POMO, EFSF News Causes Stock Surge

The Fed began POMO again today which helped the markets to stay afloat early in the session. Lighter volume this morning meant that banks did not have to use much if any of the Fed’s money to buy the market. However this afternoon the market surged on 8x average volume after news that the EFSF would be expanded. Upon actually reading the article, the fund would not be expanded and instead turned into a bond insurance plan for the first 20% of losses. The news is nonsense and is a cover for the fact the $2.75 billion was injected into the stock market. Volume on the SPY for the 3pm timeframe was around 18 million – a total of $2.178 billion dollars.

EDIT: AAPL misses earnings for the first time since 2004. Maybe another reason why the HF’s pushed the market higher this afternoon.. the backlash looks a lot less severe when the market closes at the highs.

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Markets Pause On Light Volume After Holiday Weekend

Equities Finish Off Of The Lows On Options Friday

The S&P managed to complete a two day rally for the first time this month with Friday’s close of 1271.50 on the S&P, 12,003.04 on the DOW, and 2616.48 on the Nasdaq. The 12,000 level on the DOW makes sense as round numbers are generally the case for an options expiration and additionally, the 12,000 level is a huge mental support and is not likely to be taken out with just one attempt. On Thursday I said that we would likely close higher Friday, which we did, and now I believe that the market has put in a short term bottom and will rally for the next week or so, but ultimately this down cycle is not at all finished.

So yes, I do expect this market to go lower fairly soon, but to give you an idea of how overdue for a rally we are, yesterday AAPL closed below it’s 50, 20, and 200 MA’s for the first time since April 2009. What’s more is that it was trading above all three of those moving averages just 10 trading sessions ago and since then has lost nearly 10% of the stock’s value. That to me, is simply screaming oversold.

The tag of the 200 MA and the 1257 support on Thursday was an indicator of a bottom as evidenced by the bottoming tail on the daily candlestick. Yesterday, we closed well off of the highs but still managed to tough out a rally to follow up Thursday’s action, and it had significant volume behind it.

Given the oversold condition, and the belief that so many traders are most likely waiting with their orders open below support, the contrarian might believe that the market is not ready to attempt another test of 1257 quite yet. The best way I can explain this is that when everyone is expecting the market to move one way, most often is does the exact opposite and it is clear that everyone has been doubting the market’s strength as of late what with the fear of a Greek default, which translates into what was the highest put to call ratio in 18 months. I think it makes sense that we see a minor rally in the next week or so, not an overly significant one, but enough of one to even out the lopsided short trade.

It also appears that the weekly chart confirms that a pause in the selling is up ahead. I have trouble believing that a doji candle would have been made last week if we were about to flush once again. Hedge funds, iBanks, and HNWI’s do not short charts that go straight down, nor do they buy charts that go straight up. So here’s an old equity trading 101 saying – “buy the dips, sell the rips”. In other words, never chase charts and always wait for a pullback before entering any stock that is in a confirmed up or down trend. We will get a shorting opportunity, but if you are thinking about opening new shorts at this level, you are doing so when it is already down 7.5% in the last 45 days and down 5.5% in the last 21 days.

I would look for it to gain back at least half of the 5.5% lost in the last three weeks which would make our upside target between 1290 and 1299 which are the levels that I have drawn in the daily chart above. The 20 MA is currently at 1299 and a tag or pierce of that MA could potentially be the time to go short but it won’t be clear to me until we get there. I think that it is safe to play this from the long side but I would limit those longs to stocks that are close to or at support and have lagged the market on the way down. And as always, be sure to use prudent stops as even though we are oversold, the markets are still extremely weak and are subject to any new news that comes out of Greece and the EU.

