Bulls Need to Hold Support
The market declined yesterday, but only technology showed clear weakness. The fall from the other indices was a byproduct of the decline in tech stocks. Despite the big drop in technology, and the decline from most other sectors, no support zones were taken out. Until that happens, it is hard to become bearish. The market will hopefully pick a direction soon; the activity over the past three months has been annoying. Since February, except for a brief period in March and April, the market has mired between 1350 and 1300. And the gyrations from the market in that narrow range have been maddening.
Since the broad trend remains bullish, I have favored that side of the trade this year. To a large degree that has been the right call. Lately, it has resulted in some losses, and yesterday’s decline took a few positions a lot further below our tight stops than I would have preferred. But overall, the indices continued to make new highs. And we’ve had some big wins to placate numerous little losses.
I still favor the bulls. I have to; buyers have been so impressive over the past year that you can’t fight them. Sooner or later that stance will be wrong and the bears will win a battle. But it looked like the bears were going to win several times over the past year and instead the bulls jumped back into the market to defend support zones.
To the bears credit; they are defending 1350 resistance well. Additionally, they have the chance to take out their first support zone (1332) in over two months today. A break below support (1332) will result in a move back down to 1301. But more important than the 2.6% decline, the success of breaking a support zone may invigorate sellers and the market may actually develop a strong short-term trend – something it has lacked for nearly this entire year.
The only chance the bulls have this week to defend support and take the market to 1377, my break out target, is for commodities to rally. And the only chance that commodities rally is if the euro rallies. So the bulls are highly dependant on the euro to eek out a gain this week.
The euro trades at a must hold support level $1.40. At $1.415 the currency has a little more room left to the downside, but its back is against the wall. Crude oil, which has a life force of its own at times, is also at a must hold price. Any decline below $96.50 and $89 here we come.
The news is slow this morning, although the inflation data out of the UK was scary. Consumer prices rose 4.5% in April. That annualized increase was made more frightening because core inflation was up 3.7%. The UK held off on hiking rates last month; but I doubt they will do the same at the next meeting.
Over the past two years, inflation has hit the emerging economies hard. Price increases in India and China are in the double digits. But the developed world has, until now, reported only mild price increases. The results from the UK should be an eye opener to Ben Bernanke.
In the U.S. we will receive production and industrial capacity numbers just before the open. Neither number is expected to show a large change from last month, but an unexpected miss, especially from production, would drive the market lower. The bulls need to hold support this morning or the next few sessions should be red.
