07.15.08 - Support to Break?

Submitted By Jeff Pietsch
Looking at Asia and Europe overnight, I'm guessing that SPY support we have been seeing will break. Too many tests and too much negative news flow. Lots of data up tomorrow plus Bernanke. We'll see.

7:00AM PST UPDATE: Talk about water torcher -- the VIX just eased over 30. Europe and Asia ended up down over 2-3% across the board. Math test, how many days in a row can the market drop 2%? Hint, it's more than 50! Answer, it's actually limitless, save you'd eventually hit a penny. Think about it!

News flash, F ed has just downgraded growth forecasts, but upgraded jobs with inflation just slightly hotter. Next SPY support is widely estimated between $115 and $118 -- pretty much have to throw that type of analysis out the window at this point.

Yes, the writing was on the wall for this one folks, but then again, it had been since at least 2006. When it finally came, boy did it come fast. Oil is coming in. It's going to have to come in harder or some phenomenal news flow is going to have to emerge to turn this train around. This is day 27 below the ten-day moving average.

AN ASIDE: Barron's is calling for a housing bottom. Real Estate is (still) a levered personal asset. I wonder who they think is going to lend to said requisite buyers?

7:50AM PST UPDATE: Vix at about 30.5 is now nearly 17% stretched from its ten-day moving average. The Vix is generally mean reverting and inverse to price action. It can certainly stretch more, but this level of stretch is often bullish. I haven't been good about getting studies posted, but I'll make a concerted effort to get a mini-study up by day's end on this. Looks like my post times are now corrected.

8:05AM PST UPDATE: Oil is free falling now and stocks are responding nicely. Come on in baby. I'm out of DUG, thank you very much. Interestingly, Gold is hanging tough. No more posts until the normal mid-day time.

9:30AM PST UPDATE: CAPITULATION?

OK, I'm willing to blow the bugle and more "officially" call this capitulation. With Oil down 5%+, the Vix mean reverting after a break of 30 and a 17% stretch, and the AD, Tick and Trin lines all looking supportive after a major down-gap, we have apparently found an intermediate base and are forming a nice hammer doji on the day. Now take a closer look at the fellow to the left! Hey, no taking your eye off the rising VWAP as a stop.

ANOTHER ASIDE: Boy, before today I would have thought that Stable Growth + Low Inflation = Financial Market Stability. Thanks to Mr. B, we now all know better; the right side of the equation can be independently managed...? Hmmnn. (edit: addition) Okay, now after Paulson's testimony I get it: give the agencies a blank check. Think this might have been scripted?

BREAKING NEWS: From SEC Chairman Chris Cox -- what is this about short sale regulation...? Maybe I misheard -- more momentarily. Here it is, emergency order preventing naked short selling in Fannie and Freddie, and possibly more companies/primary dealers to come. That has to support some short covering here, though we aren't yet seeing it in the broader market. (edit: That was fifteen minutes ago, as of this writing traders are finally getting it and all averages are up sharply -- hope I'm reading this right -- importantly, just how prevalent is this anyhow?)

With all the rumour mongering and capital access destruction based on stock price plunges, this certainly makes sense in this environment. With record short levels, maybe this will finally light a fire under a recovery bounce effort. Financials are now positive +1.75% on the day, a 6%+ intraday turnaround.

11:00AM PST UPDATE: Indices are struggling as the Nasdaq 100 and Dow Jones hit their five-day moving averages -- a technical sell signal for the last two months. We'll see if they can break through going into the close. For the SPY, the 5-day is still a buck above current price, probably due to energy. Everything else looks OK so far.

12:30PM PST UPDATE: Well,turnaround aside, less than impressive with Tick quieting down after the SPY was also rebuffed at its five-day. Obviously oil is going to have to keep its head down and "certain" upcoming earnings are going to have to cooperate for this to follow through (hint, wait for this!). Capitulation calls aside, from here or anywhere, trail stops. As Brian Shannon is always preaching, "Bottoming is a process, not an event." I'll get that study up after the close.

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