Choppy Markets Ahead | Euro News Dominates
The week started off strong Sunday night in the futures market which pushed the S&P 500 all the way up to 1,342. But, unfortunately, the Spanish bank bailout was viewed by institutions and many investors in Europe similar to the way MR described it Sunday night which was nothing more than a bandaid.
Investors are not buying into the feeble attempts anymore to plug every leak in the European financial system. They need much more substantial steps that address the larger country debt issues of Greece, Spain, and Italy. Consequently, even the short squeeze died out late Monday morning and the markets actually finished with heavy selling. The S&P 500 finished near its low of the day at 1,308, a full 34 points down from its nightly high. The pullback wasn’t unexpected as the markets were overbought but the size of the pullback on Monday was more than we anticipated.
Tuesday bounced back with a solid up day and today sold off with the S&P 500 finishing at 1314. This level is just above its short term trendline the 20 SMA. It has been in a textbook bullish flag pattern the last 5 days around the 1,320 level and zig-zagging above and below the important intermediate term trendline the 150 SMA.
Momentum Rider’s technical bias is slightly bullish based on the bull flag pattern which normally resolves to the upside. Also, June 1, 4, 5, and 6 formed a blended morning star candlestick pattern, which is typically a very strong bullish trend reversal pattern.
A move up would test the 50 SMA which would be near the 1,350 area. If a breakdown occurs, then the 200 SMA would be the support test near 1,288.
The next move will most likely be determined by Greece, but Spain got hit by another big rating blow today. Moody’s Investors Service cut its rating on Spanish government debt by three notches on Wednesday From A-3 to to Baa-3, saying the newly approved euro zone plan to help the country’s banks will increase the country’s debt burden. In addition, Egan-Jones cut Spain’s sovereign rating to “CCC+” from “B,” pushing the country’s debt deep into speculative territory. The rating cut was Egan-Jones’s fifth for Spain this year and it carries a “negative” outlook.
We are also waiting to see how the next Italian bond auction goes because that could be another bad omen for more market selling.
Finally, the following is a list repeat from Sunday’s newsletter of more important European events and dates that could dramatically affect the markets in June.
1) Greece goes to the polls on Sunday, June 17, so Monday June 18 could see a big down day if the election news is not positive.
2) The “Group of 20″ leaders meet in Mexico, June 18 and 19. Depending on the election results in Greece and the market’s reaction, this could be a big market mover.
3) The next day, June 20, the FOMC will release their latest monetary policy statement with Chairman Bernanke’s quarterly press conference to follow. Depending on the developments in Europe this may be the time the Fed signals or hints of another round of monetary stimulus.
4) A European Summit will be held in Brussels on June 28 and 29. Depending on how this crisis develops in the next few weeks, concrete action is expected out of the EU leaders. There has been talk of a “grand plan” being forged to backstop the banking system and create fiscal unity among the group.
The markets will remain choppy in the short term because of all of the traders pushing markets up and down based on daily momentum computer trading. And, unfortunately, the choppiness may be the norm for most of the summer and into the Fall Presidential election the way things are looking now.
MR recommends investors continue to remain cautious and lighter on riskier equities until early July when the four events listed above have been completed and the longer term financial situation in Europe has more clarity. Until some of the longer term structural debt issues have been addressed with a detailed plan, the market still has a much bigger downside risk.
Traders should remain nimble and can play select stocks on both sides of the market.
Power Stock Picks:
Many of the recent Power Stock short sell picks are still working very well for trades. We will hold off again on power picks tonight because of market direction uncertainty but will issue some exciting picks in Sunday night’s newsletter.
Sunday’s power picks are going to be relative strength speculative stocks in the drug and biotech industry. These stocks don’t seem to care what is going on in Europe and they continue to make big gains.
Gold and silver are still working higher in the short term. Oil is still trying to bottom and investors can scale in on any more weakness a little at a time.
The caution alert for retirement accounts and investors is still present and will remain for the foreseeable future.
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