Market Stats

This week's rally has pushed the market up to the point where Thursday could help determine the direction through next week. The bounce has either finished, or nearly so, to be followed by the resumption of selling, or we'll see the market head higher into next week and tomorrow's session could point the way into next week.

Today's rally was accompanied by decent market breadth, although not as strong as yesterday's, and better volume than Monday's and Tuesday's, which were the lightest days of the month, but still below the 10-day average for volume. For an end-of-month/quarter rally the strength of it has been less than impressive. However, that alone is not a rally killer; it is instead simply a warning of potential lack of follow through once the end of the month/quarter window dressing has completed. In that regard, selling could start tomorrow since it would not be reflected in funds' statements (3-day settlement window).

Other than the end of month/quarter window dressing, much of the credit for this week's rally was given to another bailout effort for Greece. Saying it would be "suicide" if the government fails to pass the austerity measures in parliament on Wednesday, Bank of Greece Governor George Provopoulos may have helped win over a couple more votes than had been expected to vote yes -- the vote passed 155 to 138 in favor of implementing additional spending cuts and tax increases so that they can receive additional financial assistance.

Another vote on legislation that will implement the measures is scheduled for Thursday. If ultimately approved, it would enable the euro-zone finance ministers to release the financial aid at a July 3 meeting. Needless to say the people of Greece are not happy about this but the bankers and government are quite pleased with [saving] themselves. I'm sure more than one is saying (under his breath of course) "let them eat cake."

The stock market will be on its own next week. The Fed's POMO ends tomorrow and once end-of-month/quarter influence is gone the market is going to have to survive on its own. It's going to be a bit like pushing a drug addict out onto the streets because there's no room at the shelter for him. No more drugs (money) and feeling a bit vulnerable, the addict (bulls) could decide to hole up someplace and hide. Without more buying pressure the market could start to sink just by its own weight. There is always selling for a multitude of personal reasons but there's just one reason to buy -- to invest in the stock market (or trade but they're in and out, somewhat neutralizing their effect). If the market starts back down it could then scare more traders into selling.

Earnings announcements are just around the corner and could be a catalyst for more selling if the market simply doesn't have the buying power to drive it higher. If there are good earnings, or perhaps I should say especially if there are good earnings, and the market sells off then that would spook the bulls even more. Of course there's still the worry about what's happening in Europe.

Many are still wondering why our stock market is so concerned about a little country like Greece not paying their bills. Even if it hurts a few European banks, so what! The so what is called contagion. When Lehman Brothers went bust in 2008 it was more than a problem with just them filing for bankruptcy. More importantly it was what that did to the other banks. All of our banks are inexorably linked, even globally, and we should think of them like dominoes. When one tips over it hits another which hits another and so on. Lehman's bankruptcy caused a credit freeze as banks were afraid to lend to each other. The overnight LIBOR (London Interbank Offered Rate) shot higher and credit spreads between Treasuries and others widened steeply.

Our global economy runs on credit and when credit freezes so does everyone else. Even companies trying to ship products, especially overseas, were not able to ship because they were unable to obtain a LOC (Letter of Credit) in order to release the shipment. No shipments, no receipts; no receipts, no money; no money, no more credit. The financial system got hit with gridlock.

Greece is merely a small domino but when it falls it will hit multiple banks who will be forced to recognize the loan loss (right now they're carrying the loans at mark-to-make-believe prices rather than actual market values). Greek bonds are at best worth 50 cents on the dollar. Banks holding Greek loans would face tens of billions in losses and since no one really knows the value of the bonds we would once again be faced with banks not trusting other banks to lend money to them.

U.S. banks are not immune to the problem. While U.S. banks have not lent much money to Greece they have sold "insurance" -- Credit Default Swaps (CDS). A default by Greece would trigger a payment from those who sold the CDS (one reason why U.S. banks are in favor of "soft" restructuring of Greek loans so that they are not declared "in default"). But many say all those CDS sales won't be a problem for U.S. banks because they bought their own insurance (more CDSs) to protect themselves. The problem is much of that secondary insurance was bought from German banks, the same ones on the hook for the Greek loans. You can see where this is all headed and finger pointing will be the least of the problems.

Part of the problem too is that the derivative market remains as unstructured and unregulated as it was before the 2007/2008 banking crisis. Nothing has been fixed (Dodd-Frank is a joke) and in many cases it's worse (with too-bigger-to-fail banks). The banks and governments are in bed together, each helping the other survive and prosper.

And Greece is just the tip of the iceberg. There are the other PIIGS nations who will saddle up to the trough looking for their handouts so that they too can push their debts out 30 years, as France is doing for Greece. The ECB could be forced into printing more money to keep the loans flowing, which of course will spark inflation, especially in stronger countries like Germany. That would likely force their citizens to rebel and then the unthinkable -- pulling out of the European Union -- suddenly becomes thinkable. So little ol' Greece ain't so little when you think about the dominoes right behind it.

But that's for another day to worry about. The stock market prefers to whistle past the graveyard and hope "The Night of the Living Dead" doesn't start playing. Each participant is convinced they'll still find a chair when the music stops.

The big question this week is whether the rally off last Thursday's low is the start of something bigger to the upside or is instead just one of what will be many sharp and short-lived short-covering rallies within a larger bear market decline. Keeping in mind that volume has been very light (Monday and Tuesday were the lightest days of the month and the 6th and 7th lightest of the year), indicating more short covering than real buying interest, and that sharp rallies like this are often seen in bear markets vs. bull markets, I think we'd have to see some bullish follow through next week to confirm this week has been more than a relief rally helped by end-of-month/quarter window dressing.

Tonight I want to take a little longer-term view of the NYSE Composite index because it looks like a good reflection of the stock market in general. The weekly chart shows the 3-wave move up from March 2009, labeled as an A-B-C correction to the 2007-2009 decline. The decline from the May 2nd high found support at its uptrend line from March 2009 through the July and August 2010 lows so the market obviously thinks this uptrend line is important. A break of it, currently near 8020, would be a significant break. I've also drawn in the possibility for a sideways consolidation (green dashed line) to indicate the market is not finished rallying. A stronger rally up to the June 1st high near 8488 would support the bullish path otherwise I'm looking at this week's bounce as just a correction within a larger move down into the fall.

NYSE Composite, NYA, Weekly chart

The NYSE daily chart below shows price ran up to resistance today at its downtrend line from May 2nd, near the day's high at 8239.44. If it's able to press a little higher this week it should be able to tag its 50-dma near 8400. It takes a drop below Monday's low near 7960 to confirm a break of its uptrend line from March 2009 and that the bounce is finished. But an earlier bearish signal will be a price drop that is sharp (impulsive) vs. a choppy corrective pullback, which would give us a good signal that the next leg down has begun. As noted on the chart, if MACD makes it back up to the zero line and then rolls back over it would be a strong sell signal.

NYSE Composite, NYA, Daily chart

As you'll see in most of tonight's daily charts, the pattern is very similar for the indexes, which should keep us on the right side of the market. At the moment the bears are not in trouble but a little more rally on Thursday would have the bulls back in control. SPX could make it up to its 50-dma, and possibly its downtrend line from May 2nd at the same time, near 1317, with another rally on Thursday. Anything above 1320 would be bullish. A turn back down below 1295 would be a bearish heads up and confirmed bearish with a break below 2167 (although the price pattern will likely indicate whether or not we should look down or up next week).

S&P 500, SPX, Daily chart

Key Levels for SPX:
- bullish above 1320
- bearish below 1267

Today's rally popped SPX slightly above the top of an up-channel for its bounce off the June 16th low. It's possible the bounce is finished right here and will start back down tomorrow. If it pulls back in a choppy sideways/down kind of move, it will point to another move higher, probably up to the 1317 area on Friday. That would then set up at least a pullback to correct the leg up from June 23rd, or the next leg down to new lows for the year.

S&P 500, SPX, 60-min chart

The DOW looks like the NYSE with its downtrend line from May 2nd below its 50-dma, unlike SPX which has the two merging next Tuesday (Monday is a holiday). Both the DOW and NYSE stopped at their downtrend lines (minor poke above it by the DOW today). Another 100 points higher is its 50-dma at 12369, but the setup right here is for a reversal back down. All the bears have to do is pounce. A break below 11925 is needed to confirm a break of its uptrend line from March 2009 through its July 2010 low.

Dow Industrials, INDU, Daily chart

Key Levels for DOW:
- bullish above 12,400
- bearish below 11,925

The blue chips were the stronger indexes today whereas NDX was hurt by the lack of participation by some of the tech's big dogs -- AAPL, NFLX, INTC, MSFT, TXN -- which finished in the red today. NDX flirted with being in the red a couple of times today. The daily chart shows the same pattern but NDX has not yet been able to reach either its 50-dma, near 2320, or its downtrend line from May 2nd, slightly lower near 2309 tomorrow. Today's rally was stopped at its May 25th low. It could turn down from resistance here or make it slightly higher to stronger resistance.

Nasdaq-100, NDX, Daily chart

Key Levels for NDX:
- bullish above 2320
- bearish below 2263

The RUT rallied up to resistance this morning at its 50-dma and stalled. It spiked down and then chopped its way a little higher into mid day and then spiked down again in the afternoon. It then chopped its way back up towards the day's high into the close. It looked like a distribution pattern and the daily candle looks like a bearish dragonfly doji at resistance. A red candle tomorrow, especially if it starts with a gap down, would be a strong sell signal. So the bulls know what they need to do to avoid that signal. If the bulls prevail for another day (or morning), resistance at its downtrend line is near 826, which is also the top of an up-channel from June 16th (bear flag?).

Russell-2000, RUT, Daily chart

Key Levels for RUT:
- bullish above 827
- bearish below 794

As we know, the Fed's POMO finishes tomorrow. They'll still be rolling over paper and therefore buying Treasuries but not with new money. That lack of new buying could spell trouble for Treasuries, as mentioned earlier. Steve, an OIN reader and economist, has pointed this out this morning:

Following yesterday's disappointing 5 Year $35 billion auction by the US Treasury, Germany followed up today with its own unsubscribed bond auction debacle, after Germany sold just 4.825 billion in 5 year bonds at the 2011 low yield of 2.16%. The auction remained technically undersubscribed as the 6 billion offer only received 5.445 billion in bids. Even on a sugar-coated basis, the BTC was just 1.1, a plunge from the 1.9s seen recently. But such is life without the backstop of Primary Dealers who buy up everything there is, until they themselves are no longer able to flip the shell game.

From Dow Jones: 'The Bundesbank said all bids at the lowest price were accepted and it satisfied all the non-competitive bids at the weighted average price. The amount retained for market-tending purposes was about EUR 1.175 billion, bringing the total issue size to EUR 6 billion, as previously announced.' Bottom line, with the pristine economy of Germany unable to sell bonds, what does that mean for the US and the rest of the insolvent "developed" world?"

That's a very good question Steve.

In order to fund Greece, and the other needy countries which are unable to pay their current loans, the ECB and IMF will be trying to sell bonds in order to lend the money. A German economy minister says Greek reforms alone are not enough and that they need appropriate private creditor involvement as well. Yea, good luck on that one. While Greek yields are enticingly high for investors, the 50% chance of default is not (equal chance of losing it all as earning a return). It's not even as good as a double-or-nothing bet that you might make with someone.

Foreign central banks have been largely absent from U.S. Treasury auctions and the Fed's pullback is going to make it even harder to find eager buyers. The one fix to this problem? A declining stock market. If the stock market starts to sell off harder it will create more eager buyers of Treasuries as a "safer investment". But at the moment there could be a problem selling Treasuries, which is reflected in the steep spike in yields this week.

In the first quarter of this year foreign central banks bought only 16% of the Treasury issuances while the Fed bought almost 200%. The Fed's buying has masked the exodus of foreign central banks, including China, from these auctions. So with the Fed's departure, or at least reduced buying, the private sector will have to fund our fiscal deficit, requiring Treasury purchase of about $370B. They will demand a higher return on Treasuries and those purchases will take money away from purchasing stocks and commodities. We unfortunately do not have the ability to create money with which to buy more and therefore the risk to the stock market is now greater.

