T-Waves Thoughts for the week of 05-10-2010
by Stephen Tetreault, T-Waves | May 10, 2010
PrintThis coming week is going to be very interesting indeed! As we have a horde of economic data to be released, and we still have unresolved European contagions brewing! We will see on Monday if market participants have had their fears quelled as Euro leaders announced after the close on Friday a mutual fiscal assistance package for their bloc's members.
The heads of state and governments of the 16 eurozone nations launched a historic 110 billion-euro financial aid package to bail out heavily indebted Greece (the question is do they have the will to do the same for the others) from bankruptcy and they vowed to fight speculators endangering the stability of their common currency (Euro-short traders beware). The eurozone leaders expressed concern over mounting pressure on the euro in financial markets and deplored the fact that speculators were targeting other debt-ridden nations such as Portugal, Spain and Ireland as the next candidates for a bailout (they will no doubt try to create an environment wherein they make war on these speculators and squeeze these speculators). They agreed on a "crisis management mechanism" to protect the eurozone from speculators and to prevent the debt crisis in Greece from engulfing the whole euro area, chairman of the euro group and Prime Minister of Luxembourg, Jean-Claude Junker, said at the conclusion of Friday's summit. Then we heard that details of the plan are still being worked out and they will be made public by the finance ministers of the euro group tomorrow…I hope that they are positive developments. As of this writing Nicolas Sarkozy and German Chancellor Angela Merkel said that Europe would setup an intervention mechanism before Monday to calm the markets. The pair also said the EU leaders would have a plan in place before Monday to defend the Euro against speculation. The New-York time put out a stunning graphical analysis as to the potential contagions (thanks Rosie) for the referenced link…its worth reviewing
However it's important to understand that once investor sentiment is shattered as it was this week it may be very difficult to recover. Most funds are up nicely from the March 2009 lows, and many were feeling a little more confident about their finances and suddenly the markets coughed up a massive furball….and now many may just throw up their hands and go away in May….trigger the sell buttons and lock in their profits as say…I do not want to traverse this mine fields with blinders on! Worse yet, for the markets that is, those in taxable accounts we could see some selling as they have little to lose as the capital gains tax is going up next year as well as higher income taxes (unless something changes quickly, fat chance of that). So unfortunately for the market bulls this may be the perfect time to take the pent up profits and move to the safety of tax-free bonds etc. And why not, there are a plethora of potential contagions (What happens if Greece defaults? What happens if China's slowing growth suddenly turns into a massive drop off as I have predicted as their Field of Dreams scenario "Built it and they will buy it" unravels….will our economy double dip…as such the path of least turmoil and resistance is to take the gains as sit on the sidelines…parking some money in bonds!
Please understand if the Greek tragedy is resolved before Monday's open I think the markets will respond favorable (likely an orchestrated short squeeze) but I doubt they will begin a new bullish run. As I have always found when the markets look for a reason to sell off they always find one, and once profit taking takes a strong strangle hold on the indexes and stocks it almost always ends up going further (breaking many support levels than many thought possible….once the hot-money fund favorites start to roll over, as we have seen in the retailers, semis and the highest of the big beta like PCLN, GOOG, AAPL, AMZN, FSLR, ISRG BIDU, etc we know there is a trend change in the air and they are selling to get out of the way and to meet redemptions! I don't think the market plunge is over at all, even if we rally on Monday I would be surprised to see it last, as once the buttheads on Wall-Street destroy investor sentiment it takes a while to be rebuilt.
At the closing bell on Friday we saw that the Nasdog has entered correction territory with a 10.3% plunge since the April 23rd close at 2,529. The Dow is down 7.4% for a total of 830 points from its April closing high, and the SPX-500 is down 109 points or 9.8% from the April 23 1,217.50 . The internals were stricken with a cancer….and volume surely has returned in a huge with Thursday trading almost 19 billion shares and Friday was 17.5 billion….I think that Art Cashin was wrong the bears have decided to forego the express elevator down instead they base-jumped.
