Tuesday, June 22, 2010

Morning Update/ Market Thread 6/22

Good Morning,

Equity futures are close to even after being lower overnight. The dollar is up, bonds are up, while oil and gold are slightly higher.

The FOMC meeting begins today with the word smithing designed to condition weak minds to be released tomorrow. At 10 Eastern this morning we’ll get Existing Home Sales data. The consensus is expecting 6.2 million, but I think this data may start to disappoint this month and by next month is very likely to disappoint. Remember, sales take roughly two months to complete, so we are still under the influence of the tax credits that expired at the end of April.

There certainly seems to be a riff in logic between the U.S. and Europe developing. Europe has awakened to the fact that they are throwing very large sums of completely ineffective money around. In fact they see the loss of confidence and thus are talking about ways to get their budgets balanced – higher taxes and less spending which equals austerity. Geithner and crowd, of course, want the debt game to continue to get larger.

These two reactions are a FALSE CHOICE. It only has to be one or the other if you are living inside of a central banker debt money box. I say that the appropriate choice is to tear down their box and run them out of power – Freedom’s Vision.

Yesterday’s gap higher open and collapse was a Key Reversal for the market. A key reversal occurs when prices open higher, produce a new high, and close below the prior day’s close. It was also a bearish engulfing day on the SPX, NDX, and RUT – this is when the high is higher than the previous day and the close is beneath the previous day’s low. Both are indications of a potential trend change.

This is dangerous as we ran up into resistance at the 50dma and failed. The collapse returned the SPX to just above the 200dma which is acting as support for now, but I think the odds of it holding for long are small. Below is a 3 month daily chart of the SPX, you can see that we threw over the down channel but returned to within the confines. Also note that the daily stochastic is overbought and just now rolling down:

SPX 1111 is support, that is where the 200dma is located. Get below that level and I think the odds favor a return to 1040, the right shoulder of the H&S pattern would then be fully formed. Below is a chart where this formation is clear – it is a longer term pattern which makes the odds of it playing out higher. Should the 1040 neckline be broken, the downside target would be approximately 860 – 22% lower than here:

Also note in the chart above that the 50dma is descending rapidly towards the 200dma. Should they cross, it will produce what’s known as a “death cross” and that would be a very bearish indication. The financials are very weak, GS and JPM stocks are languishing, their stocks produced death crosses several months ago. Below is a daily chart of the XLF, you can see that overall the financials failed in their attempt to regain the 200dma:

Yesterday’s failed rally caused TLT, the 20 year bond fund, to break beneath its uptrend line. However, by the close it had regained it and is higher this morning. This trendline is important as it tells you which direction funds are flowing – right now that would be to perceived “safety,” if you consider owning debt in a debt saturated and insolvent environment safe:

We may very well be witnessing the end of wave 2 of 3. I will not be surprised if we attempt to rise a little further, but I think overhead resistance has proven to be too strong. Keep an eye on the currencies which were looking very unstable after China’s propaganda over the weekend, and then watch the bond market to tell us which way the money is really flowing. Hey, the economy and markets are playing a tune – there’s a rhythm and a beat, all we have to do is listen:

The Doobie Brothers – Listen to the Music: