Since last I wrote, the S&P 500 bounced off the 200-day moving average, closing up four consecutive days. Today was our second tag at the 200-day moving average near 1262.58 with a low on the day at 1262.87. Most of the damage occurred straight at the open as markets overseas reacted negatively towards yesterday’s post-Bernanke conference call sell-off. In addition, some economic numbers out of China and the Eurozone did not bode well for manufacturing. During yesterday’s speech, the comments that shook the market into action were comments from Bernanke that the conditions are not the same today as they were last August when QE 2.0 was introduced as a proscription to deflationary forces. Bernanke essentially implied that QE 3.0 is not needed at this time. The risk-on trade in materials and energy rose throughout the beginning of the week in expectation of two macro events. With those behind the tape, the market was left to resume its negative trend since May.
The Week Leading up to Today
Leading up to the Greek confidence vote and the Federal Open Market Committee (FOMC) meeting, the risk-on trade was back in full force on Tuesday and Wednesday, meaning: materials, energy, and technology stocks were outperforming the market and defensive sectors like consumer staples, utilities, and healthcare were underperforming. This was exactly what we needed to see happen should the market put in a meaningful short-term bottom. In addition, Tuesday’s near 17 point rise for the S&P 500 was categorized as a greater than 90% up day; which is to say that 90% of the stock market participated in the advance. This was a display of strong demand for stocks which is something that has been lacking since May 31st, but has now showed up twice on the tape: June 14th and June 21st.
Bernanke’s comments that the soft patch might not be transitory and comments that we’re not likely to see another tranche in quantitative easing sent the markets down from a significant supply zone near 1295. 1295 had rebuffed previous advances on June 7th, 9th, 14th, and in the past two days. We closed slightly above it on Tuesday, but today at 1283, the supply zone continues to be a roadblock to any counter-trend rally.
Today’s Market Move
During the morning, the International Energy Agency member states agreed to tap government reserves in response to the supply disruption stemming from the civil war in Libya. This meant that 30 billion barrels of oil would be reintroduced into the existing supply glut already facing West Texas Intermediate crude; however, the other 26 members introducing gas should help in bringing down Brent crude. Goldman Sachs suggested the temporary supply would help Brent crude fall by $10 to $12 a barrel. Other energy analysts suggested such a move in price would be temporary.
The U.S. dollar rose on the weak economic news from overseas in the China and Eurozone Purchasing Managers’ Index (PMI) which fell for both. China’s reading for June showed a decline in both output and exports. It also showed that prices dropped which should ease some of the high inflationary pressure facing China now. As I mentioned last week, there’s been speculation that China may raise interest rates again. This data may help to stay their hand as weak economic data has caused other nations to do so.
Since the morning, Reuters reported that Greece’s representative to the International Monetary Fund expected a deal to be agreed upon between the Greek government, European Union, and IMF delegation on renewed austerity measures for Greece. Late in the trading day, news flashed that an agreement was reached. This sent the dollar lower and helped the stock market recover a lot of the day’s opening gap down. The universe and market abhors a vacuum.
Intermarket Technical Analysis
The title of this market observation is “Down but Not Out” because charts in stocks and commodities are showing topping formations; however, most of those tops have not broken down. In other words, the intermediate-term damage in commodities and equities has been extensive enough to possibly change the long-term trend. As I mentioned last week, unless conditions improve in the market tape, the technical damage to this market has been extensive. So let’s discuss some of that damage here.
Starting off with the S&P 500
The bullish setup in the March equity correction created an inverse head and shoulder pattern. The pattern was formed and completed when the S&P 500 broke above previous resistance near 1340 and proceeded to climb to an intraday high of 1370 on May 2nd. However, on May 5th the European Central Bank went on pause for their interest rates over concerns that peripheral countries were being left behind in the recovery and further hikes could cause further weakness. This caused the euro to plummet and the U.S. dollar to rise. In turn, the risk on trade reversed as commodities and equities began to decline as referenced in the CRB index and equity indices. The failure of the bullish technical pattern in the S&P 500 as price dropped below 1340 was the second warning shot across the bow in equities since the March correction.
As I mentioned last week, the market was ripe for a rally with incredible bearish sentiment both in newsletter biases and in the put-to-call ratio. On June 16th, the intraday low was within 1 point from the March closing low in the S&P 500 and within spitting distance from the 200-day moving average. This set the stage for a short-term rally of which we saw this week. News from the Greece and EU-IMF agreement hit the tape late in the day and helped foster a major reversal day on the chart – a second time now that the S&P 500 has come within distance of the 200-day moving average.