A financial contagion, that could weigh heavily on the financials and markets this week (banks/lenders) as we saw this past week that short-term money market rates LIBOR surged to near 16-month highs Friday, following the massive selloff Thursday and follow through on Friday that resulted in a huge investor-confusion spike around the world…resulting in the freezing up of activity in several markets. Lending stalled on fears many overleveraged financial institutions are holding too many assets of Europe’s most indebted nations (when will they be announcing our name in this mix). Nevertheless we saw that the London interbank offered rate, for three-month loans increased 5.5 basis points to 0.428%, the highest level since August, according to data from the British Bankers’ Association. It was the biggest increase since Jan. 16, 2009, and the 13th straight rate increase….it appears to be a fear trade starting to overtake the market. The unknown is the problem right now for market participants as it usually does as many questions are being asked without answers being forthcoming about various counterparties and their p[potential risks/exposure. It’s a question of what people have on their books and whether they are vulnerable to big losses. The trend is warning us that there are unseen contagions as the Libor rate has been steadily rising since March, as there are assumptions that Greece's debt problems will spread to other countries and significantly strain the financial markets. And of course this makes banks more worried (as they already know what their overleveraged liabilities are) about lending to each other, and the cost of doing so increases rapidly.
We saw this past week (Friday) some pro forma fuzzy-math strong data on so called job growth at least that is what the headline number showed as the data from the U.S. Labor Department showed that employers increased payrolls by 290,000…which was the most in four years and more than the 255,000 expected by the street. Now for the rest of the story as Paul Harvey was so fond of saying (we failed to hear this on the bubblevision networks until the day was almost over) the jobless rate rose to 9.9% from 9.7%, mainly because 805,000 jobseekers (those who have fallen off the collection rolls were forced into a mad dash scrambling for any jobs available as their resumed their search for work; it was also interesting that 188,000 of the 290,000 jobs that were allegedly created were magical jobs added in by the birth-death-model, which should be renamed the manipulation variable, nowhere on the various bubblevision networks was this mentioned! The higher unemployment rate will add undue stress to banking system as more defaults on loans, credit cards and home mortgages will surely follow…this is one reason why we saw selling on Friday!
This has been the most interesting trading week in a long time (brought back memories of the 1987/1997 plunges) the turn of events within the EU referencing the proverbial bailout of Greece & potentially, Portugal & Spain in the near future; has re-established some supreme FEAR and volatility in the markets, especially as the so called dollar carry trade unwinds, as way to many hedge funds are again all leveraged into the same darn trade!
I can remember back to (1997) for you youngsters you may need to access the history books, when a little obscure country called Thailand was the catalysts for a world-wide financial crisis when their currency (called the Thai Baht) collapsed after they made the decision to let it "float" (back then the vast majority of talking-but-heads then stated that they were an insignificant blip on the radar). Thailand had acquired a vast amount of foreign debt that had, effectively pressed it into a default and then as we see today most failed to understand the real contagion. The "Contagion" (as it became known) quickly spread to Indonesia, Malaysia, South Korea, Hong Kong and even Japan…like a fast acting cancer. Then as we see today the IMF and the WORLD Bank (led by stealth infusions of US taxpayer infusions) needed to step in to avert a financial crisis. So please remember that the world financial system being led by the largest connected crooks in the world is far more "global" and inter-dependent today than it was in 1997, and as such any contagion (cancer in one patient, can easily jump to a host of others). Europe is far more important to the international financial leeches, big-banks the so called mustn't touch to big to fail financial terrorists today than Southeast Asia was in 1997. And, let's be perfectly clear, we are not just talking about Greece. Spain, Portugal, Italy and Ireland have the same problems on a larger scale, indeed the strength and even the efficacy of the EURO is at stake. If you don't think this situation in Greece and the PIGS should not have any adverse affect on our stock prices you are hopelessly naïve, in my opinion (but then again if you listen to bubble vision, most are). Please remember that the stock market is a forward pricing mechanism and stock prices are not just driven by earnings, cost cutting, fuzzy-math manipulations, tax incentives, and of course the true and tested fundamentals analysis, they are primarily driven by people's moods and how they feel about their lives and the future as such…its vast important to understand this concept.
GOLD is the likely winner in the long term as the Euro crumbles, but we are historically oversold on a near term basis (hence why I'm recommending take on an trade in the ULE, the leveraged pro fund long, in the $22.00-22.50 range or a move above $23.00 once we trade below than above this level, with an upside target of 26.50-27.00) I'm now seeing some divergences forming on the dollar and gold, so for the near-term long side traders should be taking and/or protecting the profits we have enjoyed in the UUP long trade, as the dollar (see technicals below) is about to end this recent leg up in my opinion) Gold is also very toppy here as well, so caution on in the near-term is warranted!