Dollar Rolling Over After 4 Consecutive Negative Days? – Not Exactly

The markets have rallied into the end of the week as the dollar has been shaking off the overbought condition that it had accumulated in the first three weeks of May. The bull flag that I discussed on Wednesday has since broken down and is no longer in play. The dollar index has closed lower now for four consecutive days and has in fact breached the 50 MA. So does this all mean that the dollar’s recent move was a dead cat bounce? No, it doesn’t, and here’s why:

 

I have heard some noise that because the S&P has closed above the 50 MA, it is now headed higher once again and that the bearish sentiment was overblown. The noise I am hearing is not coming from market technicians and the reason is because no market technician worth more than $5c would call today’s move a breakout. First off, the candle that represents todays trading is a spinning top. A spinning top is similar to a doji. Both candles are signals of a pause, a moment of indecision, or a pivot point. In other words, no such breakout can be confirmed with a doji or a spinning top. You do not have to be a market technician to understand this concept – if there truly was a breakout, it would make sense that the candle would be a marubozu or some type of engulfing candlestick that shows no downside momentum throughout the trading day.

Secondly, the volume is not only below average, but it is weak even without considering average volume as only 120M shares moved on the SPY today. Again, any market technician should know the Dow Theory and that “volume confirms moves”. Weak volume on what appears to be a breakout is an indicator that price activity may be lying to you, and in this case I believe it is.

Lastly, it is common knowledge that the market generally gets a lift on Friday and being the day before Memorial Day weekend, many are on vacation early and are trying to take advantage of the 4 consecutive days off as the markets are closed onMonday. Light volume almost always gives the market an upside bias especially since POMO has a bigger effect with lighter trading. In short, if the market is to reverse course, it needs to do more to confirm this move.

 

Trading inverse to the market and closing below the 50 MA was the dollar. Volume was higher than the previous two days but still below the 20 day average which goes back to the initial increase in volume near the YTD low and is a good short term moving average to use here. Today and the 19th were the only two selling days that you could make an argument where there was distribution volume, but even so, the amount of accumulation volume easily trumps the 2 days of distribution volume.

Again, the closing price was not confirmed by volume, and in addition, the price managed to rally off of the lows as it found support at the 26 MA. From a technical standpoint, it made sense for the dollar index to pull back this week after a 3 week rally, but going back to the point I made about Memorial Day weekend, historically, the market gets a lift around this time of year, though it is usually short lived. Giovanni Moreano of CNBC posted an analysis on how the stock market trades leading up to and after Memorial day and here is some of the data:

 http://www.cnbc.com/id/43157752

In the past 20 years, the major U.S. indices have been, on average, relatively flat in the week prior to Memorial Day. In recent years, however, they have been slightly negative.

A week after Memorial Day, all three indexes posted a gain, with the NASDAQ showing the biggest average gain, up 1.42 percent.

Within a month, those gains fizzled for the S&P 500 and Dow, both turning negative returns. And in recent years, those losses have accentuated, down about 2 percent or more.

Though the markets have rallied into Labor Day, the S&P has on average a -2% return in the 2 months following Memorial Day with the Dow behind at -2.13% and the Nasdaq ahead with -1.73%. Trading in 2010 fits this description perfectly as the dollar peaked in June and the market bottomed in early July. The dollar has only rallied just below 3% from its YTD low last month. If we are to follow historical trends here, then the dollar could rally anywhere from another 14 to 17 percent in the next 2 months based on the 2009-2010 timeframe. That is quite a move in a short period of time, but it has been done before and it appears to be happening once again.

So price activity has been weak over the last couple of days, but I believe that the dollar’s uptrend remains intact. Reasons include, the light holiday trading volume, historical performances, and most importantly, the European debt contagion coupled with the ineptitude of Greek, Portuguese, and Spanish politicians to make any significant changes for the better in their countries. So to those who are short the market, short the Euro, or long the dollar, remain patient because it isn’t time to jump off of the train yet.

EU Default Concerns And Protests Set Off Equity Market Collapse

Protests in Spain regarding Prime Minister Rodriquez’s policies that would make deep cuts into entitlement programs have caused a sharp selloff in the Spanish and US equity markets. Adding fuel to the fire and contributing to the beating that the Euro is taking, is the growing debt contagion concerns that have stemmed in Greece. Prime Minister George Papandreou “ruled out” restructuring of debt which means that Greece must continue to accept bailouts in order to maintain some degree of solvency though it is obvious that ultimately, this strategy must fail. In addition, Standard And Poors downgraded Greek and Italian debt this morning which sent yields rising once again.

