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Tuesday, October 11, 2016

Daily update 10/11 Confidence Lost, Then Crisis


Yesterday we had a hint in the red/green chart that bears might be trying to take control.  The bears decided to step through the door.  SPX ended the day right at the 100 SMA.  That put it below the lows of the last 3 weeks.  Breadth was -84%.  New highs dropped way down to 29 while new lows picked up to 32.  Broad based selling, but no panic as TRIN was only 1.23.  Volume picked up from yesterday, but was not high enough to indicate some kind of climax. 

The futures are up at the moment and are above the recent lows.  Will the dip buyers come to the rescue again?

The red count jumped over 50, but remains below oversold levels. 

The long term bull pressure lines got a negative cross today so all time frames are negative.  This is not enough to pronounce the rally over.  However, it could be on life support.

In Daily update 9/29 IMF's SDR change on Oct. 1 I wrote "The announcement caused a big move down in the dollar the first trading day.  The market has had plenty of time to adjust.  I suspect this adjustment is what has been holding the dollar index down.  I think this could be a case of sell the rumor and buy the fact.  The volatility of the dollar is declining in recent weeks indicating positioning is likely complete.  The 500 DMA has been solid support since first touched last spring.  Instead of the dollar crashing as the gloom and doom crowd is suggesting I expect the dollar to continue its bull market.  The selling involved with the weight change looks complete to me.  However, there are still $9 trillion (or more) of dollar denominated foreign debt that should be a constant demand still out there.  There might be a down day on Monday as the news of the change hits the wires, but shortly after that I think the dollar will rally and break out above that down trendline."

The dollar rallied as expected and has a confirmed break of the downtrend line.  It looks like the dollar bull market might be back on.  There was quite a bit of discussion on CNBC about that today.  It is being noticed.  I think the dollar was largely the reason for today's sell off.  The dollar rising is effectively a global monetary tightening so what it does here is extremely important.  A test of last year's highs seems likely.  Whether it makes a triple top in the process or eventually breaks out to new highs remains to be seen. 
The bears made a strong attempt to take control of this market.  All market internals are negative.  However, SPX is still above the key 2120 level.  It tested below the 2015 high close of 2130, but ended the day above it.  The futures are up even more after hours.  Maybe the bulls will come out to play in the morning.  The sellers have been coming in between 10 and 10:10 AM.  If the futures are still up in the morning it will be important to see if the pattern repeats.  SPX 2145 has been support the last couple of weeks so it might be resistance now.  Closing back above that level would be a positive and might foretell an upside break out over the 50 DMA.

The long term bull pressure lines indicate the strong buying wave we saw last spring has run its course.  The market needs a fresh wave of buying if SPX is going to return to the highs.  The VIX is probably not high enough at this time to get that strong buying.  The problem here is that a break of the 2120 support level indicates the summer break out to new highs failed.  That could unleash considerable selling.  Especially if earnings disappoint.  On that  note David Kostin from GS was on CNBC today.  He said current expectations for Q3 earnings were for a decline of about 1%.  He also said their economic indicators suggest there is risk that companies might miss that target.  Right after he said that the market took another leg down.  Remember that wave of buying we saw last spring was because Q2 was supposed to be the earnings trough.  If that turns out not to be the case there could be even more selling pressure.  So not only are Q2 earnings important, but also what companies say about the future.  A rising dollar will not help that part.  The European banking system under stress probably won't help either.  There are lots of things that could go wrong.  Possibly wrong in a big way.  The next couple weeks of earnings reports will be critical.

This is an interesting article on Deutsche Bank situation.  On My Radar: Confidence Lost, Then Crisis


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