As you all know, I have been very bearish on US government bonds for economic and fundamental reasons, but this week I gave a trading long signal in the TLT due to the vast decay in sentiment in EURO land and I issued a take profit call on the TLT this week at $97.00 as it was what I called a gift. The TLT has bounced from their all time low to as high as 98 on Thursday. I then recommended that you now rotate into the TBT or the TMV on Friday, as I went long the TMV at $47.50 with a projected first stage upside target of $72.00 (I took 600 shares as well for our value play portfolio, and I wrote/sold the May 52 calls for $2.35 to hedge my bet and start a stair step, buy) I also recommended that you buy the TBT January 2012 $40's calls for $8.50 (I bought 15) with a recommended stop loss of $1.40) I have an upside target at $52.00…these are still decent plays if we see another drop…or for a leg in at these levels)…I took the kneejerk rally in bonds as a reshorting-opportunity! Our bonds were the magical recipient of the melt-down in Europe which was more severe & required more immediate solutions than what is was happening, as such the panic and loss of confidence in Europe's capital market has been a blessing for the US market. But I believe that hindsight will show that the safe-haven rally in TLT and drop in TBT/TMV was a byproduct of severe capital flight from Euro bonds into US bonds (out of the frying pan into the crazy-bake-oven) which are now viewed more favorably in terms of the risk of default. However, this in my opinion is akin to shifting capital from Greek junk bonds to another equally high risk California bonds.
It's worth nothing that the bullish run in bonds ios not a positive development as we have seen that Banks are also starting to succumb to negative pressure by money-market funds withdrawals a key source of liquidity for many financial institutions (hell they do not pay anything anyway). The perceived risk of Greece-style contagion infecting other European nations, appear to be shifting money out of banks and into investments considered safer-havens, such as our government bonds, and we saw how damaging this could be as during the 2008 financial debacle as such a shift by money-market funds clearly exacerbated most bank's liquidity contagions and created very difficult funding problems for big firms.
Meanwhile, another negative development for the financial markets is growing as the CDS index that tracks the average price of insuring against a default by banks (a gauge of the industry's perceived riskiness) has been soaring to its highest levels since March 2009, when the financial crisis reached their last panic lows, according to financial-data provider Markit. This skittishness among banks and investors hasn't approached this scale since the past liquidity crisis that precipitated the global financial crisis in fall 2008, and it appears that the trend has clearly rattled many investors around the globe as the risks that we move toward and into a potential nasty liquidity crunch the contagions could be overwhelming as tensions increase at a rapid pace!
As I stated last week the technical indicators that I have employed for year all lined up on one side of the proverbial boat, and that was the opposite side that the bulls were occupying (I mentioned on Monday in out trading room that AAPL would be stricken with a 5-7 day selling spree and as goes AAPL goes the NDX as its an 18% weighting of the index, as such we bought puts on AAPL to avail ourselves of some leverage). The technicals as I outlined were lined for a perfect storm…as the latest fund-manager report shows only 3.2% cash on average was being held by mutual funds; and this was an all-time low, eclipsing the recent low July 2007, the month when the Dow made its all-time high. The bullishness and overleveraged positions by funds especially in the Russell-2000 was being excreted by every pore these managers had…it was overly extreme, just like we saw in 2000 and 2007 and I warned you all about the consequences of such over leverage and how those periods ended!
I spoke about this week that the continued confluence of market contagions has caused a monumental train wreck this week as the indexes have coughed up their massive gains this year and all but the Russell-2000 are now trading down on the year, and they have broken below critical near-term support! As I have shared with you all the markets fall 4-5 times faster than the rise…I like the quote from Art Cashin "bull markets take the stairs on their way up while bear markets take the express elevator down."
The stock market got crushed this week more than the price drop alone suggests, as the internals showed alarming deterioration, and abundant selling as we saw that 477 of the SPX traded in the RED on Thursday and 457 on Friday this drop for the markets was more significant than the price drop suggested, as the internals have deteriorated very rapidly flashing a huge neon alarm. I believe the proverbial stock market fairy godmothers were frantically flying around attempting to mitigate the slide on Thursday and Friday as the drop could have been far worse without their proverbial safety net (hence why I believe the markets will again open soft on Monday unless we get some reprieve over the Weekend of the Greek/Euro contagion, and the futures players race in late Sunday to juice the markets).
We saw the most new 52 week lows on the NYSE since March 12th, 2009, as if they rise above 85, look out, we could get a Hindenburg Omen market indicator to trigger…we are close but not yet….(We did not get a Hindenburg Omen observation Thursday…but we saw one trigger on Friday because the number of New Highs were sufficient; to trigger we need both New Highs and New Lows to be more than 2.2% of total NYSE issues traded, which is about 69….on Friday we got 78-new highs and 98 new lows).
