Libya Rally Fades
The market declined mildly on Friday. Volume was jacked since Friday was option expiration day. But the price movement wasn't terribly exciting, or even all that frightening.
The selling was steady and persistent, but it didn't look convincing. While stocks declined, very few hit new lows. And the lack of new lows indicates that the indices are forming support zones.
The market action over the past few weeks has been extremely volatile. And it seems like support zones are regained and lost in hours. But SPX is stable around 1115. And hopefully that means it is forming a long term base from which to launch higher.
The big news items this week are the victory in Libya and Ben Bernanke's meeting at Jackson Hole. The success in Libya should be a non-event for the market. In a perfectly rational market, oil would fall, stocks would rally and gold would fall.
Earlier in the year, during the riots in Libya, stocks fell due to uncertainty, oil rose due to supply concerns and gold increased as a flight to safety asset. If the situation in Libya were to be resolved, shouldn't the opposite of those reactions occur?
Like I said, in a perfectly rational market, yes. But that is not where we find our market today.
Stocks are poised to increase, but I think that has more to do with the fact that most indices trade near very strong support areas. Gold was up over 2% and is hitting new highs just short of $1,900 this morning. Oil is also higher by nearly 2% to $84 - although some grades of oil did fall from Friday.
In addition to a market reaction due to events unfolding in Libya, the market will also prepare for Ben Bernanke and a strategy that could be announced at Jackson Hole, Wyoming. Last year, Bennie and the Feds announced the highly controversial, and largely unsuccessful and expensive, QE2. After that announcement the indices went on a relentless five month bull rally.
As the week wears-on, look for traders to "price-in" positive news from Ben Bernanke. And with bonds already soaring to new highs during the past few weeks, investors should adopt a strategy that favors stock or commodities, which have more risk, if they think that Ben Bernanke will flood the system with more free money.
In addition to the Jackson Hole event, key economic data will be released throughout the week. On Wednesday, U.S. durable goods are announced. Last month, durable goods orders fell 1.9% and it was that economic item that kick-started the selling in the market. On Friday, the U.K. and U.S. will announce GDP for the second quarter. Expectations are still for 1.1% growth; this could prove to be too high.
For those subscribers who are new to trading, or to this service, the market does not typically move this quickly. Resistance and support levels are generally respected on a daily basis, and only under extreme circumstances will two or three minor resistance levels be lost in a session - and rarely will a major area of support or resistance be lost in a session. But over the past month, the market has been able to chop through four or five support or resistance zone in hours, and sometimes even able to take out two areas of strong support.
The bears have taken the market far too low and far too quickly. I think 1115 could be retested this month, and as I've mentioned before ultimately this month's low, 1101, will be breached. But following the decline last week, SPX, along with the rest of the indices, will pump higher. And while it should be choppy over the next few sessions, I favor a move up to 1197 again before a new major push lower.