WaveTrack International's technical analysis says 10-year Treasuries should be yielding around 4% later this summer and 6% a year from now. If that comes to pass it will be a significant competitor to investors' money, with the thinking that a "safe" 4%-6% return is preferable to a questionable return on stocks, especially if the stock market starts to sell off. I'm not convinced of the higher yields yet but nevertheless, there are some interesting times ahead.

While the stock market rallied on low volume, indicating more short covering than real buying interest, bonds sold off this week, which looked like "long covering", resulting in a sharp spike down in bond prices and up for yields. The 10-year yield, TNX, has seen a strong 3-day rally and made it up to its broken 50 and 200-dma's near 3.12% (the 50 is now just crossing down below the 200). Following the strong rally up to resistance the short-term charts are overbought and showing short-term divergences at today's high. The wave count for its rally from Friday can be counted as a completed 5-wave move, which in turn calls for at least a pullback to correct the move up. More bearishly the strong spike up could be the completion of the corrective pattern since early June, making it ready for a turn back down to new lows.

10-year Yield, TNX, Daily chart

The 20+ year bond fund, TLT, dropped below its 50 and 200-dma's today and could drop a little further to a Fib price target at 93.53 (today's low was 94.02) where a possible a-b-c pullback from June 1st would have the c-wave = 162% of the a-wave. That's the setup that could lead to a resumption of its rally from February (green path). But as with TNX, only in reverse, the sharp drop from last Thursday could be the start of a more significant decline in bond prices. In either case the move down from last week looks ready for at least a bounce correction and any bounce followed by a new low below today's (assuming we'll get a bounce from here) would be a strong indication that TLT will drop down to at least the bottom of its channel, currently near 92.

20+ Year Treasury ETF, TLT, Daily chart

BAC got a big lift this morning, thanks to an agreement to settle the charges that it bilked, um, I mean cost investors who purchased non-investment-grade mortgage-backed securities from Countrywide. BAC spiked higher this morning but closed off its high. It still finished up +$0.32 (+3%) at 11.14. And of course the Greek austerity vote relieved a lot fear about banks in general. The bank indexes were up more than +2% for the day.

BKX's chart shows it rallied up to its broken uptrend line from August-November for what could be a bearish setup for a kiss goodbye. Today's high at 48.26 was also a penny above the level where it achieved two equal legs for the bounce off the June 10th low. It might press a little higher to its 50-dma near 49 (the other bank index, BIX, stopped 8 cents shy of its 50-dma at 137.17) or it could go sideways for a little longer before heading lower but regardless, the price pattern remains bearish so it's just a matter of how high the bounce will get before continuing lower. Today's setup is a good one for a reversal from here.

KBW Bank index, BKX, Daily chart

At this morning's high the TRAN tagged the 62% retracement of its May-June decline, at 5366.16 (the high was 5371.58). If it can push a little higher into Friday it will find resistance at its broken uptrend line from August-March near 5400, again, which is the trend line that stopped today's rally and the rally on June 22nd. Much above 5400 would be bullish otherwise the expectation is that the bounce off the June 13th low will be followed by another leg down.

Transportation Index, TRAN, Daily chart

The euro reacted positively to the Greek vote and that pushed the dollar lower to its 50-dma at 74.65 (ignore the right most red bar -- it's not really there). Slightly lower, at 74.47, it would have two equal legs down for a larger a-b-c pullback from the high on June 16th and set up the next rally leg (green). A drop much below 74.47 would point to its uptrend line from May 4th, near 74.10. A bullish resolution for the dollar is still possible as long as it doesn't break below the June 7th low at 73.50, but it's looking less likely if it's not able to rally from here (or from 74.47).

U.S. Dollar contract, DX, Daily chart

The bounce off Monday's low for gold looks like it has the potential to at least make it back up to its broken 50-dma at 1520.50 before starting back down again. The bearish wave pattern would be negated with a rally back above the June 22nd high at 1559.30 but until that happens I think a bounce in gold is an opportunity to short it.

