WOW! a bit of news out of Italy and it's ABANDON SHIP for stock market bulls. This coming a mere two days later after I posted my little piece about stock traders ignoring a downside technical reversal signal on the charts. Talk about a rapid shift in sentiment since then!
That news from Italy was enough to put Euroland back on the radar screen of traders after it had been completely erased since the Europeans began their bond buyiong program. The fear is that Italy will be gridlocked due to the election results that have been coming in and render it unable to comply with requirements for these continued bond purchases. The of course brings the stability of the Euro back into question.
That currency was spanked quite rudely today as the Italian news hit the markets. What aggravated the move lower in the Euro was a huge short squeeze in the Yen, that hit the Euro_Yen cross further exaggerating the Yen's move higher and putting additional downside on the Euro-Dollar cross.
The Euro and Yen have both been a sort of proxy for the risk trade with the Euro moving higher and the Yen moving lower as traders felt comfortable assuming risk once again. With risk aversion today's mood, those two currencies reversed their recent trends.
A lot therefore depends on what Chairman Bernanke is going to say when he gets before the Congress tomorrow. Will he whisper sweet nothings to the ears of equity bulls or will he strike a more cautious note? I for one will be greatly suprised if he says anything more about an early cessation to QE. He must certainly know that his words will be parsed with a fine-toothed comb.
The S&P 500 dropped so sharply on such large volume, that it sent the VIX, the Volatility Index surging over 35% today. Talk about rattling the complacency cage.
The S&P will need a lot of help from the Chairman tomorrow in his testimony to prevent a further move towards the Target level I have indicated on the chart. The Directional Movement has not only indicated a halt in the strong uptrend but has generated its first sell signal since December of last year. The loss of upside momentum that had been noted finally caught up to this index today. Quite frankly, there was a very large wave of selling - quite different than what we have been accustomed to when we have seen dip buyers eager to jump right back in. They appear to have been rattled for a change and look to be waiting for a bit deeper correction before plowing back in. By the way, that Directional Index sell signal back near Mid-December of last year was quickly negated by subsequent action. I honestly have no idea what the index is going to do tomorrow - everything depends on how the market interprets Beranke's comments.
Gold showed some signs of life today as it moved up in terms of the British Pound, the Euro and of course the Dollar. I will not be too impressed with gold until I see a handle of "16" in front of this metal that remains there. That will tell us that the spike down towards support near $1550 was a temporary bottom. It is not unexpected to see the metal bounce from its first test of that critical support level; however, to convince me that this is anything more than a type of Dead Cat bounce, I want to see that "16" handle PLUS a clear upside break in the HUI. Gold has found a base of support here about $1550 but specs are still favoring trading it from the short side so we want to see how it handles tests of upside resistance.
The HUI was rather lifeless today given the nice pop higher in gold settling well off its best level of the day. That index has been a drag on the gold price for some time now so if we see it begin to lead to the upside for any reason, a great weight will have been lifted off of the actual metal.
There are several downside gaps that need to be at the very least filled, before this index will give an all clear signal. Aggressive traders can buy shares but please be sure to use sound money management strategies. Don't forget the trend is down so one buying must know that you are going against the trend. Just be careful. You can end up a HERO or you can end up a great big fat ZERO. That is not my style of trading but I realize that we have many wild-eyed specs out there who love taking reckless chances with their trading accounts.
"When misguided public opinion honors what is despicable and despises what is honorable, punishes virtue and rewards vice, encourages what is harmful and discourages what is useful, applauds falsehood and smothers truth under indifference or insult, a nation turns its back on progress and can be restored only by the terrible lessons of catastrophe." … Frederic Bastiat
Evil talks about tolerance only when it’s weak. When it gains the upper hand, its vanity always requires the destruction of the good and the innocent, because the example of good and innocent lives is an ongoing witness against it. So it always has been. So it always will be. And America has no special immunity to becoming an enemy of its own founding beliefs about human freedom, human dignity, the limited power of the state, and the sovereignty of God. – Archbishop Chaput
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