PII…2 down and 3 to go. Bears cover and Spain locks in their bailout, just at the point in time markets come down to similar support levels during last year’s crisis. Is it just me or do you think it’s really true that bears lack the conviction to take it all the way? Last week it didn’t take much to tweak the bears as all we needed was a press release from Janet Yellen to send bears for the hills in the form of the one of the best market days of the year last Wednesday. On Thursday Bernanke went up to Capitol Hill to pour cold water on the whole thing but by Friday bulls didn’t need any excuse to take markets higher.
But as we get a week closer to the seasonal time window there are 3 conditions that still concern me. First of all, it’s the turn window itself. Any time we rally into a major seasonal point in a larger degree downtrend we run the risk of inverting and topping out. Second, I’ll throw out a couple of news events which could serve to scare markets, next week we’ll have elections in Greece and Egypt where a potentially hostile to Western interests group can win power. Finally, we have a VIX that peaked in the 27 handle but fell back all the way to 21. The bottom line is based on the positioning of the VIX we are not set up for a fresh bull leg that can sustain beyond the higher end of the range. That could change if we get a major shake of the trees with these elections, but it’s not the way things look right now.
But the biggest factor working in the equity market’s favor as I write this late Sunday night is the gap down in the Greenback. When the Greenback topped on decent Gann readings the initial last man in group who bought near the highs got trapped as you can see from this chart. Once the price action fell below the last ridge of support before the high, all of those traders who didn’t use stop losses probably wish they had. If that happened to you, what would you hope for? Just to breakeven and you’d never do it again, right? These traders did get that chance but it appears some of them stubbornly held on because it dropped one more time AND CAME RIGHT BACK UP. Given the point on the chart where prices dropped we see that former support became resistance and polarity flipped. That means we had the last group near the old high give up and the next group which may have thought they were buying a dip. That group of traders was stubborn as well or else the price action could not have rallied again. Granted, this is not the classic unwind of distribution but the gap down now has the price action sitting under the market. If it comes up to the 82 handle and drops or if it just covers the gap and drops then we likely confirm a top. However the price action is slowly becoming supportive of a larger move for stocks.
Getting back to stocks, Sunday night’s action is positive on 2 fronts. First of all, as we stated last week, prices had come all the way down to the October peak and as we know, not a lot of buyers supporting the market below in a zone down to the October low. What was the market up? Quite frankly a lack of bearish conviction which made the whole support zone very shaky. Here we are with the Spanish bailout and longer term bears are starting to show the same kind of indecision they showed last year all over again. That doesn’t mean we aren’t going down there, just not right now. On the other side of the coin the NQ has now cleared all near term overhead resistance during the Greek sequence from a couple of weeks ago which led to the last breakdown. This rally ought to at least test the upper third of the range. As I write this the NQ is sitting at 2585 and the A wave tendency low from April 23 is 2619. In the very least this bounce should test that level.
Another chart that had zero margin for error was the EUR-USD which had a beautiful flip in polarity to it’s A wave tendency line on Sunday night. As you can see from this chart the initial burst off the bottom is the A wave (we rule out the subjectivity of Elliott). Prices came back to retest, lifted again and by Friday made a 2nd test of the line. It was either going to happen or it wasn’t. By Sunday night the retest of the line confirmed the polarity flip and prices exploded higher, likely a combination of buying interest and well as a short squeeze.
Next page: What was behind the drop?