Gold continuous contract, GC, Daily chart

In last Wednesday's newsletter I had mentioned that silver looked to be ready for a continuation lower. This was based on the sideways triangle pattern since the May low and an analogue pattern of the post-parabolic climb in 1980 and 2011. The next day silver started the decline and broke below the bottom of its triangle pattern on Friday (the uptrend line from May (and in reality, from January). Monday's low was a test of the May lows and then bounced. Today's rally in silver, thanks in part to the decline in the dollar, is about ready to test resistance in the $35 area. It's close to testing the bottom of the triangle pattern (uptrend line from January-May), near 35.10-35.60, which are also the 50% and 62% retracements of the leg down from last Wednesday, depending on whether you use the log or arithmetic price scale. It's also testing its downtrend line from April 28-June 22. It takes a rally back above last Wednesday's high at 36.77 to negate the bearish price pattern (which would potentially set up another rally leg to the $40 area) but in the meantime I'm looking at this week's bounce as another shorting opportunity.

Silver continuous contract, SI, Daily chart

With a high of 95.84 today, oil hit an area of resistance near 96, again, which is going to be a tough level to break. Last Wednesday it rallied up to 95.70 but then dropped to a new low. Today it made it back up to tag its broken H&S neckline (which can be considered anywhere between 95 and 96.30 so today's bounce qualifies as another test) and obviously a drop back down from here would leave another bearish kiss goodbye. This time, at the same level, it has hit its downtrend line from May 2nd and came close to achieving a 50% retracement of the leg down from June 9th, which is at 96.06. If the bulls can crack this level it will be a bullish statement but until it can get above 96.30 and stay above that level the bounce should be viewed as a shorting opportunity for a continuation lower to 82 if not 77.

Oil continuous contract, CL, Daily chart

The only economic report tomorrow that could have an impact will be the Chicago PMI at 9:45 AM (so be careful if you like the trade in the first 30 minutes). The market is very nervous about signs of the economy slowing so any nasty surprise could spark some profit taking after this week's strong rally. A positive surprise might not have that much of an impact considering the strong rally (many shorts have been punched out of their positions).

Friday's reports could definitely move the market, especially if there are any nasty surprises. Both the ISM index and construction spending will tell us how well the economy is doing and if the ISM drops below 50 it will be a sign contraction.

Economic reports, summary and Key Trading Levels

Sharp rallies are the hallmark of bear markets as shorts scramble to cover their positions. This usually creates a strong rally from a points perspective but on low volume and shrinking market breadth, both of which have been present this week. Therefore, chasing the market higher could be very risky at this point and this is especially so as we finish out the month/quarter, not knowing how much of this week's rally was more window dressing than anything else. It that window dressing starts to get unwound, and there were hints of that today in the RUT's pattern, we could see this week's rally retraced just as quickly as it rallied.

The additional risk for bulls as we finish out the month is the lack of Fed's efforts to buy Treasuries, other than maturing paper that they roll over into new paper. A lack of participation in Treasury auctions could lead to lower bond prices/higher yields and that in turn could attract investors out of the stock market.

With the stock indexes up against resistance following the strong bounce, placing the short-term charts back into overbought, it requires caution if you're leaning to the long side. But clearly in a strong rally you don't want to get sliced up looking to short it. It's a good time to nibble on shorts if it rolls over from resistance and then add to the position on bounces to lower highs, rinse and repeat. If we get a choppy corrective pullback it will be a good time to do the opposite and nibble on longs when it bounces at support and then add to the position on pullbacks to higher lows (yes, it sounds easier than it really is).

The market is at an inflection point here and tomorrow's direction could lead the way into next week.

Good luck and I'll be back with you next Wednesday.

Key Levels for SPX:
- bullish above 1320
- bearish below 1267

Key Levels for DOW:
- bullish above 12,400
- bearish below 11,925

Key Levels for NDX:
- bullish above 2320
- bearish below 2263

Key Levels for RUT:
- bullish above 827
- bearish below 794

Keene H. Little, CMT

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