I hope everyone has a great weekend. Be back Sunday night.

I hope you took my advice and sat on your hands today. If you went short you got killed, and if you went long you got killed. Maybe next week will offer a little more clarity. I hope everyone has a good weekend.

Deflation = my biggest fear for our economy.

There's quite a difference between the RUT (+1.6%) and the DOW (virtually flat). There's obviously not a lot of fear of owning small caps going into the weekend.

I have been reading some things about the dissention going on within the Federal Reserve. Bernanke is facing arguments from some of the regional governors who want more stimulus within the economy due to the risk of a deflationary spiral. Speculation has these governors pressuring Bernanke to OK an increase in the Fed's balance sheet to $5T from $2.4T.

Wow!

The RUT's 30-min chart shows the same Fib retracements and time projections based on yesterday morning's low. The bounce would be equal in time to the decline if it finishes on Tuesday (instead of 62% for SPX based on this morning's low). RUT 30-min chart

The downside risk for Monday is based more on the pattern for the RUT. If I use yesterday morning's low as the completion of the 1st wave down then the 62% time projection falls on Monday morning. So the bounce could be counted as complete at this point. But because its short in both time and price (it hasn't retraced even 38%) I'm reluctant to call the bounce complete. The risk is that it is complete and Monday will be hard down (caused by some event over the weekend, perhaps around the G8 Summit meeting in Toronto). So stay aware of the possibility of a strong decline on Monday even though I don't think that's what we'll see.

Using the Fib retracements and Fib time projections, the SPX 30-min chart shows how we could have a choppy climb into Tuesday so it may mean sitting on your hands or trading very carefully. SPX 30-min chart

Could this be a head fake?

Uh oh.

SPX has a little different pattern than the RUT since it made a new low yesterday afternoon and then another new low this morning, which is what has it looking like it finished its 5th wave down with a small descending wedge (ending diagonal). The first leg of its a-b-c bounce is the one off this morning's low. But the end result should be very similar--ideally we'll see the completion of the a-b-c bounce on Tuesday, perhaps back up to 1100 and the previous 4th wave high, to set up the short play. SPX 60-min chart

I'm back and I see the bounce has developed a little further than when I left. That's good since it should be into the 2-day bounce to correct this week's decline. The RUT has one of the cleaner patterns and this morning's new low fits as part of the bounce pattern starting from yesterday morning. Today's high should complete the a-wave of an a-b-c bounce into Tuesday now. Depending on how far wave-b pulls back I'll then be able to get some upside projections for wave-c. That's when I'll be licking my chops for a nice short entry. RUT 60-min chart

Intraday Market Update

US equities opened slightly higher this morning but quickly turned lower extending yesterday's decline. An unexpected downward revision to Q1 GDP did not help investor sentiment in early trading as the S&P 500 was down -7 points. However, equities shrugged off the news and have recovered from their lows after an unexpected upward revision to the final University of Michigan Consumer Sentiment Index and strength in financial stocks after the US Congress conference committee completed negotiations on the FinReg reform bill. Despite the added regulation, the uncertainty of the process has been removed which is giving banks a boost. Goldman Sachs and Citigroup are +4% higher while most other large banks are +2% higher. The S&P 500 has rallied +15 points from its lows and is now positive by +8 points (+0.75%) as the index broke through its downtrend line from Monday. The Russell 2000 has gained +1.77%, while DJIA is lagging behind, up only +0.30%. The only sector in the red is the homebuilders after a disappointing report from KB Homes.

Greece's problems continue as CDS spreads on its debt hit new highs again and chatter is circulating that the country may sell various islands in a capital raising effort. Most major international markets traded lower on Friday.

Earnings reports are sending a mixed message, with Oracle beating estimates, while RIMM missed revenue and KB Home announced a larger than expected loss. RIMM has lost -10% and is trading below a key support level of $54. The next major levels of support are $48 and $40. ORCL is up +4% while KBH is down nearly -8%. KBH is hanging onto a key support level of $11 with the next major level of support down near $8.

Final GDP for Q1 turned out to be significantly less than expected. GDP was revised down to an annualized growth rate of 2.7% compared to the prior estimate of 3.0% and the initial estimate of 3.2%. Estimates called for an unrevised growth rate of 3.0%. Personal consumption gained +3.0% which was below estimates of 3.5%. Real final sales to domestic purchasers were revised down to 1.6% from 2.0% while final sales of domestic product, which excludes changes in inventory, were revised down to 0.8% versus the prior estimate of 1.4%.

Consumer sentiment has been increasing for the past few months and today's report increased more than initially reported in the preliminary release, rising from an initial reading of 75.5 to 76.0 in June. Expectations were for an unchanged reading. The upward revision came as the current economic conditions component increased from 82.9 to 85.6 in the preliminary report which offset a decline in the economic outlook component from 70.7 to 69.8.Today's 76.0 level is the highest level since January 2008.

Commodities/Currencies:

The US dollar is weak today which is giving commodities a boost. The greenback is nearing a critical support level of $85.36 which is also near its 50-day SMA. Crude oil has gained +3% as a tropical disturbance is brewing in the western Caribbean. It appears some short stops were also hit above $77.60 and if crude closes at current levels it will be the highest daily close since May 6. Copper is at its highest levels in nearly a month.
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Core Sector List:

Overall reading: 15 sectors advancing, 1 sector declining

Strongest Sectors: Gold Miners, Banks, Oil Services

Weakest Sectors: Homebuilders, Pharmaceuticals, Oil

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S&P 500 - Daily and 30-minute Intraday Charts:
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Dow Jones - Daily and 30-minute Intraday Charts:
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NASDAQ - Daily and 30-minute Intraday Charts:
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Russell 2000 - Daily and 30-minute Intraday Charts:
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SPX broke below its 20 DMA this week. I would expect that it will encounter some resistance when it approaches that average again from underneath. That level is approximately 1089.

It is interesting that Apple (AAPL) is in the red today. I wrote a 290/300 bear call spread for July last week when it hit previous resistance at $272. I got really nervous when it punched right through that former resistance and made it up to $277. Tomi Kilgore wrote an interesting article today about APPL. Here it is: Technical Assessment of AAPL

1,080.50 is R1, regular trading hours.

It cut through those levels like a hot knife though butter. We are +15 points off of lows now.

On the ES 15 minute chart we have the RTH pivot (1,073.50), 50-SMA, and downtrend line from Monday all within about 2 points of each other. If we break through these the afternoon rally could gain some steam.

The RUT certainly looks like it's succeeding with its breakout. If it can continue above 644 it will confirm a bottom is in for now (although it doesn't preclude a retest of the low). If it can't get above 644 and drops back down we could still get the minor new low to finish its decline. So far the 60-min chart shown in last night's wrap appears to be the pattern in play. RUT 60-min chart

I've got to run off to run some errands which requires a boat trip over to the mainland (no, I'm not going flying, although it's such a nice day that I wish I was). I'll be back before the market closes to see how it's set up for Monday.

The bulls are gaining momentum but not all the internals are bullish enough for me to put on a trade.

This is a bold call on VMware:

Capstone Initiates VMW with Sell, price target = $40

Capstone Investments is making a major negative call on VMware initiating it with a Sell rating and a $40 price target.

It gets worse, folks. Reading the call it looks like Capstone analyst James Gilman (CFA) is accusing VMware management of artificially propping up license revenue by offering shadow discounts of up to 70%, that haven't shown up in the income statement side yet.

They believe the discounting has continued since Q4 2009, albeit on a smaller scale. They expect this discounting to lead to revenue and earnings miss in second half of 2010.

Capstone notes they come to these conclusions after performing a detailed analysis of deferred revenue due to the exceptionally large sequential increase in current deferred revenue in Q4 2009 absent a corresponding proportional increase in revenue from license sales.

Firm notes they contacted VMW management but as Gilman says "Their response and explanation only fueled our curiosity. If they were able to address our concern then we would have dropped this subject, but we thought management downplayed our question by reiterating information from the Q4 2009 earnings call."

The RUT has been relatively strong today (at least it's in the green) but it too is still battling its downtrend line from Monday and if it's going to finish its decline with a small descending wedge pattern it ideally needs one more minor new low to finish it. A downside projection near 627 by the end of the day would do it. A break above 639 would be a bullish heads up and above 644 would confirm the bottom is in.

I've depicted a low this afternoon to finish the decline from Monday and then a typical 50% bounce in 62% of the time would take it back up to 652 by June 30th, which of course is also the end of the month/quarter. As the Church Lady would say, "Well isn't that special". RUT 30-min chart

Internals are getting stronger again but that's about the third time today they've gotten stronger only to be turned back by sellers.

I have this funny feeling the bulls will stage a late day rally, although this is entirely based on gut feeling and nothing else.

I've got zero short positions except that SPY 112/114 bear call spread from 6/10. It is starting to benefit from time decay. I must admit I've thought about closing it but will probably wait.

