Stock market price action biased to the short side

Corrective mode leads to confusing markets

Stock index, chart, technical analysis Stock index, chart, technical analysis

I told you the market didn’t like the new French President. As expected Mr. Hollande won under a platform rejecting austerity. As conditions developed it appeared we had a sell the rumor buy the news event but it appears we are about to get a retest of that very same bottom of only 2 weeks ago in the CAC. A double buy the news event? We’ll see, but based on the turn of events from last week markets are looking for any excuse to sell right now.

As an interesting aside, I don’t believe any prosperity ever comes from austerity and this could be another case of Euro equity bears attempting to shoot for the moon but somewhere down the road have it blow up in the face like it did last year. I’m not so much interested in what happens on Monday as I am on Tuesday. While all of this is materializing, the Chinese SSE is back to the top of the range. Are you confused yet?

Make no mistake, markets are in a grinding corrective mode for the past month and a half no matter what the Dow or BTK tells you. Apple computer had a moment in the sun but has done absolutely nothing since then. Realize the NBA market (Nothing But Apple) takes notice as the SOX is also retesting its Apple inspired spike. If Apple isn’t going to go, it will fail to inspire confidence in the rest of technology. So not only is Apple properly weighted to impact the NDX, it has a psychological factor attached that creates or denies momentum similar to that of the Stanley Cup Playoffs. Right now the momentum is going the other way.

Readers of this space know the main culprit is the VIX. We corrected for an entire month yet made very little net progress toward fear and respectability. Bear phases generally last until they wipe complacency as well as the smiles off traders’ mugs. A month of grind didn’t even net us a sustained reading over 20. My biggest concern was the month was wasted because even if we set a new high (which we did in the Dow) it would do no good as far as sustaining the move. We need a minimum level of 20 to create a trading leg up that can retest the top of the range and we probably need a VIX closer to 30 to end this bearish phase altogether. As I write this, the NQ already has a new low for the entire correction which means the first month was indeed a waste.

If there is a positive takeaway, looking at all of the events since Thursday it does appear that sentiment is getting thick enough to turn the markets back up just at the point in time bears are starting to get comfortable. Now that the reality of first new Socialist government in France since the 80’s has materialized we’ll see just how resolute Euro bears really are.

A quick look at the Greenback also shows us a big trading range as the pattern is about to retest a double high from early April. One of the big tests of this week will be determined by the US Dollar’s ability to break through the 80.35 handle. As bullish as the near term pattern looks right now we all know we could be looking at an entirely different picture come Tuesday.

So when we boil this down, what is likely to be the high probability event for the week? If you haven’t checked out my new article in the May issue of this magazine you should look at the research of my latest Gann installment. But my next article scheduled for July is about support and resistance levels. When patterns take out old highs sooner or later they come back to retest them. This one wasted a whole month but it appears that the test of the 2011 high and the corresponding test of polarity is inevitable. But realize this correction does not materialize any technical damage until it breaks through that ridge of support.

nasdaq, stock index, technical analysis

We could very easily achieve this test by Monday or Tuesday. Depending how much fear comes into the market that could be it for right now. In the bigger picture, the final low might not be achieved until we get back down near the April 2010 peak which is a little over 400 points from where we are right now. That would be another 14% and a grand total of 19% off the top. If that happened this bearish phase would accomplish getting back to the breakout point from right after Christmas.

Next page: Where Apple may go

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