The traditional definition of a Hindenburg Omen is that the daily number of NYSE New 52 Week Highs and the Daily number of New 52 Week Lows must both be so high as to have the lesser of the two be greater than 2.2% of total NYSE issues traded that day (2750+/-)…this is just condition number one. The traditional definition had two more filters….that the NYSE 10 Week Moving Average is also on an uptrend…whish is is/was, which I consider met if it is higher than the level 10 weeks earlier, the next condition, is that the McClellan Oscillator is negative on that same day (which it was).
We have now seen (5) 90% down day in the Dow within the past 13 trading sessions, a very nasty technical development as the last time we saw this many 90% distribution down days in a such a concentrated period was back in September 2008, just prior to the so called market crash of September to November 2008. Back then we experienced (5) 90% down days within a four week period….please understand a 90% down day is associated with a run for the exits suggesting investors are very worried/scared, and the potential exists for a massive upchucking of stocks after such a stellar run.
We saws that the indexes have also decisively broken below the bottom boundary lines of their respective broadening top megaphone patterns and below the lower trend lines of their ascending wedge patterns in the DOW, SPX, NDX, Nasdog and Russell-2000, and this suggests a top could have developed on a near-term basis.
Volatility is picking up significantly, and the rise in triple digit loss days on significantly heavier volume 170-220% as compared to the bleed up days is hardly bullish. Volatile days bullish/bearish usually pick up in intensity before major tops and bottoms after prolonged runs, just as we saw in September 1987 top, and the recent October 2007 top is another example
IMPORTANT to UNDERSTAND
As I stated repeatedly in our real-time trading room one of the major contagions had been this past weekend's agreement to provide $144 billion to bailout the non-responsible Greeks was still not completed satisfactorily as there were snags. The upper and lower houses of the German parliament (the German people did not want this) still have to vote on it this week and the IMF still has to approve it next weekend. Civil unrest in Greece is increasing concerns that the mandatory austerity programs will be shunned and that the Greeks will not enforced them or implement them hence they will likely be unsuccessful.
As I stated this week the trouble getting this massive bailout deal done for the Greeks that were not bearing gifts, provide more worry that investors wanted to bear as they were very concerned that the EU would find it almost impossible to construct a similar bailout program for the other larger countries like Spain or Portugal both who no doubt will have their worthless hands extended. They lecherous banks, governments will no doubt attempt to craft some "chicken little ad hoc" bailout over the weekend as Paulson and Bernanke did but after their plan was reviled later on as nothing more that
The debt crisis in Greece has sent interest rates soaring for all EU countries. This makes it even more likely that other countries are also going to need a bailout sooner than later. Where countries who were already struggling to pay their ballooning debt suddenly find that their interest rates which were in the range of 3-5% are now going to be slammed with rates approaching 8-9%...this is exactly what is going to happen to those US/UK and other homeowners with ARMs, as debt issues have not mitigated at all but the payments based on interest only for right now have double/tripled creates a huge contagion, as weaker countries cannot afford to pay the current rates when they have to roll over their monstrous debt loads. Every day the problem in Greece continues, and the markets believe that the cancer could spread interest rates increase for other EU countries.
We saw that Spain was forced to make a public statement on yesterday to deny rumors they had already asked the EU and IMF for a bailout (hum is it the truth, time will tell). This shows how rampant speculation can feed upon itself that countries have to deny rumors to slow a run on their debt.
The euro currency is under a significant attack as is the European Central Bank (ECB). The ECB was forced to retract its prior claim that it would no longer buy bonds issued by EU countries. This sent yields on their bonds soaring as the implied guarantee evaporated. The ECB was forced to eat those words and say they would buy bonds in order to stop the spike in yields. This is eroding the credibility of the ECB and it is clear that they will not be able to orchestrate continuing bailouts of other EU countries.
The so called bailout Greece agreed to over the weekend could cure the disease (potentially) but it could very well kill the proverbial patient. Greece had to agree to an additional $40 billion spending cut in order to qualify for the bailout. They are raising the value added tax to 23% (likely only the first step) and that is going to be a huge impact to the citizens who are already in revolt and are taking to the streets. Public sector workers and pensioners are going to see a 15-20% cut in pay. This is likely the start of civil unrest in the Euro-zone…so now there is backroom chatter of the Greeks pulling out of the EU and basically defaulting and re-pricing their ballooning debt at cents on the proverbial dollar!
