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ORIGINAL POST: 09:30 AM
High potential for a pop and drop this morning, with key levels being 1523.74 and 1527.10. I’m operating on the assumption that this is a bounce in the midst of a larger move lower.
Why am I suspicious of this rally? The dollar has back-tested the 25% line in the big rising channel, as well as the 1.272 Fib in what looks like a Crab to the 1.618 at 82.281 (and red .618 at 82.136.)
SPX is taking a crack at the .886 at 1527.10.
That move didn’t take long to fail. A reversal here leaves a nice tag of the top of the white channel, a tag of the 75% line of the light blue channel, a near tag of the .886 (1525.84 v 1527.10) and a nice reversal candle on the 60-min chart.
SPX broke back down through the big purple channel midline, which augers well for further downside. Watch for a backtest to the midline (around 1519.)
UPDATE: 2:00 PM
We’ve racked up a nice 24 points since shorting this morning, which is especially cool on the heels of the 26-point gain from our long position (the bounce from 1497) and the 32-point gain since originally shorting at 1530.50 on the 19th. That’s a 5%+ week — much appreciated after the market’s directionless churning in the days leading up to 1530.
As we approach the .886 retracement (1500.54) of the rally from 1497 to 1525, we should be on the lookout for a bounce at the still-important 1500. A good place to start is the RSI channels on short-term charts like the 5-min. A break of the upper bound of a well-defined channel is always a warning signal of building momentum.
Much of its strength is being attributed to euro weakness which, of course, is being blamed on Berlusconi’s unexpected success in the Italian elections. It goes without saying that his reelection would be a disaster for the euro zone.
The EURUSD, which had carved out a solid channel to the moon (well, 1.39 anyway) broke down and backtested the channel that’s guided its upside since last July.
We should expect some support here at the .886 of the 1.2996 to 1.3710 rally at 1.3078 (also a potential price channel bottom in yellow.) It’s also the bottom of an RSI channel (below in white) on the daily chart.
As unpopular as Monti is with Italians, Germany thinks he’s just swell. He’s been a team player, falling in line with Merkel’s efforts to salvage Germany’s investments throughout the continent.
Berlusconi, who was heavily criticized by his former contemporaries around the time of his resignation, is a wild card whose election, at best, would leave Italy with a divided leadership at a time when a unified front seems essential to the euro’s continued survival.
This is not what the bulls needed, especially as they try to get through the sequester week unscathed.
UPDATE: 3:00 PM
Adding the complications of the euro mess to the sequester mess makes for a very tricky path ahead for equities. Last week, I theorized that a decline to 1490 would make for a deliciously ambiguous setup (for market makers, at least) to fleece the greatest possible number of investors.
Does that scenario still make sense?
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