The banking indexes have stayed in positive territory all morning and that should provide a lift to the market as well. The broader market remains weak but it's still not one I'd want to short right now.

The SOX is one of the weaker sectors this morning (-1.6%) but it has now dropped down to its 62% retracement of the rally off the June 8th low, at 345.82. It's been chopping lower since this morning's opening bounce and bullish divergences are showing up on it as well. If the SOX start to bounce, taking NDX with it, that would help the bulls come back out and start nibbling on some of their favorite stocks.

Looks like the financial reform bill hasn't affected Goldman Sachs this morning, its up over $1.00 so far. Morgan Stanley is up as well.

The finance ministers and central bankers attending the G-8 conference in Toronto need to confine their discussions to things that they are supposed to know something about (finance and economics) NOT global warming.

If SPX falls out the bottom of the descending wedge and doesn't immediately turn back up, leaving a throw-under, but instead keeps heading south, that would be uber bearish and reason to simply short it in the hole and hang on (with a wider stop to accommodate a spike back up before heading lower again). It's not what I'm expecting but what I'm aware of as far as what could happen if no buyers show up soon.

SPX is inside a small descending wedge from Wednesday, the bottom of which is near 1065, with the bullish divergences supporting the bullishness of the pattern. So I continue to expect a bounce out of this but so far there are no takers. The bulls have gone into hiding. The hard part with these wedges is the fact that they can morph into larger ones so it's best to wait for confirmation of a break of them. Above 1078 would be a bullish heads up and above 1086 would confirm the descending wedge has completed. SPX 10-min chart

The G8 are meeting in Toronto today and on the agenda are a range of topics including the global economic issues and global warming. G8 meetings are usually attended by finance ministers and central bankers from the G7 nations - Canada, Italy, France, Germany, Japan, the UK, and the US - with the addition of Russia. The meetings are closed to the press but officials usually talk with reporters throughout the day and a formal statement covering policy shifts and meeting objectives is released after the meetings have concluded.

This quote from Keene's wrap last night is so true:

One reason I'm a little worried, from a trading perspective, about a hard decline from here is that this market has a habit of not letting traders trade. In rallies the move keeps going with nary a pullback to let dipsters in and shorts out. Following small pullbacks and then a continuation higher creates an environment where both sides are forced to chase higher highs. Might the same thing happen on the downside?

The TRIN is now above 1.00 at 1.17 so getting more bearish but the other internals need to line up and they are just not doing that today.

Here's a look at the VIX/VXX/SPX. Notice the VXX (top chart) is not testing daily highs whereas the VIX (middle chart) is making new daily highs matching the SPX's new daily lows. I can't give up the VIX quite yet, although the VXX and VIX do print very similar to one another, there are still differences. I have relied so much on the VIX its hard to abandon it completely even for an internal that is almost exactly the same so for now I will watch both. SPX/VXX/VIX

Poor RIMM. If it loses support here the next stops are $48, $42, and $35.

You got that right Jane, and said perfectly. No trade that saves you from losing is more important than one that makes you money. If I could take away just one or two bad trades per month my profits would be significantly better. Patience and exiting trades are my two biggest challenges.

This is one of the reasons I like trading with the internals, they will keep you (me) out of trouble more often than any other trading system I've ever used. It's not to say they will always keep me honest but much more than any other way I've traded before. And, to me, staying out of trade that goes sour is just as important as making a profitable one, maybe even more so because of the psychology aspect.

Yup John, I agree.

I think the best advice I could give today is don't even think about trading this, and start your weekend early.

Sure glad I didn't go long too.

According to the Reuter's/University of Michigan Survey, Consumer Sentiment grew to 76 from 73.6 in May and 70.8 in June 2009. This was a 3.3 percent change and 7.3 percent year over year change. Consensus was for 75.5.

"The June survey indicated that consumers expect economic growth to slow, and as a result, anticipate that the unemployment rate will remain largely unchanged through the balance of the year. Weak financial prospects, including lackluster job and income growth as well as tight credit remain the primary constraint to a more robust spending out-look. Overall, confidence is strong enough to sup-port the continued growth in consumption, al-though the pace of growth will slow into the start of 2011. The survey data indicate real spending growth will average 2.5% in 2010."

Ach, too much. The bulls couldn't break the downtrend line.

The internals are certainly bullish now but not to the point where I would be comfortable with a long - yet.

ES is testing the top of its down-channel again. A little more and the bulls will have done it, with a confirmed break above 1075 (about SPX 1079).

