Around 9:00 yesterday morning with S&P 500 futures at limit down and precipitous falls throughout Asia and Europe, Chairman Bernanke came through in spades. Traders were presented with a 75 basis point cut in the fed funds rate and most significantly there was none of the usual obfuscation and measured nuances of Fedspeak.

When the central banker of the most powerful economy in the world drops the usual cover of weasel words and other key figures step up the barrage of reassurances that "the underlying fundamentals are sound" etc. we should all be feeling more uneasy about the stability of the global financial system. The malaise goes far beyond the sub-prime problem and raises more profound questions about the integrity of the structured instruments that have been embraced by accident prone bankers without adequate stress testing.

The S&P Midcap index (^MID) bounced off the 200-week EMA but the long tail below the green line on the chart below suggests that we may see quite a bit of donwside testing before the markets decide whether Mr Bernanke should do another 50 basis points next week. These certainly are interesting times!



One of the most positive responses to the Fed move came from the FTSE index in the UK which reversed sharply in afternoon trading and transformed a panic stricken intraday loss that took the index below 5400 back above the opening price to close with an almost three percent gain on the session. The governor of the Bank of England indicated that rate cuts are on the cards for the UK but other comments from his speech last night and recently released minutes from the most recent MPC meeting suggest that rate cuts will be harder to come by and less generous than those on offer from the Fed.

The outlook could of course change quite quickly if key indicators turn down more sharply and it is the housing market that remains the elephant in the room as many consider the UK real estate market to have even more bubble like characteristics than those in the US.

As this is being written the good cheer that surfaced yesterday afternoon in Europe is fading fast with the FTSE down by 1.5% and Germany's DAX sliding fast with more than a three percent loss. Encouraged by the way that Mr Bernanke appears so anxious to please, traders now seem intent on sending pointed messages to the governors of the ECB and the B oF E.



Sales of Maalox are probably booming in Hong Kong. During Tuesday’s trading the Hang Seng (^HSI) went into free fall and registered an 8.6% loss when it closed several hours before the FOMC announcement. Today the market staged a massive rally of more than ten percent. As global hedge funds game this market it would not be surprising to see another dramatic reversal tomorrow. Without being disrespectful it is fair to question whether or not health warnings and safety belts should be mandatory for all of the pension funds and asset managers that have major exposure to this market on the long side.



The VIX surged to close above 35 which exceeded the closing level from mid-August 2006.



Mylan Labs (MYL) bounced off two moving averages in yesterday's session.



Humana (HUM) may try to consolidate in the near term but recent topping behavior shows that there is plenty of downside potential.



Following Monday's surge on high volume, Xilinx (XLNX) produced an inside day which may well be followed by further consolidation, but in the intermediate term the positive momentum should carry this stock higher.



I shall keep Men's Wearhouse (MW) on the watch list for signs that the pullback pattern is running into resistance.



Clive Corcoran is the publisher of TradeWithForm.com, which provides daily analysis and commentary on the US stock market. He specializes in market neutral investing and and is currently working on a book about the benefits of trading with long/short strategies, which is scheduled for publication later this year.

Disclaimer
The purpose of this article is to offer you the chance to review the trading methodology, risk reduction strategies and portfolio construction techniques described at tradewithform.com. There is no guarantee that the trading strategies advocated will be profitable. Moreover, there is a risk that following these strategies will lead to loss of capital. Past results are no guarantee of future results. Trading stocks and CFD's can yield large rewards, but also has large potential risks. Trading with leverage can be especially risky. You should be fully aware of the risks of trading in the capital markets. You are strongly advised not to trade with capital.