As mentioned Friday, this market has been akin to the saga between Lucy and Charlie Brown in regards to kicking that darn football. Just as things improve technically, the ball is pulled away and Charlie lands flat on his back. Last Wednesday the S&P 500 broke over a descending trendline connecting a series of multi month highs, a bullish condition. After a very quick run up, it would be sensible to expect a modest pullback but the hope with these type of "back and fills" is they are controlled and not violent. Instead we saw the S&P 500 push back downward in relatively harsh fashion Friday and U.S. investors are greeted with a substantial gap down this morning as Spain reintroduces itself to the risk spectrum. This is now going to create a break of the lower trend line that connected the lows of the past 8 weeks. All is not yet lost for the bull case but Lucy has a firm grip on the football and is eyeing the nearest treeline.
What has happened since early June is a series of higher highs and higher lows. For this pattern to break, S&P 1325 would need to go. However, particularly vicious is the pattern of the past handful of days. After breaking out of this triangle pattern (denoted by orange lines) to the upside, the index is going to gap down and through the bottom of the triangle this morning. Very harsh action.
Spanish yields are touching the 7.5% range as various provinces are now asking for bailouts from the federal level and more are expected on the way. One week Europe is pushed to the background, the next it is front and center – one just never knows which week(s) will be the one of focus.
It will be another week of hot and heavy earnings action with Apple the highlight, but if the market will be focused on Europe all week or U.S. earnings is unknown. On the economic front a few important reports highlighted by Q2 GDP Friday, which is expected to come in at a paltry 1.2%. Markit has introduced a "flash" PMI for the United States which is supposedly trying to predict U.S. ISM – this is only a few months old but has not yet caught much attention in the marketplace. If it can show a good predictable pattern with the actual data to be released early the following month it should get more mind share. This # is to be released Tuesday with a 52.6 expectation. Outside of that there are some housing numbers and a durable goods order (Thursday).
It remains a very difficult market since early April and we're currently stuck in a pattern of 4-7 day rallies with 4-7 day selloff in the U.S. since mid June. Both directions are extremely strong, with much of the action coming overnight. We've had a serious headfake now to the upside in the past few sessions, and a break below the 1325 level would create a "lower low" and a serious change in the near term setup in this market.
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