Global Fears Signal Correction, Not a Top
11/09/2011 9:52 am EST
European markets are selling off sharply on the latest debt-crisis developments, but if the selling spreads to the US, traders and investors are likely to realize good buying opportunities.
Overseas investors took another look at Tuesday’s developments in the European debt crisis and hit the sell buttons early Wednesday. Once again, it appears that the “solutions” in Greece and Italy have failed to reassure bondholders.
The sharp uptick in Italian bond yields and the resulting impact on borrowing costs requires some quick action by the European Central Bank (ECB) and International Monetary Fund (IMF). A break below short-term support in the German DAX Index and in France’s CAC Index is likely to trigger further selling, both in the US and overseas.
Two hours before the opening, the US futures were down sharply with the Dow futures off 200 points and the S&P futures down over 28 points. Anything can happen before the close today, but if we do see a sharply lower close, it is likely to signal the start of a deeper correction and provide a good buying opportunity.
Chart Analysis: The German DAX Index opened a bit lower Wednesday and quickly dropped well over 2%.
- The next key support stands at 5747 (line a). A close below this level would be more negative
- The 50% Fibonacci retracement support stands at 5699. If broken, it would signal a decline to the 61.8% support at 5526
- There is first resistance at 6000-6100
- A daily close above 6200 is needed to turn the chart positive
The French CAC Index has been weaker than the DAX, as concerns over the solvency of French banks have depressed this market. It is also down over 2% before Wednesday’s New York opening.
- There is next support at 3029, which was the low on November 3
- This low violated the 50% retracement support at 3053
- A retest of the breakout level, line b, could take CAC to the 61.8% support at 2966
- There is initial resistance at 3200-3230 with major resistance above 3300
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The December E-mini futures have traded as low as 1240 before the Wednesday open with next short-term support at 1232.
- The trend line support on the daily chart, line a, is now at 1222
- The futures hit low of 1208.50 on November 1
- If we see a correction from Tuesday’s high that is equal to the decline from the October highs to the November 1 lows, an equality target of 1194.50 would result
- The 50% retracement support is at 1178.75 with the more important 61.8% support at 1152.75
- The daily on-balance volume (OBV) made marginal new highs on Tuesday and is well above support at line b
The Spyder Trust (SPY) was trading below $125 as of one hour before the New York opening. The daily trend line support, line c, is at $122.78.
- The November 1 low at $121.52 is the next support level to watch. If that level is broken, watch the 38.2% retracement support at $121.03
- The equality target is at $120.12 with additional support at $119.12-$119.20
- The 50% retracement support is at $118.43
- The daily OBV confirmed the late-October highs and turned higher Tuesday
- There is initial resistance (assuming an opening at $125 or lower) at $126-$126.50 and further resistance at $127.50-$128
What It Means: If the major US averages close sharply lower Wednesday, then the short-term momentum will turn lower, consistent with a further correction. SPY could get as low as $118.43-$121. The S&P futures should find good support in the 1200-1210 area, although a drop to 1180 is possible.
My analysis of the intermediate-term trend and my view that the economy is doing better than most believe indicates to me that a deeper correction would be a buying opportunity.
How to Profit: Unless you are a short-term trader, it is likely going to be difficult to hedge your long positions, as the highs and lows are often made in the futures markets during the middle of the night. This makes putting a hedge on during the New York session quite challenging.
On existing long positions, be sure you have your stops in place. If you have nice profits on those positions, be sure to move your stops up to protect those hard-earned profits.