We are technically still in bearish territory. When you look at where SPY (for example) is trading (or you can also take a look at SPX), it is still trading below 200 day MA. It however knocked on that resistance several times (which may be a sign of a break thru sometime in the future).

So shall we chase this rally, or is this rally a fake?

It looks like a regular correction or consolidation to me. I still think this market will correct all the way down to 50 day MA (circa 1200 level) and then we will see. I am expecting a bounce at that level.

What can however destroy this beginning of a rally? A bad news from Europe. Although politicians were trying to kick the can further down the road this morning a German chancellor Angela Merkel said that she wasn’t willing to invest a cent into Euro debt crisis any more. That has sent the market lower.

[poll id=”10″]

However, if you take a look at VIX.X you can see, that is collapsed from its high levels and lost about 20%. The market is not that much concerned about the European crisis as it was before. Is it a sign that all the crisis is already priced in? Possibly.

So what can send the market lower? It would be a collapse of the entire Eurozone. Is it likely? It is. In my opinion Europeans are not able to find consensus. The EU is a union of a different nations, languages and moral. And I understand it. A recent poll in Germany showed that Germans are no longer willing to support those nations who weren’t responsible in their fiscal policies. And once again, it is understandable. And you know this situation yourself in our country when our social welfare system is sometimes too generous to people who do not deserve it.

Pushing this “forced solidarity” towards the countries who irresponsibly spent the money they didn’t have can be a political suicide for Angela and possibly even for Sarkozy, although he faces a different problems than the German chancellor. He plays about saving his own country. In my opinion, Germans are better off surviving this crisis on their own than France.

And so far all deals about financial policy within Eurozone is something, which may work well inside the group of countries which are still well and relatively healthy, but what motivates Greek, Italy, and Spain to accept such policy at this time? I guess nothing.

As soon as investors realize this, they will no longer trust politicians and the market will tank. Unless they come up with something solid. Even break up of Eurozone may be a solid solution, which will shock the markets, but not for long unlike this long lasting death with unpredictable results.

This morning I messed up my stop loss and got out of my long Put position on SPY I had. So I decided to wait for the market to recover the morning’s decline to step in, playing the FOMC meeting.
Looks like this was a good move. I bought back when the market was back up at $1245 and now the market turned back down on results of FOMC (making nice profits on this turn around).

Happy Trading!