This Classic Pattern May Set Up Soon
Stock index futures experienced a sharp sell-off last
week and for the first time in nearly a year there appeared to be
some panic selling by market players. Much of the attention was focused around
Thursday’s bombing in Madrid, which experts are suggesting was terrorist
related. However, the fact is that the decline was well underway prior to the
bombing. More to the point, I’d suggest that General Electric’s decision on
Monday to sell $4 billion of its own stock was what took the legs out from
underneath market. The key indexes were able to bounce on Friday, which seemed
to improve sentiment a bit, but the overall point declines were confirmed by
heavy volume and weak breadth. It was a week where there was nowhere to run and
nowhere to hide, as just about every sector lost ground. The one bright spot
was the U.S. Dollar, which continued its recent rally to the surprise of all the
dollar bears.
The June SP 500 futures closed
Friday’s session with a gain points, and closed out the week with a loss of
-39.75 points . Volume in the ES was estimated at 741,000 contracts, which was
behind Thursday’s pace, but still above the daily average. Open interest
continues to expand with the market’s weakness, however, so far, all we have is
a normal correction of an excessive rally. On a weekly basis, the contract
finally broke its weekly uptrend going back to the March ’03 bottom, but was
able to settle above its 200-week MA. Looking at the daily chart, the ESM
posted a market structure low off of its 100-day MA support, while the SPM
posted an inside market structure low. On an intraday basis, the contract hasn’t
been able to even breach 60-min and 30-min resistance the entire week.
The Banking Index (BKX) posted
a weekly market structure high, but was able to hold its trend line from the
Sept. ’03 lows. On a daily basis, the index posted an inside market structure
low and was able to settle back above its 50-day MA. The Dollar Index (DXC)
posted a 4th straight week of gains, but still has some work to do to even test
its big weekly downtrend line in the 91.70 area. The index posted a daily
bullish engulfing line as it continues to base along its 100-day MA support. The
SOX posted a weekly bearish engulfing line and is trying to base off of daily
support at 480. The VIX broke its weekly downtrend line and posted a daily
market structure high after bouncing off of its 200-day MA support.
Despite
Friday’s bounce from deeply oversold short-term levels, a serious amount of
technical deterioration took place in the last week. All 4 of the key indexes
closed below their 50-day Moving Averages, the NASDAQ Composite closed below the
critical psychological support level of 2000, and the first Dow Theory sell
signal in a long time was issued. Also worth noting was that volume expanded on
the down days, which suggests a large amount of distribution took place. These
are all developments we haven’t seen transpire together since the bear market
started.
With the
great irony and perversity of the market, this is probably the “more serious
correction†that all the top-pickers were spouting about (and getting squeezed
like an orange) back in January. This correction still appears to have further
to go in both time and price, before the major indexes may be ready to mount
another try at making new highs ahead of earnings season. We’ll probably need
to see more fear that the bull run is over before a bottom is put in (at least
one that will be able to hold for more than a few days). It’s probably a good
idea to be very skeptical about further rallies in the short-term and the
potential is there for a classic “bull trap” to be set up in the week ahead.
Program Trading Levels
Fair Value – (1.33)
Buy Program Premium – (0.22)
Sell Program Discount – (2.42)
Closing Premium – (2.50)
Closing Bias: If the futures gap up at the
open, watch for a retracement down towards the gap fill.
Please feel free to email me with any questions
you might have, and have a great trading day tomorrow!
Chris Curran