The countdown has begun for the FOMC meeting next week. Just what will the future hold for all of us market buffs? Wouldn't it be nice to have a magic mirror like the one in the movie Snow White? But, alas, no such mirror for us, so back to reason and revelation, I guess.

To tell you the truth, three weeks ago, I felt that Dr. Ben (Bernanke - the Fed chief) would hold the line on any further cuts and wait until the December meeting for more evidence that would make for a clearer direction. Maybe he still will. But, I am not so sure now.

I do know that the Fed is running computer simulations (unlike the Greenspan generation) that will at least give some possibilities of outcome if any "action" versus "no action" controversy develops at the meeting. That is something he brought with him from academia.

However, the most real evidence I see at the moment is from that hard-boiled group called bond traders. Talk about realists! These guys would sell their grandmother if the market for grandmothers started to get soft! (Forgive me Grandma May and Grandma Marie.)

At the moment, the bond traders are saying that there is a 100 percent chance that Dr. Ben will reduce rates. For sure, they say the Fed will reduce by quarter point and there's a 75 percent chance of a full half percent cut.

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I have found that betting against this coalition is usually a bad bet. And it puts a lot of pressure on Dr. Ben. Whether the bonds move from true market conditions or just sheer panic, the bond market must be part of the equation come FOMC day next week.

So, let's look at the charts for a moment. The 30-year Treasury bond chart below is quite revealing. Notice that from December 2006 until May 2007 the bond folks seemed to be pretty satisfied that rates were right and that mostly all was right with the world.

My Keyline was crossed up and down several times, but nothing much to really write home about, especially after all the action from the huge dip in bond prices in early summer 2006 was followed by a huge bond rally into September 2006.

Then in May 2007 (see the circle) and maybe as a result of some whiffs of possible subprime spoiled meat and inflation problems, there was a huge and fast drop in prices. I wrote at the time that the bond market had it all wrong.

It was really quite evident from the data and the charts available that things were quite stable. No inflation ratcheting up, no huge sell-off of U.S. dollars. No, that sell-off was just one time the bond guys got it wrong. My response was to say that the drop would be retraced. It was, as you can see, by the end of August.

But, I must be fair here. In late June and early July, the subprime bubble really was about to burst. The rectangle on the chart shows we popped up and down three or four times in a narrow range — a tug of war between the bond bulls and bears — and finally the bulls won and the price climb started. I felt vindicated.

[Editor's Note:Special Report: 5 Ways to Profit From the Housing Bust.]

Then, in early August, after we had retraced the previous May decline by about 90 percent, the subprime problem really did hit the headlines. From there, it was all panic buying, as the prices skyrocketed from the 109 level to the 114 level in less than nine sessions.

That folks is what panic looks like. I have seen it worse over the years, but this one looks pretty panic stricken by any measure you want to use.

Then, as I expected, the panic subsided as the reality of the subprime situation began to indicate that the problems from subprime would be contained. In response, the bond bulls sold and we crossed down the Keyline and then pulled back up towards the underside of the Keyline in September 2007, a classic reaction rally after a cross-down that usually leads to further downside selling — which is exactly what happened, UNTIL . . . .

As prices dropped toward the 200-day moving average, a strange thing happened. It began to be rumored that the subprime problem was more than just subprime. The housing market speculation investors (those that have been propelling the housing price increases over the last five to six years) were finding it very difficult to get money for speculation.

This speculation was a key factor in the run-up of nearly 100 percent in home prices in some areas of the U.S. With no money for speculation, the housing market could face some serious declines, it was rumored. A recession was said to be coming.

So, as the stock market churned in a trading range trying to digest if that rumor really was true, bond prices stopped dropping and consolidated at about the 110-10 area for nearly two weeks.

I knew this was unusual bond action, but had to sit it out until it was clear which way things were headed. Well, it didn't take long to see. On Oct. 17, prices skyrocketed one and a half points in one day and crossed up the Keyline (or should I say rocketed up past the Keyline!). Once again, panic buying, folks — just sheer panic. Too bad, too. There is still not a lot of hard data - except in the housing area — that says there is a problem big enough to bring on recession.

