Snapshot: It’s been known for several months that Greece and many other European countries are at the brink of insolvency. Already back in January, The Economist asked “A Greek bailout, and soon?” The euro turned down back in November 2009. The market didn’t seem to care. In fact, stocks rallied parallel to news reports of Greek bailouts and news reports of failed Greek bailouts. It didn’t really matter what the news was, the market rallied. Now all of a sudden, stocks decline and it’s Greece’s fault, compounded by an alleged trading error (who would place an order for a “b”illion shares instead of a “m”illion shares?). Wall Street seems to be in denial, when the simple fact is that the market has been crusin’ for a brusin’. Even though last Sunday’s (5-2-10) Technical Forecast was decisively bearish, we got more than we bargained for. At one point, Thursday’s meltdown erased three months worth of gains within a matter of minutes (see chart below). If you’ve been following the ETF Profit Strategy Newsletter for a while you know that we’ve been expecting a “fear inspiringly powerful decline.” What we saw on Thursday (5-6-10) fits the bill and suggests that the next leg down, a powerful and persistent one, has started. Nevertheless, the market has been full of head fakes and we’ve come to know better than to jump all in. Let’s evaluate what technical indicators are telling us.
On Thursday (5-6-10) the S&P pierced through the 20-day simple moving average (SMA) at 1,135 on a weekly candle and kissed the 50-day SMA and the lower accelerated band at 1,064, slicing through the 2 standard deviation lower band but closing above it. Back on January 2010 the S&P had a similar weekly down move that pierced through the 20-day SMA and following a two-week selloff kissed the 2 standard deviation lower band before continuing its rally. In plain English, this means that even though the technicals are showing the beginning of a trend roll over, a longer-term trend change has not yet been confirmed. This upcoming week’s price action is important to confirm a trend change. A large weekly candle toward the 20-day SMA, the lower accelerated bands at 1,050, and a break through the 1,044 February 5, 2010 low will go a long way in confirming the trend change. Devising an exact forecast for the upcoming week is challenging as the ‘wings have opened up.” In other words, volatility has increased and the pivot and resistance levels spread are far apart.
Summary: Based on the technicals, here is the most likely outcome for tomorrow: In pre-market traded, the S&P 500 futures spiked up 31.5 points so we should see a huge gap up open. Ideally this will be a fake rally and result in a retracement back to and below pivot (1,116). A break below pivot would confirm the downtrend on a smaller scale. Overall it's very probable that we see larger trading ranges. If this downturn is for real, we should see lower lows and lower highs with trading from pivot to support s1 or s2.
Illustrated below are the daily/weekly candles for the S&P 500 futures. The S&P 500 (SPX) trades about five points above the futures.