From a reversal point of view, today was a hammer candlestick in which the bottom shadow is more than twice the distance of the real body. Today’s reversal candlestick will be confirmed tomorrow if the market closes higher – above 1295 would be even more bullish. Tech was one of the highlighted performers today backed by earnings from Red Hat (RHT) at the close yesterday. We’ll just have to see what tomorrow brings given news from Europe and earnings news from Oracle and Micron. Oracle’s (ORCL) earnings were good after the market closed; however, their hardware revenue fell 6% from last year’s level. Fewer units sold mean less service down the road possibly, where they received the bulk of their growth last quarter. Oracle sold off 7% after the announcement which probably doesn’t bode well for tech tomorrow. Micron (MU) also released earnings after the close. They missed estimates and the stock sold off 9% after the close.
So the equity indices are down, but not out for the count. As I mentioned last week when discussing Dow Theory, should the Dow Industrial Average rally here to form a failure swing or lower high, in this case, then we will have the fourth warning shot concerning a reversal and top to this cyclical bull market. On that note, we are now in the third year of a recovery that showed all of the signs of a bull market as I wrote in “Recipe: Bear Market Bottom” on May 13th, 2009 which I discussed all the ingredients necessary to declare a bottom in the market (first) and economic cycle (second).
The last few issues to discuss here are the interweaving effects in the technical macro picture. This includes the interaction between currencies, bonds, commodities, and equities. As I showed above, we have some stark warning shots that have hit equities over the course of the last four months now since the February top on the 18th. As I discussed above, the next warning shot could be a lower high in equities over the next couple of weeks should the 50-day moving average hold stocks down. Beyond equities, other areas are showing cracks in the foundation of this cyclical bull. One is the recent drop in yield on U.S. Treasuries as investors seek safety of principle and the guarantee of the U.S. Treasury.
10-Year Treasury
Actually, the drop in the 10-year Treasury yield began at the peak in February. As stocks climbed higher into April, yields formed a lower peak as some investors maintained their position through the April equity rally. Purchases began in earnest mid-April and the yield has been dropping ever since. Technically speaking, I’m noticing the same divergences in momentum that we saw in October that warned of a possible rally in yields and a correction for Treasury prices. As yield has fallen through June, momentum has waned as it often does at peaks and troughs. The MACD on the 10-year Treasury is beginning to move higher, but a clear buy signal will not be given until yield gets above the 200-day moving average near 3.12% currently. 3.1% was the close on the 10-year Treasury yield when equities rallied strongly on June 14th. Interestingly enough, and something that caught my eye, was that the 10-year yield rose after the FOMC meeting and even after the conference meeting with Bernanke despite the sell-off in equities thereafter. Things that make you go hmm.
U.S. Dollar
The dollar has been very influenced by the Greek upset as the euro fell tick-for-tick on negative headlines surrounding peripheral nation credit rating cuts, political strife, and weak economic indicators over the past two months. Before May, the decline was firmly set for the U.S. dollar with a major pattern break spanning seven years (pennant). However, in the last two months, there has been a turn of events for the U.S. dollar and an identifiable bottom is in the makings. There has been a higher low set this month on the chart. A close above 76 on the index would confirm a double bottom and a reversal in the long-term decline for the dollar that began in June of 2010.
CRB Index
Vis-à-vis a rally in the U.S. dollar, commodities have been hammered on the anvil as the risk-on trade unwinds. The CRB index peaked in April as WTI crude reached 6 a barrel, gold hit 58, and silver hit near in parabolic fashion. Since the beginning of May when the ECB went on pause, the CRB commodity index has mirrored the advance in the dollar. Currently, a lower high has been set and today’s lower close broke support. Despite the break in support, I’m not quite ready to call the CRB down and out until we can cross below the 200-day moving average and stay there. However, the chart is certainly ominous and should be heavily considered by commodity investors that the tape in commodities looks very risky. The CRB will need to whipsaw back above 337 for today’s move to be a bear trap.
Conclusion
That should sum the technical picture for now. Short-term trends are as follows:
Equities – neutral
Bond yields – down – possible reversal warning from momentum divergence
Commodities – down – breaking March and May support today
Dollar – up
Long-term trends:
Equities – neutral - possibly topping
Bond yields – down
Commodities – down – top is in as of today; however rising 200-day MA should be respected.
Dollar – Trend is still down since the June 2010 top; however possible bottom here on a break above 76.
Despite the day’s horrible drop in equities at the open, the reversal mid-day due to the Greek and EU-IMF agreement was a bullish moment for the market. A 25 point drop in the S&P 500 narrowed to only 3.64 points. We still face stiff resistance at 1295 and then likely at the old gap support at 1313 and a falling 50-day moving average, at 1318 currently. If a rally from here stands to be anything more than just a counter-trend rally, we will need to see bond yields rise, the U.S. dollar fall, and commodities to rise again as they all did earlier this week. Within equities, we should see energy, materials, industrials, and technology lead. If a rally is formed on the back of utilities, healthcare, and consumer staples, beware.
