Overnight Highlights

Yesterday I talked a lot about a bounce coming, we were simply down too much on the day in the small caps especially and an oversold situation is not healthy for a downtrend or any trend, the market has to wring out the excesses to maintain a trend.

 Here's the ES positive divergence I showed you yesterday on a 1 min timeframe and ES gently moving higher in late night trade.

There was a negative 3C divergence building in to the European open and you can see price fall at the open (at the green arrow). Apparently Angela's Merkel's economic advisor had not only mentioned in an interview that they cannot rule out a Eurozone breakup in 2012, but also that the PIGGS countries would have to, "submit to a long term insolvency rule" as Germany seems to be throwing their weight around again. German recession possibilities were also brought up in the interview, I assume that's what caused the sour start in Europe.

Later a positive divergence developed and the market has leaked higher since. I don't think it has to do with the Italian bond auctions today as they look disappointing. Speaking of which, Italy auctioned off 3 and 10 year bonds today, both outside the LTRO 3 year loan window. As for the shorter term duration notes sold, Italy missed their target of $8.5 billion Euros. The 10 year came in about 60 basis points lower then the last auction, but still at 6.98% and just after the auction the secondary 10-year BTP's once again broke above 7%, suggesting some disappointment with the auction. 7% is the yield that is considered unsustainable and the area in which other PIIGS countries have sought bailouts, Italy is just much, much larger then the other countries combined so a bail out doesn't look feasible at this time. As for the bounce, Italy's 10 year yield at this auction will probably be called the catalyst even though it was extremely weak, but in reality I still believe the bounce is technical in nature, after all we saw it coming well before the Italian auction.

Here is the Euro's response to the auction...

A sell off below $1.29

Overnight Hungary, which has been downgraded to junk status (but is still one of my favorite countries to visit, I just wonder how different things are there now on the street?) also had a debt auction which was considered a total failure. Remember that IMF loan talks with Hungary a few weeks ago broke down, they are an EU member nation, but not a Euro currency member as they still use the Forint.

As far as other news out of Europe, Italy specifically, it seems Italy's Monti may be needing Obama's teleprompter as Bloomberg releases some quotes from a press conference in Rome (I didn't make this up):

• *MONTI SAYS EUROPE MUST NOT GIVE UP MODEL OF SOCIAL WELFARE
• *MONTI SAYS EUROPE CAN'T SUSTAIN CURRENT WELFARE SPENDING
• *MONTI SAYS EFSF NEED `SIGNIFICANTLY MORE' FUNDING
• *MONTI SAYS NOTHING JUSTIFIES CURRENT ITALIAN SPREAD

Contradiction? Yes. Everyone knows the EFSF needs SIGNIFICANTLY more funding, they just can't find it and as to the Italian spreads, I think if they are not justified, then neither were the Greek, Irish and Portuguese spreads.