Here’s The Good News About This Pullback
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The major indexes finally experienced a setback last
week, after the broad-based gains seen in prior weeks. The bulk of
the declines took place on Friday, which market pundits blamed on Alan
Greenspan’s comments about the U.S. Dollar and interest rates. Otherwise, the
action seen was pretty constructive, thanks to what was regarded as an upbeat
earnings report from Hewlett-Packard and a merger between struggling retailers
Sears and K-Mart. Overall, it was nice to finally see some consolidation after
the magnitude of the recent rally.
The
December SP 500 futures closed out the week with a loss of -10.50 points, while
the Dow futures slid -59 points. On a weekly basis, the ES posted a gravestone
and a market structure high, and gave us the reversal candle we were looking for
on the bearish Butterfly pattern. Looking at the daily chart, the ES posted a
key reversal as it broke its rising wedge/uptrend line and 10-day MA support,
and aside from minor support at 1170, has an air pocket down to its 20-day MA at
1154.  The weekly YM posted a gravestone and market structure high, while the
daily broke its uptrend line and 10-day MA, and bounced off of its broken April
high, which is now acting as support. On an intraday basis, we have 60-min and
30-min bullish Butterflies on both the YM and ES, but keep in mind that a
bullish pattern is not as reliable off of a top. For you daily 3-Line Break
followers, the YM broke short, giving a new Break Price of 10,587, while the ES
bounced just above its Break Price at 1167.75. In the small caps, the ER2
followed its cousins to post a weekly market structure high and break its daily
uptrend line and 10-day MA support. The VIX posted a key reversal and bullish
engulfing line off of its 13 support area, and settled above its 10-day MA for
the first time in 2 weeks.
                   
The U.S.
Dollar closed at another weekly low as it rides its 10-day MA down as
resistance, but has formed bullish Stochs divergence. The Semiconductor Index
(SOX) posted both weekly and daily gravestones, and has formed a weekly bear
flag. The Banking Index (BKX) posted a weekly market structure high after
running into resistance at its March high and is testing its 20-day MA support.
^next^
It was
essential for the longer-term health of equities that some sort of a pause took
place. Remember, straight up moves almost always lead to severe declines. A
move higher in a stair-step fashion could significantly improve the
sustainability of the recent gains. More to the point, the consolidation could
serve as a nice launching pad for further gains. The pause seen in recent days
went a long way towards improving the key indexes’ technical health. Looking at
the daily chart of the SPX, we have potential support levels at 1163, 1150, and
1146. The line in the sand is the 1140 level, which would be a 50% retracement
of the last leg up starting in late October, and also a 50% retracement of the
entire move up that started in August.
                   
While all
appears well on the technical front in equities, there have been some troubling
developments in the currency markets. The U.S. Dollar continues to lose ground
and even key Fed Officials have talked in a bearish manner lately about it.Â
These sort of currency movements often do not have a significant impact for a
long time. However, when they do, the impact can be substantial. Because a
large percentage of the U.S. Dollars in circulation are held by foreign
investors, and because the twin deficits remain firmly in place, it’s essential
that confidence in the currency does not plummet. If a problem were to develop,
it would most likely be seen first in the debt markets. Should U.S. Treasuries
begin to experience large declines, it would likely be a tip-off of severe
problems to come for the Dollar, the equities markets, and the economy. At this
point, I’m not overly concerned about a possible currency crisis in the
near-term. Nonetheless, it’s important to keep the action in both the currency
and bond markets on the radar screen, since problems in either have the
potential to completely undermine the current stock rally.
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Please feel free to email me with any questions
you might have, and have a great trading week!
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