Technical Approach: Where The Markets Trade Next

Includes: DIA
by: Randy Lacen

Equity investors at the moment have turned extremely skeptical about taking any risk in today's stock market, as the Dow Jones Industrial Average rallied 500+ points after slightly breaking through the 200-day moving average on Tuesday afternoon's trading session the week ending June 8, 2012. Many macro economists on Wall Street are still predicting the worse out of the ensuing euro crisis, and the Federal Reserve Bank of New York has just announced more QE3 as a possibility for the United States in case of economic activity contracting in the near future causing even further deterioration in material progress on the jobs front.

As these events continue to unfold, Wall Street speculators are implementing gradual risk-adverse strategies to their current investing models signaling Wall Street investors intend to shore up their investment portfolios in the short-term and make their next move on the secondary markets risk-on.

Fundamental and macroeconomic news for global business is offsetting at the moment, creating sideways momentum for stock market participants as the European Union still remains fairly pessimistic for Greece to stay within the Euro currency. Federal Reserve Chairman Ben Bernanke is setting up to make a statement when the FOMC meets June 19-20, addressing growth in the U.S. going forward to make material progress on the unemployment rate. In December of 2011, fear for France's debt rating downgrade, an extensive Greek default on the financial markets, a Eurozone recession, the U.S slow recovery and China's manufacturing slowdown did not waver secondary markets. All major indices rallied from this point sharply to the upside and the stock-market was critically in the overbought zone for more than 4 months. The market is also said to have been saved here by the ECB's 1 trillion dollar commitment to financial market stability in Europe and 2 LTRO operations.

At the same time, a 5 year chart of the Dow Jones Industrial Average shows a major crash can happen if the Dow Jones breaks 12,215. If the technical levels of 12,215 and 10,673 are broken on the DJIA, many technical analysts on Wall Street are claiming this event will bring on part 2 of the financial crisis and is said to exacerbate if Greece exits the Euro zone. On Tuesday June 5th, interim support was broken at 12,200. So far to date, the Dow Jones Industrial Average has rallied initially off the 12,000 level which can be interpreted as a "psychological" or "easy reference" support.

As the week closed out for major indices, the DJIA managed to take in 500+ points on the composite and reclaim its perch atop the 200-day moving average. "The fact that we had a big bounce is always nice, but volume wasn't much to write home about. So, you have to consider that as a potential warning," said Ryan Detrick Senior Technical Strategist at Schaeffer's Investment Research. "In fact," Detrick continued,

the bears grew rather vocal on this violation, and they could now be facing what's called a bear trap. This occurs as bearish investors get a little too excited and find themselves trapped near the lows, only to see the market rip higher.

The offsetting phenomena in fundamental and macroeconomic news out of Greece and the Fed becomes more and more dilutive to market direction, including that the Dow Jones Industrial Average is now trading in a relatively long range of 500+ points between major short-term corrections peak to trough. Investors are now looking forward to this week's trading session to see if positive news will break the sideways trend in the stock market and begin to outweigh the bears.

For starters, Q2 2012 earnings have been mixed so far, but many companies are still outpacing their consumer markets and revenue figures overall have remained in-tact with Wall Street expectations despite EPS estimates missing the boat. Investors are also taking note to one key event which developed out of Europe over the weekend, and that is the news Spain is willing to accept rescue from Europe for its ailing banking system.

Wall Street speculators this week are advocating for the bailout of Spanish banks, stipulating this chain of events will help U.S stocks and reassure bond investors in the short-term. Right now, a bailout of the crippled banks in Spain should relieve financial markets and provide the necessary lift for stocks in the United States. Peter Tchir, manager of TF Market Advisor, said that he expected traders to sell traditionally safe investments like U.S. Treasuries and German bunds in Monday's trading session. "We'll get a brief rally on Monday or Tuesday," Tchir said. "Then people will sit around saying, 'What comes next?'"

Short-term relief is finally here and secondary markets are set to move to the upside this week. Good news has already begun to outweigh all the recent bad news so far, to include last week's market selloff. Did the bears really grow too vocal too soon and are now in for a bear trap themselves? I say, this is just the beginning.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.