Meanwhile, the dollar is trading at 2 months highs as gold is flat to positive. In short, the old safe havens against default and currency debacles are rallying one more time. If you read some of my blog posts going back to January, you’ll see that I predicted that when European debt concerns began to make headlines, the dollar and gold would rally together as opposed to trading inverse to each other.

Many of the major asset classes are flirting with the 100 MA, and I expect that moving average to serve as short term support/resistance before those assets advance again.

This looks very much like a bear flag breakdown in the Euro. There will be support at the 100 MA, so look for a bounce off of that support after today’s 1% gap lower.

Big breakdown in the SPY as the rising wedge has been convincingly breached to say the least. Again, it is trading just above its 100 MA and that should be used as short term support. I will likely short the market if it does in fact get a dead cat bounce off of that level.

There is a reason why analysts are calling gold a forex play, it is because gold is a store of value and the ultimate hedge versus currency devaluation. What we are seeing today is exactly what I was referring to when I wrote those articles in January about gold and the dollar, specifically, the fact that the dollar is a bad measure of inflation and that it doesn’t matter which currency rallies versus which so long as there is money being printed and credit eased on both sides. Gold, unlike other commodities, has held onto most of the gains that it has had in the last 4 months and has yet to break the 50 day MA. That isn’t to say that gold will not get stuck in a trading range in the coming months, but it will certainly outperform other commodities and most likely the US equity markets as well.

Regarding the precious metals market, the real bargin here has been gold stocks. Gold is only 4% off of it’s YTD highs yet the GDX and the HUI are 14% off of each of their respective peaks. Meanwhile the GDXJ is 19% off of it’s peak, the GOX 12%, and the XAU 15%. All of these ETF’s or Indexes except for the GDXJ are made up of mid-tier and senior gold producers meaning that there is little speculation regarding the feasability of their operations. In other words, the non-speculative gold plays like large caps producers should be not be significantly underperforming the spot price of gold, even as it loses 4% from its $1575/oz peak.

The dollar is up another .7% on Euro weakness and will continue to rally as the problems with rising yields and sovereign debt concerns in the EU spread at an alarming rate. I posted commentary on Saturday disclosing my position on a certain UUP call contract. I paid a $.13 premium for the Jun 11 $22 call on Friday, it is currently trading between $.19 and $.22 for 35-50% gains in just one trading session.

Bottom line is that the 100 MA should be a short term resistance level for the dollar, and is the moving average to watch across the board this week. If the EU continues to make headlines as it is today, UUP could easily reach $22 within the next 2 weeks.

Dollar Up After Greece Weighs Leaving EU And Starting Their Own Currency

http://www.reuters.com/article/2011/05/06/businesspro-us-greece-eurozone-exit-idUSTRE74546320110506

(Reuters) – Greece has raised the
possibility of exiting the euro zone in discussions with the European Commission
and other member states in recent days, Germany’s Spiegel Online reported on
Friday.

The magazine said euro zone finance ministers
were meeting in Luxembourg on Friday evening to discuss the Greek crisis and
that a possible restructuring of its debt would be on the agenda of the
meeting.

“The government has raised the possibility of leaving the euro zone and
reintroducing its own currency,” the report said, without citing its
sources.

I feel like I’ve been a broken record for the last 4 months expressing my bullishness for the dollar index. Powershares DB Bullish US Dollar Fund (UUP) is higher once again trading up $.10 (.47%). Currency shares EuroTrust down $1.27(.86%).

Portugal Agrees To $115B Bailout

http://seekingalpha.com/news-article/1018982-official-portugal-bailout-to-be-115-billion

LISBON, Portugal — Hard-up Portugal has negotiated an international bailout worth
euro78 billion ($115 billion) over a three-year period, officials said
Tuesday.

A government official, speaking on departmental rules of anonymity, told
The Associated Press the amount includes aid for Portugal’s cash-strapped banks. The official did not
provide further details.

Portugal’s interim prime minister announced the
financial rescue package for his ailing country will run through 2013.

___________________________________________________________________________________

This was expected yet not priced in, as I pointed out back in January to make a case for the dollar index vs the Euro. The ECB rate hike has made this more expensive to fund and there will be more in the future. This may be the catalyst for the dollar index to finally reverse course.