The market rallied (SPY) today and the rally was impressive after a week of fall. But what is behind this rally? Let’s take a look at fundamental reasons, at least, what I could see on the Internet:
Stocks jump on hopes for a Europe fix; Dow up 272
That’s what Yahoo! says as its top story. And I think, investors believe it. It is however foolish to believe that Europeans fix something. The only capable country out there is Germany, but Germans are tired of bailing out irresponsible countries. Germans are no longer willing to pay for Greece.
But there are other PIGS countries waiting in the line! (PIGS stands for Portugal, Italy, Greece, and Spain). These are in deep trouble as well and they are already spending their chunk of help from EU funds and ECB. And we can go on listing other countries – Ireland, Island among others, who may need help.
Also there are other countries, such as Sweden and Slovakia, which refused to help at all (Slovakia blocked a help package to Greece twice in their parliament). Members of euro-zone are not united in willingness to help. Though all the proclamations we already have heard from ECB and Euro-zone leaders have only one goal: prolong the agony of inevitable – bankruptcy of Greece and huge issues of other countries in trouble.
European banks were, well, ordered or asked, by ECB to increase their reserves to handle potential issues and hardships which may come when Greece goes under. But ECB knows, that there are no more money to take to increase those reserves. Unlike FED, ECB cannot print Euros. No other country in Eurozone will be willing to print more money to bail out other country.
So fundamentally, this rally is weak.
Let’s take a look at technical aspect of this rally:
We are in bearish trend. We broke a head and shoulders and fell deeply down to $110 level (SPY). We stopped at the major support level formed in May and September 2010. Then we witnessed a creation of a bearish continuation pattern – pennant. On September 22 we broke down thru the pennant (see magenta lines) on heave volume and fell further down and stopped at the same support as in previous sessions on August 8-11 and August 19-23 (see green line on the chart). Now we bounced back up from that support. Well, where is our next stop? The previous support becomes a new resistance. Thus the previous pennant bottom line is our resistance.
Since I believe that this market heads further down, we may see a bounce from that new resistance and continue down, see the blue arrow. As a second alternative, we may see several bounces (see red arrow), but in my opinion it is very unlikely.
If that happens and we bounce from the pennant resistance (now resistance) I will consider re-entering puts on SPY and ride this market down. You can also sell SPY shorts if you like.
If that happens and we break the re-tested support, we may see the market slumping all the way down to 100 level and I hope will be already riding this downtrend.