If you have read my recent commentary, you may remember the “Domino Effect” that the E.U. Faces, or probably more accurately, is now in the midst of. When the last Domino falls it will be of the Euro and the European Union.
Today the story is the former Celtic Tiger, but the wider picture is that of Union itself. The cracks and rifts are being seen now on almost an hourly basis as sovereign nations who once thought a Union to compete with the U.S. was a good idea are doing what comes naturally and starting to think, “me first”. Ireland is certainly doing it with their obstinace toward taking a strange bailout, strange because the benefactors are nearly begging them to take it. The Irish know that if they hold the other member nations ransom to prohibitive borrowing costs, they can cut themselves the best deal possible. Austria is thinking, “why bailout the Greeks when they lied and can't even keep books correctly”. The Finnish rang in today with a similar thought process.
Looking at some of the countries likely to default in the future, we know Greece's problem is thy simply can not make the cuts needed, they're in too deep. Ireland actually took early austerity measures, but an American-like credit financed housing boom went belly up. Similarly Spain saw a housing boom that went bust. Spain also has the second highest budget deficit in the Union with an economy that has stagnated, there's not a lot to work with there to bring that down. And France? They have an exceedingly expensive social system and they are not keen on change as you may remember the recent protests over pension reform; heads will roll so to speak.Italy's economy has been in shambles since they joined the Union, a few of my best friends are Italian. It's not so much their current deficits a it is their past debt that still haunts them.
The main problem with the E.U. Is the idea that various economies and cultures can all be centrally managed identically, they can't and we are seeing proof of what England knew right now as plugging one hole only leads to another bursting somewhere else. What is really important to us as market participants is the effect this will have and it seems unavoidable that the E.U. Is headed for another recession or double dip as is the current vernacular.
However all of this focus on the E.U. May give the impression it's all because of them, it's not although we will feel the effects.
We have our own problems, Fauxclosure gate doesn't seem to be going away any time soon. While many are cynical in their feeling of what will happen to the perpetrators of Robo-signing (i.e. Congress will pass a law that lets them out the back door), the problem develops deeper roots every day. For example today Fox News has learned that the head of The financial Crisis Inquiry Commission will be investigating whether mortgages packaged into bonds and sold to investors were done so legally. This involves Trillions of dollars in debt which all comes back to Robo-signers and due process for those foreclosed on. Guess who are two of the main banks at the center of this controversy? Noe other then our recent short plays BAC and JPM. If this goes south, those bonds will be declared illegal and the banks could be forced by investors to buyback the mortgages.
Also as I mentioned yesterday after Moody's said extending the Bush tax cuts would likely lead to a downgrade of U.S. Sovereign debt ratings. Negotiations today in the Senate between top Democrats and Republicans ended on a pessimistic tone. So if thy do extend them, ratings are cut, if they don't extend them, marginal income tax rates will rise, family tax credits will be on the chopping block, some estate taxes will rise and the dividend and capital gains tax will increase as well. I'm not even getting to what Q3 GDP might look like after sliding for the last 3 quarters. Ooh and don't forget the fun that we might have watching Congress try and strip the Fed of its dual mandate. The same Fed that holds as much or more of the U.S. Debt on any given day depending on POMO purchases and continuing Chinese purchases. That could be a wild show as the Fed does carry a big stick right now. One last note about the Fed and QE2 specifically (I will say that I called this several weeks back)-Hoenig, Warsh and Lacker who are skeptical of QE2 have said in the last few days that they'd be willing to cut it off short over inflationary concerns. It's still a little bewildering to see how much criticism is coming in of QE2 considering it was one of the most telegraphed moves the Fed has made. I wouldn't want to be Bernanke this Friday speaking at an ECB conference in Frankfurt, Germany.
Last on the Macro front tonight is Asia and specifically China which are taking steps toward tightening policies slow down their economies. The fear of a slowdown in Chinese growth is what hit the materials sector so hard today over concerns about Chinese demand for raw materials; agricultural products and metals took a big hit.
As for the market...
I bet you can guess which of the four possible outcomes, today's market presented in the form of Price/Volume relationships?
If you said Close Down and Volume Up, you were right. It is not the most bearish relationship, but the second most bearish, however it does indicate a degree and in today's case, an overwhelming degree of panic selling as the ratio was very high for each average.
As you can see, the red trendline depicted the point in which 3C daily would go into a leading negative divergence which on a daily chart is a serious affair. All of the movement under that trendline came today.
Today's thematic 3C readings were a series of 1 min positive divergences that just got bulldozed by unrelenting selling in the Euro, however, that does not mean that there was not accumulation as suggested on the 1 min charts, just that there were other outside influences that prevented the market from seeing any sort of 1 min inspired bounce. The SPY did manage to close with a 5 min positive divergence which does suggest we will see some sort of relief bounce, whether it be intraday or on a closing basis. This does not diminish anything bearish we have seen, it is quite common to see a market go into a 1 day oversold or overbought stance. A bounce can be an opportunity to set up a great position that you have been waiting on if you can bring yourself to short into strength, just like buying into weakness. There is a thin line there though and I try to address it with good risk management and phasing into positions. For example, the recent BAC short opportunity I talked about as it neared the top of the Trend Channel allowed you the ability to go short BAC at a better entry, but I would not enter the entire position there, just part of it and then enter the rest as the trade moves in your favor. Tops are notorious for their volatility and I'd much rather not get in at the exact top in exchange for less risk and a higher probability trade. When the market trends, I tend to loosen up on that policy a bit and enter full positions, but while it's still range bound as this market is (albeit a very large range), playing defense is better then trying to be smart and catch tops or bottoms. It's the trend that makes you the money.
