Market Observations: 24 October 2011

As I wrote a couple of weeks ago in my last Market Observation before a short break, I feel as though we are in the midst of a correction in ‘risk assets.’ That view remains.

General Conditions

  • The big fundamental story affecting all markets still is the European Debt saga. Going into the weekend, a huge deal was made of the EU summit in Brussels and the attempts at coming to a ‘resolution,’ which would supposedly prevent a Greek default and/or contagion.
  • French Manufacturing PMI comes in at 49.0, in contraction but above the estimates of 48.1. Services PMI comes in at 46.0, worse than the expected 50.6
  • German Manufacturing PMI comes in at 48.9, missing the forecast of 50. Services PMI beats the forecast of 49.8, with a print of 52.1
  • Eurozone Manufacturing PMI comes in at 47.3 on expectations of 48.1. Services PMI at 47.2 on expectations of 48.6
  • HSBC Flash China Manufacturing PMI came in at 51.9, slightly higher than the magic 50 and higher than the 49.9 print from last month.

The Technicals

SPX

The SPX has risen over 150 handles since that low put in at 1074. Most of the rally has been on hopes and dreams of a European resolution. Friday’s close above 1230 was quite firm, on the highs of the day basically. I’d still be wary of classifying it as a true breakout, Mondays action will go a long way to confirming or denying the strength of the breakout. This weekly chart suggests a continued move higher, particularly with that bullish hammer to end last week at the highs. It makes sense to continue in long positions, but I’d be wary of initiating new ones, outside from day trade scalps. I’m looking for a turn lower as early as 1257.

A closer look at the SPX, via the daily timeframe, shows why I’ve pegged this 1257 area. I’ve added a horizontal line in white and a fibonnaci analysis of the move from the 1370 high to the recent 1074 low. The 1257-1260 area represents the bottom of the range that once broken took us to the lower trading range we have recently broken from as discussed above. In other words, we are testing former support, which may hold as resistance. This area coincides with the 61.8% retracement level, and the cluster of trading that took place from 2-4 August, prior to the massive drop lower. In other words, we seem to be seeing a return to that supply level, the first return at that. An opportunity to short exists once we get there, and should that level fail, it would be time to reassess.

Trading levels to watch: 1257-1260 above, 1230 below.


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