There are growing calls for Greece to drop out of the EU and restructure its own debt for pennies on the dollar….once again this would be a huge contagion…...the EU is pressuring Greece not to take this route because of the billions in Greek debt owned by other EU countries and banks. By bailing out Greece and forcing them to pay off their debt…if they can force them is basically bailout out the rest of the EU (in a stealth manner) with the emphasis on France and Germany (you will not hear or see this on bubblevision), which hold the most of these Greek toxic bonds. This is the equivalent of when the bailout-bastards during the massive bailout out AIG and paying $1.00 on the $1.00 for the counter party loans to companies like we saw happened for Goldman Sachs, the firm that does god's work; as we saw that AIG was responsible for repaying $129 billion in counter party debts…then the bailout specialists (Hank Paulson and Bernanke) stated this was necessary to prevent a collapse in the banking system.
By forcing Greece to repay all €330 billion in debt…this would be an implied bailout of the EU banking system (would it not be nice to hear the truth on bubblevision or by those involved). Did you know that you are bailing out Greece and the EU as well….the way the $144 billion bailout is structured today the IMF will put up 30% of the money, and since the IMF is 40-45% funded by U.S. taxpayers (wow another revelation) this means we are giving money to the IMF to give to Greece to pay off debts to European banks **This is an out-rage in my opinion** as we have enough problems here at home! Worse yet this EU/IMF loan will be junior to the current bondholders; basically meaning that if Greece takes the money and then takes a hike the IMF loans will never be repaid in my opinion sticking a sharp stick in American taxpayers' eyes!
In a Greek bankruptcy, restructuring or devaluation the IMF debt will be the lowest tranche on the list. It will be the equivalent of being the very bottom tranche in a worthless CDO market….so how/why are our idiots in the Treasury, Fed and government so silent on this issue!
That was why I issued a Mega-Tsunami warning!
The weak EU nations, such as Portugal, Ireland, Italy, Spain and Greece account for 36-37% of the GDP for the Eurozone (not huge but very significant). Each of these nations needs to drastically undertake serious austerity programs in order to get back below the EU debt limits and get their economies functioning again. This is going to be very detrimental to the EU and to Europe in general as it will dramatically reduce consumption and economic growth. The European nations and their lecherous banks including those not in the EU are currently holding $2.2 trillion (yes trillion) in debt from those five-PIGS. So I believe that the odds of successfully avoiding a default especially if we see a huge moral hazard exploited is close to "0" because there is no one entity large enough to fund such a combined bailout that large and those countries are in a debt spiral down into a cesspool now that their interest rates have increased so significantly (more than double for some).
The Greeks failing to bear-gifts and the near imploding Eurozone is just one of the many contagions the markets faced these past several days (one reason I stated today in our trading room to fade/sell the noon-time romp into the close). Economic reports from China yesterday showed their economy is slowing from its rapid pace of growth as it continues to raise reserve requirements hoping for a soft landing. Australia raised their rates again (making it attractive to park money there) and then they subsequently passed a huge tax on natural resources like iron ore and coal (not bullish at first blush for providers). The Times Square Unabomber was arrested and he has ties to Pakistan; and then we have the ever expanding oil slick (and drilling contagion) in the gulf as it take center stage daily….these are serious headwinds.
China's manufacturing activity dropped as the April PMI dropped to 55.4 from 57.0 *(at first blush not a huge drop) since anything over 50 is still on a path of growth and this was their 13th consecutive month of growth but that growth is slowing, and the markets are sniffing it out….the real contagion was that inflation in China increased for the 10th consecutive month (it's happening everywhere as well just others are camouflaging the problem better). The Chinese government warned that inflation in the manufacturing sector was expected to "increase significantly" in the months ahead…hardly a bullish development. China also hiked the bank reserve requirement ratio by another 50-basis points in an effort to slow growth and the rise of inflation.
Another technical that has been ignored is that the 10-day moving average of the CBOE Equity Put/Call Ratio had below 0.45, which means that the volume of trading in calls has been more than twice that in puts (too much bullishness) as way to many investors betting recklessly on rising prices, and disregarding the premise that what goes up must come down, and that’s a very bearish contrarian indicator. The 30-day average dipped below 0.50, the lowest reading since October 2000….and it took years of relentless bullishness during 1997-2000 following the 1987 crash for investors to get that bullish, and wow in just 13-14 months after the GREAT-Recession we reach such levels is purely ridiculous, as was a flshing neon sign to take risk off the table and start to establish SHORT positions.
