Can equities rally survive E.U. turmoil?

If you are wondering, Europe is still there. Last week at this time we had a situation where Europe was on the brink (on the chart as well as otherwise) but we had some charts that were telling us the problems might not be as bad as everyone thought. The banks were trying to stay at the lower end of the range and you know that nothing bad happens to the markets when the banks are at least neutral. Monday was somewhat rough as it gapped down but shot straight up. The offshoot was a recovery in the SOX. The SOX led a great week for the equity markets on the 3rd anniversary of the Lehman disaster. Last week China and then Australia were not confirming our rally but as you see from Friday’s SSE it’s trying to put in a floor on the market. There’s no reversal yet but if we could keep a well-defined trading range we have a condition that could manifest over several months and what the Chinese might be telling us is the fact the EU has postponed their day of reckoning until NEXT TIME.

Sunday night started off bad and we are under no illusion that the problems are taken care of and I will tell you this, sentiment got as bad as I’ve seen it for Europe as Thursday night the Polish Finance Minister told CNBC that if the EU doesn’t get their act together and if for some reason they dissolve the Euro it eventually could lead to a war. In our work that kind of sentiment is extreme and it’s the kind of thing we look for. In reality the guy is spot on the money. Our generation has not seen a Europe destroy itself. But we all know it can and will if the perfect storm materializes.

From trading the NQ on a regular basis I’m here to tell you the bullish side has been real strong. Bears gave up easily and readily. We’ve seen just about every bullish outcome that could happen on a chart throughout the course of the week. Even on Friday, early in the day it looked like bears were going to take over. My clients have been following my blow by blow description of the intraday candles, once price action got down to the area where the last small shift in the balance of power stayed with the bulls, prices rallied again. They rallied every single time it attempted to break down.

On Thursday the SOX got near its important overhead resistance. As it did that, slowly and steadily the banking sector started to improve. I think it’s wonderful at this point but this the best action we’ve seen out of banks in a long time and anytime you see the banks elevate and join in the participation it’s a bullish sign. I know that on Friday they started stalling out. But what I’ve been seeing is a tendency, at least for the past week that every time the bears try to take over they are overcome by bullish activity. In hockey we say that one team is a little quicker on the puck, in the corner and just wants it a tad bit more. That’s what we can say about the bulls until Friday.

Here we are in the premarket with the Futures and the EUR-USD pointing south with the Greenback pointing north. The more they greet this news with concern, the quicker it will resolve. After a week up, there should be some retracement. But as I told you there’s lots of support under the market. I don’t think the EUR-USD turned on good calculations so I do not think a bottom is in but from what I’ve seen, there’s a really good chance we can continue to see a sideways market.

In terms of our cycle work, we are coming to the seasonal change point on Friday which is the Autumnal Equinox. In our Gann calendar work, the most important days are the seasonal turns where markets have a greater tendency to change direction. If it’s a bearish week, we could see another low at that time. If the market ends up higher by Friday, we could be topping out. But the way it looks right now, we have a near term high in place.

Just because it’s September and everyone is waiting for the European Lehman moment does it mean it will happen. These "Black Swan" type events have more firepower when they take market participants by surprise. Part of the panic psychology is the fact people are taken by surprise. Everyone is expecting a disaster and in a perverse way, when something appears so obvious markets have a way of not delivering.

Getting back to the SOX, make no mistake this has been a rally led by the SOX, it hit its target which is the overhead resistance point at the July low near 381. One should expect selling to come in and there will no technical damage to the chart until it takes out the August 31st high of 363. If the pullback is greeted with complacency, apathy or a business as usual approach, get nervous. On the other hand, if we get more European shock and awe sentiment, the selling is likely to exhaust itself. From what I’ve seen on Sunday night sentiment is bad and full of worry.

But as the SOX already hit its overhead resistance target early Thursday, the banks started improving slowly and steadily. I’m out here in the Arizona desert and we are prone to seeing mirages. Do they really have running water out here? Apparently they do and as I tracked the banking stocks late Thursday it actually looked like they were breaking out. Was it real? Or was I seeing things? I thought back to the prior Friday when the Euro hysteria first hit. The banks were just not confirming the move down. The point being we are vulnerable to all kinds of hysteria but as long as the banks stay neutral, we aren’t going to drop very much. Obviously, if the banks start failing all bets are off.

At the end of the day, we are in the 2nd half of September and as each day passes without disaster, the greater the chance we won’t have a disaster. Finally, the bond market pointed north on Sunday night with a gap up. It’s telling us we should expect some turbulence this week. I think the week will be tougher than last week but I don’t necessarily buy into the September disaster scenario anymore.

Next page: Examining the charts

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