A $125.0B lifeline is thrown at Spain’s banking system, but will it be enough for bulls to “follow-through” technically? For the five day period the SP-500 (SPY) is up 3.73% and June Gloom has subsided, but for bulls to receive the benefit of the doubt on “Day 6” of the rally attempt, price and volume will need to be significant or reinforce the likelihood of a bear market rally.   

THE WEEKLY NUTSHELL    

• “Bear, Bull, Doji Monday.” SP-500 finishes flat with 0.01% gain after decisive and fearful first half pressure of about 0.90% reverses into closing bullish doji set narrowly below 200SMA. Imbuing early continuation selling, fear feeding on itself with VIX ($VIX) nearing 28% in a short-term stretched and historically elevated position. Chinese non-manufacturing PMI data disappoints. Factory orders come in weaker than forecast. S&P states Greece has 1/3 chance of exiting Euro. Wildcards of bearish uncertainty versus hopeful optimism in front of Wednesday’s ECB meeting and stateside Congressional testimony from Fed Chief on Thursday. Large cap tech (AAPL, GOOG) leads second half short-squeeze rally with Naz’ only major to maintain 200SMA support. WSJ report says Germany may bow to issuing common Eurozone bonds, while Spain pushes for direct European rescue of its banks without new EU/IMF adjustment.
• “Bull / Bear Line Tuesday.” Bulls confirm doji decision candle with gainer of 0.56% in SP-500 but stall and close below 200SMA. ISM Services data modestly bests forecasts, but real inspiration looks to come from bargain-hunting / short-covering off oversold corrective low. Uncertainty regarding upcoming EU / ECB meetings and Fed testimony on Wednesday and Thursday look to contain gains. Teleconference of G-7 finance members disappoints as no inroads into sorting out Eurozone situation are made. Europe sees varied but none too far off-the-mark PMI services and retail sales data which more or less confirms its sticky and sickly situation.
• “Wins-Day for Bulls.” Bulls take an optimistic cue from the Wall Street Journal pointing at policymakers “weighing more action amid recovery doubts” in front of Thursday’s congressional Bullnanke testimony, while bears get “Fed up” in bull territory and cover shorts. SP-500 finishes up 2.30% in gap, trend day to finish at session highs. Word of Australia Q1 GDP coming in at 1.3% also helps with “G’day!” support, while traders are able to dismiss disappointing ECB hold on rates at 1.0% and no fresh monetary programs implemented, though possibly appreciative of President Draghi’s insistent “act if needed” promise. Bulls pay little mind to weaker-than-forecast productivity dip of 0.9% or optimistically see additional evidence for Fed action, while Beige Book shows continued moderate economic improvement. Treasuries (TLT) take an unsurprising southern flight of 2.0% back towards sanity and the VIX ($VIX) loses 10% to 22% as investor “fear of missing out” grows more confident.
• “Tail Turning Thursday.” Surprise Chinese rate cut of 25 basis points, the country’s first since the financial crisis began, shoots majors higher out-the-gate, as the move by policymakers looks to shore up its declining economic growth. Pent up hopes congressional economic testimony from Bernanke are dashed as dialogue remains void of new monetary policy language suggesting imminent quant easing at June meeting and instead offers regurgitation of existing “standing ready to act” despite backdrop of a still at-risk economy. Coupled with second half Fitch downgrade of Spain’s credit and not-to-be overlooked 5% three day neutralizer rally into resistance, bulls give up gains in excess of 1% to finish flat in bearish hangman pattern in SP-500.
• “Fearful of Missing Out Friday.” Flat to slightly bearish first half finds bulls bullying their way to 0.81% closing gain to challenge Thursday’s highs. Early mild pressure attributed to Bearnanke & Fitch buzz-kill, but a repeat of a second fearful Friday fall to the wayside. Technical failure by bears to break below 1300 level allows bulls to joyfully embrace possibility Spain will request bank recapitalization assistance from the Eurozone this weekend. And “ObamaSpeak” of “We are seeing weakness in our economy” finds bulls optimistically seeing the brass ring of QE3 within arm’s reach at June FOMC meeting.

WEEKLY CALENDAR OF KEY UPCOMING EVENTS

Monday:
Economic: Wildcard Eurozone credit markets as policymakers convene over weekend and grant Spain’s banks $125.0B lifeline to help shore up country’s financial system. Limbo government / Eurozone status for Greece as country nears its second vote.

Earnings After Hours: Finisar (FNSR), Shanda Games (GAME).

Tuesday:
Economic: Import / Export, Treasury Budget (-$125.0B).

Earnings: FactSet (FDS), Michael Kors (KORS).

After Hours: Casey’s (CASY).

Wednesday:
Economic:  Weekly Crude, MBA Mortgage Index, Retail Sales & Ex Auto (-0.2% & 0.0%), PPI & Core (-0.7% & 0.2%), Business Inventories (0.2%).

Earnings After Hours: Korn/Ferry (KFY).

Thursday:
Economic:  Weekly Claims (375K), Continuing Claims (3.27M), CPI & Core (-0.2% & 0.1%).

Earnings: Kroger (KR), Pier 1 (PIR), Smithfield (SFD), Winnebago (WGO).

After Hours: JDA Software (JDAS).

Friday:
Economic: Empire (13.5), IP & CU (0.1% & 79.1%), Michigan (77.0).

Earnings: NA.

TECHNICAL OUTLOOK

Figure 1: SP-500 (SPY) Daily Chart

Reuters confidently proclaimed “US stocks will get a lift on Monday” following Spain’s $125B lifeline for its financial system. If only it were that easy; though we’ll give them the opening bias as a likely strong one. The reality is last week’s rally has neutralized an oversold condition after its strong gain of 3.73%, it’s best of 2012 and incidentally, one which follows 2012’s “worst of” performance. With resistance now in the picture and any price extension likely to move the market into an overbought condition, a “sell the news” set up could easily find its way into any reaction gaps; which mind you, was already being priced in with Friday’s bid into the close.

Not that a “sell the news” set up is guaranteed. But, given what’s been described technically, traders may wish to wait and confirm actual strength in the form of a closing “follow-through day” signal. Rather than buying into light volume short-covering gap, waiting for a significant bullish thrust of 1.5% or more in the likes of the SP-500 with increased volume on Day 6 of the “rally attempt” count seems quite sensible rather than chasing the market into an overbought and vulnerable position.  A failure of bulls to make this sort of commitment during the classic count window of days 4 – 7, would in our estimation, set up a strong bearish opportunity with anticipated June Gloom re-entering the technical landscape shortly.  

MARKET LAB
Bullish Technicals

• First Week Effect 2012.
• Elevated and fearful ($VIX) as “closing” low of key 1278 – 1300 support in SPX is tested.
• RSI 13 divergence as SP-500 makes lower low.
• Weekly Kings & Queens candle reversal low pattern.
• Day 6 of Rally Attempt / FTD count within Day 4 – 7 classic time window.

Bearish Technicals

• Fibonacci based butterfly completion around test of 1400 with triple doji high.
• Worst Six seasonal period and market downtrend from higher low / butterfly top.
• SP-500 into first zone resistance and neutralized, but nearing overbought conditions.

Chris Tyler
Senior Options Writer, former Market Maker & fulltime Option Hedge Hog Advocate
Optionetics.com ~ Your Options Education Site
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The information offered here is based upon Christopher Tyler’s observations and strictly intended for educational purposes only, the use of which is the responsibility of the individual.