The VIX, a measure of volatility based on options premiums (the so called FEAR-indicator) I like the term complacently, had been sitting at its lowest level since May 2008….these drafty low premiums indicate complacency among options writers, and this past week we saw that they walked into a buzz-saw this week as the VIX closed out at 20.19 on Monday, and in just 4-trading days later it closed at 40.95 after peaking at 42.15 on Friday a massive gain of a massive gain of 102% (the VXN tracking technology volatility closed at 21.26 on Monday closed at 41.52 on Friday up 95% in just 4-days)….we have seen stellar gains in our VXX long position, we bought it at $18.01….and it closed at $29.25 on Friday for a gain of 62%! The fact that the options market was too darn complacent was beautiful as we sated legging into the inverse pro fund calls a week ago) As I stated than whenever options writers are selling options so darn cheap, the market is likely to move in a big way against them within 15-days as the markets do not give away such gains. As I had been repeatedly stating put protection and puts utilized for speculation were bargains.
The market was crushed on Thursday there is a very good chance it was a capitulation event by someone that was deeply underwater in the currency dollar carry trade, likely a hedge fund or two that was overleveraged as most are as far to many have been shorting the dollar and using the cash (leveraged up) to buy commodities and equities; when the huge spike started in the dollar these past weeks , especially last week these funds were in some very serious trouble, as they were caught flat footed and they were all leaning to the same side of the over crowed dingy. Currencies don't move in 5% pops historically in a week but our greenback did just this last week squeezing the crap out of those so over-leveraged, as so many hedge funds (oxymoron as they are supposed to be hedged) construct highly leveraged trades and when they go bad they go so very bad; we also saw that the Yen carry trade also unraveled this past week.
Chart hyperlinks were removed…..annotated charts are for subscribers only
The Dow technical-assessment
We posted a serious key reversal this week, and on Friday the Dow coughed up another 139.89 points to settle out at 10,380.43 the daily chart is very damaged and look venerable for another significant leg down, but it is very oversold, so we could see a strong reflex-over-sold relief rally around the corner back to 10,550 then 10,677 at best before the next mega leg down starts. The index coughed up a whopping 5.71% it fared the best of the big-4 (628.18-points) a significantly weekly drop! And the bears have the bulls on the run, as they smell blood in the streets….the weekly chart has displayed significant breaks in support as it closed at 10,380+/- below the weekly 21sma at 10,563 and we have likely seen a shift it the bullish tonality as 10,563 is now OHR. The monthly chart, is showing distinct signs of cracking, after we touched the 11,258+/- level of OHR, since then we have rolled over hard coughing up 878+/- points (628.18 points this month alone)…we have seen some serious technical damage as we dropped below the 50Msma at 11,141 and the 100Msma at 10,487….the bulls better pray that the Dow monthly holds firm at the 20ema (10,134) along with the 100Mema at (10,264) as there is little support below till we reach 9,025+/- So if the bad news bears return on Monday as they could they will target the 10,230+/- area, and if this area fails to hold I believe we could easily drop to 9,900-9,920….if the bulls muster up some new cash or the contagions over the weekend abate the bulls will look to retake the 10,520 level thereafter the 10,675!
The Dow-transports technical-assessment
We posted a serious key reversal this week, and on Friday the Transports coughed up another 114.00 or 2.58% points to settle out at 4,298.12 the daily chart is very damaged and look venerable for another significant leg down, but it is quite oversold like the Dow, so we could see a strong reflex-over-sold relief rally around the corner back to 10,550 then 10,677 at best before the next mega leg down starts. The index on a weekly bias coughed up a whopping 7.98% or 372.80 points a huge weekly drop! And the bears have the bulls on the run, as they not only smell blood they have tasted the sweet meet of the newbie (veal) longs being led to slaughter; the weekly chart has displayed significant breaks in bullish tonality as we have broken down through strong support as it closed below the weekly 200Wsma at 4,320 and we have likely seen a shift it the bullish tonality as 4,320 is now OHR. if the bears return on Monday in a very nasty mood they will look to retest the reactionary low of 4176+/- if this level fails to hold I would be a strong-reflex buyer at the 3985-4000 level for a huge oversold bounce ….conversely if the bulls return on Monday in a buying mood after the-weekend look for them to assault the 4450+/- a strong significant level of OHR a successful breech up through these levels and we could see a quick run to 4500+/- level of OHR.
