury’s ability to issue long term debt and posing the risk of long term yields spiraling out of control, it’s by far the lowest on our probability scale.  1 and 2 are about equal, and 3 a bit lower.

Trading Today:  As we write, the ES has advanced to the daily R1’s and made new highs, nearly reaching our long term 1008.50 upside target.  However, it is in a potential reversal area, which bulls will need to…

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