The markets enter this weeks trading on a 7 day losing streak, their longest such streak since July. The current conditions in the market are oversold. While they can certainly become more oversold, a bounce is the more predictable outcome from here. We’ve argued the last few days that the risk/reward was in the bulls favor. Each time we got stopped out, but the key is is that the stop losses were very close by, so losses were minimal. As try once again to catch a bounce, this time is no different; 1,150-1,155 is the last line of defense for the bulls above the 1,074 10/4 low.
If the markets do indeed bounce it is important to remember that the underlying trend remains very much bearish. The fact the S&P500 couldn’t find support in its previous resistance range of 1,200-1,230 shows there isn’t enough conviction amongst sideline cash that we’ve seen the lows for the year. Furthermore, sentiment remains contrarian bullish, as many surveys point to a large number of bears vs. bulls. However, the current technical backdrop somewhat negates this contrarian signal. Contrarian sentiment indicators work best when technicals are bullish yet sentiment remains bearish, which definitely isn’t the case here.
While evaluating certain stocks we’re privy to the ones that failed to break above their August/September highs. Such price action in stocks points to an even greater weakness vs. the overall market. Two stocks that fit that criteria are Freeport McMoran (FCX) and J.P. Morgan (JPM). Both stocks look like prime short candidates on any rallies. Traders could use each stocks downward sloping 50 day sma as stop loss points to exit their short positions should they choose to put them on.
As is usual the last few weeks, continue to watch the action in the U.S. dollar and Euro. We’ve also been following the daily yields on Belgium, Spanish, Italian, and French 10 year bonds. The bulls also need copper to get above its 50 day sma around $3.40. Otherwise a breakdown in copper below $3.20 would target the 2010 low around $2.75 and would surely have bearish implications for markets.
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