As I posted earlier today with my Trend Channel, if SPY were a long position I had, today at the close I would have stopped out.
Notice how my proprietary Trend Channel caught all of the trend up on this rally, not one single incidence of a false stop out. Today the SPY did close below the highest level of the lower channel, that is a stop out on the close when using the Trend Channel which I highly recommend or an alternative stop system which is objective and not an arbitrary guess. You may not get out at the exact top, in fact using the Trend Channel you'll never get out at the exact top, but you will have caught the majority of the trend.
Remember that VIX positive divergence? The VIX moves opposite the market mostly, when it is in an oversold condition, we are near a top, when it is an overbought condition, we are near a bottom. The last time we saw a much smaller divergence, the market sold off from the April highs.
Now we have both a bigger positive divergence (bearish for the stock market) and a descending wedge that just broke out today (also bearish for the market).
Another big positive divergence that's been building has been on the Dollar Index.
The Dollar Index has now convincingly broke out above resistance. Remember as the Euro sells off, typically the dollar gains. When the dollar gains, it's usually bad for the stock market and commodities.
Here's UUP also breaking out from resistance with a leading positive divergence on the daily chart.
Last night I showed you the daily chart for XLF which looked like it saw a false breakout. This is one of the only charts today that held together a 1 min positive divergence so I expect something will be announced in financials and they'll see at least early upside tomorrow, which is good if you want to short any financial stocks or buy inverse ETFs like FAZ or SKF.
FAZ had a strong move today but didn't quite close the deal by closing above the gap. For that reason, any buying I might be interested in with FAZ would be easing into a position, I don't want to commit to it fully until it really starts moving in my direction. I might add a little more when it gets back above resistance and fill out the position when it breaks out of the trading range that it was in before it broke resistance.
Both BAC and JPM put in reversal candlesticks that looks like they'll see some bounce to the upside tomorrow.
USO also managed a nice 5 min positive divergence, so I imagine oil will see a bounce tomorrow as well. These bounces could be more then 1 day, we'll have to see what they do tomorrow, but I'll be watching this one for a setup or opening.
TMV took a big hit today, but the chart below still has it as a possible buy. I said last night I'd like to be a buyer at the 10-day moving average and it may make it to that area. Much below the 10-day m.a. And I think I'd wait it out or if RSI were to cross below 50, then I'd stay away, but we can see what it looks like tomorrow as the premise of the trade still seems to be intact.
GLD saw some heavy volume selling today, SLV while down, still looks better to me then GLD. In fact, I'd probably take a shot at bounce trade in SLV and see what it led to as it did put in a nice 5 min 3C positive divergence.
I don't know how long I would hold this one, it may just be for a bounce or it may be longer, depending on what it's underlying action was saying, but I do like it for a bounce at least.
Here's a very speculative trade, but because it seems that we will see some upside tomorrow, unless we get more unexpected fundamental news out of China or Europe , I do like how NYNY held up today in an otherwise very ugly market.
This is an ascending triangle, which is a bullish pattern, volume has dropped into the formation as it should. 3C looks pretty good as well. Ideally, I'd want to go long as it broke out above the resistance trend line around >$1.07. A reasonable stop would be around $1.05 on the close. If you were to buy this one, you want to see a strong move up and a strong close, then you might see another day or two of follow through off that move. However as I cautioned above, it is a low price, low volume SPECULATIVE TRADE. It may deliver some decent quick gains, but it's not the type of trade you want to go swinging for the fences with as it could also drop a lot on a gap down.
JSDA is another SPECULATIVE bounce play. This one was down nearly 14% on Friday, but today it managed to hold some support at unchanged. When taken with the 10-min positive divergence t has going for it, I think if this were not to gap down, I might take a shot at this one on the open at market (as long as it doesn't gap too high up either). However, my position size would reflect the fact that it is a speculative play.
DIG is another Bounce Play. I do not like this stock long for a position trade, but it has formed an intraday base and 3C is in a leading positive divergence. If it were to break above the rd trendline, it may be worth a shot on a bounce.
In looking around at charts tonight, I see a lot that are in very bad shape, tomorrow I'll probably start listing more short sale set ups, but in the very near term it does look to me like a bounce is coming tomorrow-so long as fundamental surprises don't pop up overnight.
Since the market has been down so many days and the Price Volume relationship was so heavily skewed, it seems to me that the market is entering an oversold area-this is normal. The chart below shows the SPY and two trendlines. I would not find it strange or bullish if the market were to bounce somewhere in that area. Many times when a stock makes a big break from a trend or channel, it will often try to rally back up to the trend or channel on a bounce and then rollover again, this is what creates the lower highs, lower lows of a downtrend.
As has been the situation for several months now, we have seen the market at extremes, meaning it is very volatile and will tend to swing too far one way and too far the other, so it's possible for a bigger move. However, from what I'm seeing, I feel that this, if in fact does occur, will be short lived. My personal tactic for tomorrow would be to maybe try out some of the bounce plays or longs you may like. We'll see what the underlying action is and that may set up some good short entries. If not tomorrow then we continue to watch it until we do see that. I will list the stocks with charts if possible that look like they may be in good risk/reward -high probability positions. Just keep an eye on the Euro if you can.
I'll be at the doctor's at market open, I should be updating by late morning.
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