But, facts in a panic don't mean much. And now as we approach the FOMC meeting next week, the bond guys and gals are sure that Dr. Ben will be forced to reduce rates further. I said in early summer, I expected to see the Fed funds rate at 4 percent by year's end, but for different reasons (see my column of Aug. 24). Now, the bond folks see that coming sooner than even the end of the year.

It was Pimco's Bill Gross (a huge California bond fund) that said last week he expects 3.75 percent by spring. I don't know if I would go that far, but I will repeat my 4 percent forecast again, but, again, for different reasons. Panic knows no logic. It only knows it believes the rumors and heads for the safest spot on earth — bonds.

So, we will just have to wait until the FOMC meeting and see what happens. Will Dr. Ben hold the line? Will the twelve Fed presidents present evidence to Dr. Ben that convinces the Fed chairman that indeed rates must be lowered? Will the Fed computer simulations carry the day? And will there be that terrible recession that's rumored about so freely? As I said, tune in next week. Should be a fascinating one!

But, I do have one other matter to touch on before I close today. It has to do with the Fed and it is a matter of total speculation on my part. But, I have watched the Fed closely for many years and I speak from experience in what I have to say here.

In the market crash of 1987, the then Fed Chairman Alan Greenspan was terribly frustrated by not being able to do more to stop the huge selling that went on for three to four days. He vowed to insiders that it would never happen again, at least that's the word in several biographies of former Fed watchers and insiders, including one Richard Russell, grandpa of all us newsletter writers.

The outcome was (at least according to rumor) that Greenspan formed what has since been irreverently called the "PPT" or Plunge Protection Team. This team of experts was charged with making sure that markets didn't drop through the floor ever again like they did in 1987.

How did they intend to accomplish that? Simple. In panic selling times, the Fed would just step in — usually via large brokerage houses so it was not easily traced back to them — and buy, buy, buy. And why should we be surprised at that? They have done that openly in the currency markets for years!

Sometimes, they supposedly did their stock market buying in dribs and drabs, just enough to scare the selling bears. But, in March 2003 — the week of Mar. 21 — they were clearly present as the stock market soared straight up over 40 S&P points in less than 30 minutes. The buying was relentless and it broke the back of the bears for good. The decline that started in 2000 ended. From that time on, though, there has still never been any outright confirmation that the PPT actually exists.

I bring this up today, as my charts have noticed three times in the last two months (once yesterday, Oct. 24) that as the market was pressing to break key support levels, suddenly a HUGE buy move hit the computers and the market just reversed on a dime.

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Now, it could be hedge funds, true. It could be some big brokerages, true (but not likely with the problems they are having at the moment, I'd say). But, on the other hand, it surely had the smell of the PPT to me.

Think about it. You are the Fed Chairman and the market action is ugly while you are trying to work out a pressing problem. Right then, you don't need a panic selling day in the stock market to jerk investors around, so you reverse the market. Who pays for all those shares being bought? Well, the Fed just writes a check. Simple isn't it. It's your tax dollars at work!

Now, being realistic, the Fed can't hold off a full-fledged sell-off if the reason is a clear recession in progress. But, it can hold off selling by keeping the bears off balance until it either works out a solution to a current problem or has to admit it can't.

So, if you see sudden reverses on days where selling is the order of the day, like yesterday, maybe it is our tax dollars at work, as I said. Who says the Fed can't spur markets in the direction it wants? Not me. For sure, not me.

Well, that‘s about all today. Next week ought to be very, very interesting! Do hope that your investing week will be as interesting and hopefully profitable. In the meantime, you keep in touch. I do! See you next week.

Editor's note:
4 Foreign Currency Plays to Beat the Falling Dollar.
Special Report: 5 Ways to Profit From the Housing Bust.
Commodities Are Still in a Bull Market. Get Our Top 6 Recos for the Coming Year.