The SPX-500 technical-assessment
The SPX-500 which was once a stellar performer sold off hard coughed up a huge furball this past week as it lost 6.39% or 75.81-points…..closing out the week at 1,110.88…the biggest loser on the week, and the weekly charts are clearly pointing to a nasty break-down…as we dropped on very heavy volume throughout the week…and the index broke hard through the weekly 20sma at 1,138.88 a very bearish development on a near-term basis as we also broke down below the weekly rising sedge formation as well, the bulls better pray that the index is supported at the weekly 40sma at 1098 or the situation could turn very nasty! The selling was very heavy on Thursday and Friday! The daily charts broke down hard this week, and we saw a huge technical breakdown, as the index broke down through the daily 100ema at 1139 and on the reactionary plunge on Thursday through the 200sma at 1,095…and we retested that level 1,094+/- level on Friday before the dip buyers emerged at this critical level…it could be tested again early next week if the bulls lose traction! SPX-500 Monthly Chart If the bulls emerge on Monday they will try to press the index back up to 1,129 then 1,140. This week the CME stated that on Thursday there were $16 billion in E-mini futures traded in a 20 minute time period, four times their previous record volume…and it's important to understand that when futures contracts are sold there is a computer somewhere that tracks those contracts and is often selling the equivalent SPX-500, SPY, SSO assets as well as others a very basic explanation but I hope you get the picture. To further illustrate how dangerous high-frequency and program trading really is as the SPY is the most heavily traded ETF and on Thursday it traded 640 million and most of that was on heavy sell volume with 60 million shares sold in a 15 min period…this forces that fund manager who was overwhelmed with SPY shares coming back home to roost….s/he had to redeem those shares quickly and sell the corresponding shares of the SPX-500 (close to a 10:1 ratio)…and the dominos rolled over!
The Russell-2000 technical-assessment
The Russell-2000 which was one of the best performing indexes out of the big four sure coughed up a huge furball this past week as it lost 8.88% or 63.60-points…..closing out the week at 653.00…the biggest loser on the week, and the weekly charts are clearly pointing to a nasty break-down…as we dropped on very heavy volume throughout the week….right through the 100sma at 574.77 a very bearish development as we also broke down below the weekly rising sedge formation as well, the bulls better pray that the index is supported at the weekly 40sma at 627 or the situation could turn very nasty! The daily chart broke down very fast this past week (the index coughed up 2.86% on Friday alone) and we are very oversold on a multitude of time frames…as such we could be nearing a inflection point where an oversold relief rally launches…if the bears return on Monday in a very nasty mood they will look to retest the reactionary low of 638+/- if this level fails to hold I would be a strong-reflex buyer at the 619-623….conversely if the bulls return on Monday in a buying mood after the-weekend look for them to assault the 666-668 level of significant OHR a successful breech up through these levels and we could see a quick run to 675-678+/- level of OHR. Russell-2000 Monthly Chart is also showing some serious deterioration on a technical basis!
The Nasdog/NDX technical-assessment
We posted a serious key reversal this week, as the index coughed up a whopping 7.95% (195.55-points) one of the largest weekly drops in many years! And the bears have the bulls on the run, as they smell blood in the streets….the weekly chart has displayed significant breaks in support as it closed at 2,265.64 below the weekly 20sma at 2,323 and we have likely seen a shift it the bullish tonality as 2,323 is now OHR. The Daily chart is also displaying huge cracks in its once invincible armor! The Nasdog dropped 54-points on Friday alone to close out the week at 2,265.64. Nasdog Monthly Chart, is showing distinct signs of cracking, after we touched the 2535 level of OHR, since then we have rolled over hard coughing up 260+/- points (195.55 points this month alone)…the bulls better pray that the Nasdog holds firm at the 50sma (2220) as there is little support till we reach 2100 then 2000!
The NDX-100 the top 100 shocks of the Nasdog fared a little better than the Nasdog as it only lost 151.19 points this week or 7.56% to close out the week at 1849.44 and like the Nasdog the NDX Weekly-Chart has succumbed to some very nasty technical damage as it has broken down below the weekly 20ema at (1890) also demonstrating a trend change is now underway…the NDX daily chart has broken below the daily 20ema and the daily 50sma on heavy volume and on Friday it dropped significantly below the 100sma at 1890 a very bearish development as you can see in the daily chart the downside volume was extremely heavy and this correction I believe will take us down ultimately to the 1550+/- level!