It's almost time for a long day trade.

Aren't you glad you didn't short this market when the SPX was falling?

I agree with Keene - I would not chase it lower. However, loading up on long positions would be a gutsy move, and also ill-advised (IMO).

As long as the market doesn't drop hard, a first hour low could be bullish. So I wouldn't chase it lower if it's only making minor new lows. If a small descending wedge is being hammered out we could see general weakness this morning but not a hard selloff.

VIX/VXX are telling me the bears are in control but the AD volume, AD line and TRIN are not agreeing. My ducks are scattered all over the place again but they do have a tendency to follow and the VIX/VXX are pretty strong leaders.

All indexes are below their January 1, 2010, opening print except RUT (which is 8 points above).

There is nothing that could convince me to trade so far this morning. Yesterday was an easy day to trade and you very rarely get two days in a row that are easy.

Yesterday's low for SPX was 1071.6. The bulls better not lose that, because it could be a quick trip down to 1060 if they do.

I see both the VIX and VXX are making new daily highs but the TRIN is below 1.00 and that is never where the bears want the TRIN. Yesterday the TRIN made a low of 1.22, spending the entire day above 1.21, so you can see the bears are not as strong today.

Crude is also heading back up to test resistance after making a higher low on June 23rd. I would not be short this market. Daily Crude

AD line opens at +591.

Gold is heading back for another test of yearly highs and it doesn't seem to care the MACD is not agreeing with it. Keep in mind the more a resistance (or a support) level is tested the more likely it will break. I would be a much more comfortable Goldbug if Gold had made a deeper pullback, maybe not all the way back to support, but much deeper than the June 23 low.
Daily Gold

The overnight range widened with a new overnight low at around 6:00EDT but the indices recovered and almost made it back to their respective ON highs. Then the final estimate of the GDP was released and wham! back down again. I see the markets are now struggling to stay above their previous day closes so it'll be a toss up if we have a red or green open. Overnight session

The techs will not be helped today by the downgrade of RIMM. The number of new subscribers was less than Wall Street was expecting. With the introduction of the new 4G iPhone along with the smart phone from Google/Droid the market is getting saturated, and the Blackberry was bound to suffer.

Turns out the final estimate of GDP for Q1 was lower than the median consensus of 3.0 percent. First quarter GDP has been revised downward to an annualized 2.7 pace from the prior (the preliminary) estimate of 3.0 percent and initial (the advance) estimate of 3.2 percent. The downward revision to GDP growth was mostly due to an upward revision in imports and a downward revision in personal consumption expenditures. Adding to the GDP were exports and private inventory investment.

Economy-wide inflation was little revised at 1.1 percent annualized for the first quarter, compared to the prior estimate of 1.0 percent. Analysts expected 1.1 percent.

All eyes are front and center on the sweeping financial reform legislation that seems poised to go into law. Like most legislation that is well-intended, there will be unintended consequences. One thing you may be certain about; the banks will not bear this burden alone. They will find a way to "share" that with you. Financial Reform

ES still can't break free from its down-channel but at least seems to be finding support at its mid line while the bullish divergences continue to suggest it's putting in a bottom. A break above 1075 would now break its down-channel otherwise a drop down to 1060 could in the cards. The GDP number (2.7% vs. 3.0% expected) just knocked futures back down so it's a coin toss which way number it will hit first. ES all-hours 60-min chart

SPX

The overnight pattern from last week (buyers showing up between 3:00AM-4:00AM) seemed to have reversed. At 4:00 AM the futures dropped sharply lower, taking out yesterday's lows. ES hit a low of 1065.25 just before 6:00 AM. It was beginning to look like Keene's "crash" scenario was going to play out. But then, miraculously the bulls arrived back on the scene and almost completely reversed the early morning decline. After four days of almost incessant selling, it seems logical (if you dare use that word to describe the market) that we would get an oversold bounce that would retrace some portion of the week's decline. It also seems "logical" that we could see a push higher into the first part of next week ahead of Wednesday (EOM and EOQ). "Window dressing" is not a lost art - put some lipstick on that pig. How far the bounce will go is the big question. If SPX can make it back above 1100 I'm going to start adding to my short positions all the way up to 1107. However, it it climbs back above 1109, it will be time to start getting cautious if you are a bear. A push that takes SPX back above 1112 would suggest to me that there are higher prices in our future.

How ES does with its parallel down-channel during the overnight session should provide some clues for Friday morning (chart as of 10:40 PM with ES up +3.25): ES all-hours 60-min chart

Friday's pivot table

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