Nov 26th, 2010 - S&P 500 lower highs

The market had a hell of a rally, however, as European situation was brought to center stage by Ireland reality has been kicking in. Ireland will be voting on austerity measures December 7th, 2010.   In attention to this Korea tensions are increases. Most relevant this weekend is the imminent release of 2 million documents from WikiLeaks.

A sample from the linked story:

"U.S. officials said the documents may contain accounts of compromising conversations with political dissidents and friendly politicians. They also could damage U.S. relations with allies around the world and result in the expulsion of U.S. diplomats from foreign postings."

Yesterday the markets were closed and today they closed at 1pm.  Obviously the volume was extremely low today, as who would say no to a 4 day weekend?  

The major aspect of this chart is the lower highs since beginning of November.  A previous high has never been taken out, and the 1200 level is proving to be strong resistance.  Since breaking this level, the price action has stayed below.  The Nov 19th high was 1999.97

If the 1200 level breaks, it will be a good intraday play to the upside.  However, until price gets back over 1215 this market in the short term is bearish.

 

S&P 500 - 1200 proving hard to break

This is a daily chart from the flash crash until now.
This chart can be accessed here.

Technical indicators

Volume - One of the most important things to note today is the low volume.  Much lower then the average.  What should be noted also is that low volume usually means markets flat to slightly bullish.
MACD - Momentum is down on the histogram.  The histogram is the measure of the distance between the macd line (blue) and the signal line (white).  However, macd line is higher then the 0 level, which is bullish.
Slow Stoch, has dropped dramatically, failed a bounce and is now at 35.   Which means the market is not overbought or oversold.

ADX line - This is interesting,  the bearish crossover occurred however the yellow trend strength line is lower than 25 which means the trend isn't strong.  Usually a cross over with strong trend should be taken as a buy / sell signal.  So this is bearish but not strongly bearish yet (trend may pick up if a continue of the downside happens short term).

Trend lines:

Purple:  Recent low, appears to be a level the may flash crash rally occurred.

White: The bottom white line is the 1200 level.  I think this is more of a psychological level that is acting as heavy resistance.  The hourly is below with more details.

Cyan:   A line was drawn from the low point to the breaking point of the may flash crash.  That like was then copied and placed at the low point of the current rally.  Result was a battle being fought at the predicted level and time period.

From this I believe that 1200 is the level to watch, lets see if the bulls can get back up and over 1200.

From what I see, there is not much of a catalyst to the upside.  QE2 was the catalyst for the current rally, hope/expectation of  an improving economic picture is also driving the upside.  Downside catalysts are :

• Situation with the euro zone: Greece, Ireland, Spain, Portugal, Italy.  
• Potential war in Korea
• Heated up tensions in the middle east with: Iran, Iraq, Afghanistan, Lebanon, Israel, West Bank, Qatar 
• China need to cool inflation but continuing to raise interest rates
• China and Japanese tensions 

I think the most important economic story is Irelands proposal for austerity measures.  This package has to pass parliament on December 7th, 2010. The opposite are going to be faced by a situation where politically all they need to do is fight for the people and reject the proposal.  However, economically the only thing that can be done is this package.  And this is the going to be the the hard part for all countries around the world, mainly in the west. The system is not sustainable. Yes we can continue this for 5 years. But what about 15 years? I doubt it.
Lets see what happens when the economy picks up.  Inflation raises.  Lets say at the 2% target.  Anything above this interest rates needs to rise to bring it down.  What happens to all the mortgages ?  The debt that people, countries, corporations will rise.  The increase on interest payments are going to be what cripples the economy. 

So austerity measures are the only alternative to inflating our way out of this.  This would mean that the borrower is who is rewarded. This means that if interest rates do not adjust, it would be much easier to pay off your loan.  Since the government is racking up huge debt levels, they too will be able to pay off the debts faster.

This becomes a special case when a country has world reserve currency.
The Triffin Dilemma is :

The Triffin dilemma (less commonly the Triffin paradox) is the observation that when a national currency also serves as an international reserve currency (as the US dollar does today), there are fundamental conflicts of interest between short-term domestic and long-term international economic objectives.

In addition to this, everyone in the world holds US dollars.  This means that inflation / devaluing the currency. is making every country poorer.  However, there has been a strong trend of countries increasing their gold holdings.  Iran has recently purchased a sizable quantity of gold along with Bangladesh (mainly mid east and South East Asia).

15 minute chart.
1200 level is Cyan.  Purple lines are the range I think that is relevant and watch for a break out of either.

4th Attempt at 1200, and the attempts have been trending lower... This confirms the momentum oscillators being bearish.

GM update: 5 min chart Bearish Divergence

An update on GM IPO.  Friday morning came close to the issue price of $33.  However a nice bounce back occurred.  While looking at the chart I noticed on the 5 Minute chart that a bearish Divergence occurred.  This Divergence is also confirmed on the MACD.  As this is a short term chart, I don't predict any massive move down, but to see GM next week trade at some point between $33.50 and $34.00 is not a stretch. 


The overall market however may find a boost as Ireland will announce a bailout before Monday, which will involve IMF and ECB.  The markets reaction to the confirmation that Europe's financial situation is on the rocks is quite funny.  This also proves that the "stress tests" that were done were not stringent effort to be of any value. 

Portugal should be on the radar next along with Spain.