If the Nasdog bulls return after the shellacking that they took this past week in a buying mood on Monday they will attempt to press the index up to 2,295+/- thereafter the following levels of OHR 2,315-2,325 thereafter the 2,349-2,358 level.....The charts are still displaying increased negative divergences, and the near-term charts as well as the daily are somewhat oversold so we could get a nice bullish-reversal relief rally in the next 16+/- hours but as I previously stated in this irrational-environment we can remain overbought and or oversold for extended periods of time....(as I stated last week and the week before April periods are renowned for bearish reversals…and we sure saw a nasty reversal this week! ) So aside from (relief rally reversals) please be careful taking on blinded-momentum longs, as in this terrible volatile environment! If the bears return on Monday in a ravenous after being awoken from their hibernation and tasting blood…. after they have been denied for so long...they will likely attempt to grind the bulls into chuck roast....(now we will likely see that the mantra has changed into sell-into-strength scenario...as such the bears will look to take the index back down to 2,218-2,229 thereafter we have support at the 2,175-2,185+/- level.
DOLLAR Index technicals
After forming a near perfect falling wedge pattern, which is a TYPICAL reversal pattern...as I so consistently have stated (the primary reason why I suggested than we undertake a contrarian long play at the $74.50-$75.00+/- level....back in December….back then I recommended buying that support at the climax of the weekly falling wedge-pattern (and that calls were the best vehicle to use). As forecasted the Dollar index has breached (moved above) the important $79.15 level of overhead resistance which is now solid support, then I stated that we would retested the $81.95-$82.55 would easily be the next target….and we hit that target this week. Last week I stated that I believe we could lift off for $84.00-$85.00 before a distinct rollover begins (we hit that level this week as we closed out at 84.59)….
I have written that we must remain very diligent and watchful of this dollar index. The bottom line is the Dollar has broken out above (daily chart) the 38.2% retracement of its own bear market on 2 separate occasions. If it ever breaks through the $81.69 (as it has done) it could easily make a run for 86.20 then 88.06, as then probability shifts to an anticipated longer term target of the 38.2% retracement from the 120.24 highs to the 71.75 which was the 2008 lows) thereafter the 32.8% retracement comes into play at 90.27.
I’m sure the threat to the consumer has not fully abated because of all the foreclosures looming and additional job losses at the state and municipal levels (and of course the later withdrawal of employees once the census workers tasks expire), there are still hundreds of thousands of home loans still out there in the system that were originated during the subprime slime years and the ARM-years that will start to reset higher, back then the greenback (2003-2005) was trading in the 90’s to high 80’s…..in my opinion it's going to be a very nasty challenge for these people to pay back those loans with dollars earned with a dollar trading above 88.00 as the threat of a really strong greenback pushes the economy into a disinflationary than deflationary period the deeper we get into what I believe will be a massive and damaging ATM reset contagion cesspool and the nasty foreclosure wave that is approaching because as those easy dollar loans will get washed out of the system. I stated 2-3 weeks ago that far to many folks were of the belief that the dollar rally was over, I was it total disagreement as I believed there’s was a good chance that the greenback rallies further another leg up…but a minor retracement is now in order, and it could take us back to the 79.15 level where we will resume the next leg higher in my humble opinion.
We saw this past week that the Value Line Index after making new relevant highs (2697+/-) the old highs in 2007 came in at ~2,510 has started a distinct roll over and has breached the old relevant highs to the downside as it closed out the week at 2,389 this is a very bearish development as we had been more over-bought than at any time in the past 15-years, with a huge MACD divergence, which was one compelling reason why I raised a huge warning signal 2-weeks ago that we were on the verge of a nasty roll over, and it has now begun…I see very little support till we reach the 2,000 level and it better hold or look out below as 1,775 would be the next-down side target! Value Line Weekly-Chart Value Line Index Monthly
The volatility index surged a blistering 18.90-points or 85.71% this past week, a new weekly record…now we have entered into extreme bearish zone as we closed out the week at 40.95, we could see a push to 45-47 (such a reversal could happen violently ) or better before this FEAR-trend reverses….see the Daily and weekly charts for annotations! Weekly VIX chart As I sated last week when reflecting on the Daily VIX Chart the next break out of the falling wedge pattern will likely be very nasty for the bulls as the fear-gauge will rocket and the markets sell off hard, just as they did this week, Friday we saw that the VIX surged 8.15-points to close at 40.95 a whopping 24.85% move in a day as the Fear trade took on a life of its own!
Baltic Dry Index (Daily-chart) We are starting to see positive divergence in prices paid per tonnage (however the shippers (DRYS, DSX, etc.) have started to roll over with the rest of the market, as such the shippers will be compelling buys when the dust clears, as increased rates will be accretive for their bottom lines!
Copyright © 2010 Stephen Tetreault
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