DOW AND NASDAQ BOUNCE OFF KEY RETRACEMENTS - INDUSTRIALS, FINANCIALS AND CONSUMER DISCRETIONARY LEAD - EURO FALLS BACK AFTER GAP AS GOLD CLOSES MIXED - TREASURIES MOVE SHARPLY LOWER IN FLIGHT FROM SAFETY - BIG ANNOUNCEMENTS CAN MEAN BIG VOLATILITY

DOW BOUNCES OFF KEY RETRACEMENT... Link for todays video. News of a $956 billion European bailout plan sparked a huge rally on Wall Street. Stocks fell sharply last week as Greece teetered and fears of contagion gripped Wall Street. A weekend bailout package alleviated these fears and put risk back into play. Last week was all about risk aversion. Money moved into Treasuries, the Dollar, the Yen and gold. Conversely, money moved out of stocks, the Euro, oil and junk bonds. The opposite is happening today. Stocks, the Euro, oil and junk bonds are up. Treasuries, the Dollar, the Yen and gold are down. Chart 1 shows the Dow Industrials bouncing off the 62% retracement mark today and surging above 10700. Notice that the Average closed near its high for the day. The ability to hold gains after such a strong open shows underlying strength. I showed this chart on Friday with the Fibonacci Retracements Tool based on the February low and April high. Today, I made a small adjustment and applied the Fibonacci Retracements Tool to the early February closing low and the April closing high. Fridays close was just below the 62% retracement. Todays bounce establishes a support level based on Fridays close (10380). Such a big bounce should hold and a close below 10380 would call for a reassessment. Chart 2 shows the Nasdaq with similar chart features. Todays volume was not as strong as last week, but volume was above average.

Chart 1

Chart 2

INDUSTRIALS, FINANCIALS AND CONSUMER DISCRETIONARY POWER MARKET... All sectors were up with big gains. The defensive sectors sported the smallest gains as healthcare, utilities and consumer staples gained around 3%. The big gains came from financials, industrials and consumer discretionary, each of which gained over 5%. It is hardly surprising to see financials leading the market after another bailout for the banks. Chart 3 shows the Financials SPDR (XLF) finding support near the 62% retracement and surging towards 16. Chart 4 shows the Industrials SPDR (XLI) also finding support near the 62% retracement and surging with a big gap today. Notice that XLI has been steadily outperforming the S&P 500 this year. Chart 5 shows the Consumer Discretionary SPDR (XLY) also finding support near the 62% retracement and bouncing with a big gap. The consumer discretionary sector has been outperforming the S&P 500 steadily since mid January. Todays gaps and surges established important support levels based on Fridays closing lows. A strong move should hold. Failure to hold and a close below Fridays lows would be quite negative.

Chart 3

Chart 4

Chart 5

EURO FALLS BACK AFTER STRONG OPEN AS GOLD CLOSES MIXED... Even though the Euro ETF (FXE) closed up on the day, the ETF formed a long black candlestick as sellers took advantage of strength. A candlestick body forms with the open and close. The body is hollow when the close is above the open and filled when the close is below the open. Chart 6 shows the Euro ETF opening at 128.87 and moving lower after the gap open. A long black candlestick formed because the ETF closed near the low for the day. There was not a lot of confidence in todays gap.

Chart 6

Chart 7 shows the Gold ETF (GLD) closing near the mid point of todays range. A doji formed on the day and these indicate indecision. GLD became overbought after a sharp surge the last six weeks so a pullback or correction is certainly possible from current levels. Broken resistance around 112-114 marks the first area to watch for support. The indicator window shows the Gold ETF and the Euro ETF together. Notice how these two seriously diverged in mid April. Gold moved sharply higher the last three weeks as the Euro moved sharply lower. Money was moving out of the Euro and into bullion. At this point, there may be some confusion surrounding gold. Gold traditionally benefits from a weak Dollar/strong Euro, but that relationship was reversed over the last three weeks as gold advanced with a strong Dollar/weak Euro. Todays big bailout announcement may stabilize the Euro and detract from gold as a safe haven. With gold turn back to its traditional Dollar relationship or will it stick with its current Euro relationship? The Dollar-Gold-Euro relationship is one to watch closely in the coming days and weeks.

Chart 7

TREASURIES MOVE SHARPLY LOWER IN FLIGHT TO RISK... US Treasuries benefitted from the flight to safety as investors worried about Greek debt, contagion and the EUs slow response. Todays announcement of the massive bailout package erased a portion of last weeks losses, but this was not enough to undo the bullish breakout. Chart 8 shows the 20+ Year Treasury ETF (TLT) breaking resistance with a surge above 99. At one point last Thursday, the ETF was up around 13% from its April low. This is a HUGE move for bonds. TLT was overbought after such a sharp surge and entitled to a pullback or retracement. Broken resistance around 91-91.5 turns into a support zone. In addition, the Fibonacci Retracements Tool shows potential retracement support in the 90-91 area. Admittedly, applying the Fibonacci Retracements Tool is challenging with the sharp spikes on Thursday-Friday. Therefore, I opted to use last weeks closing high to measure potential retracements. Chart 9 shows a long-term perspective with support in the 87-88 area.

Chart 8

Chart 9

BIG ANNOUNCEMENTS CAN MEAN BIG VOLATILITY... The comprehensive EU bailout package sure sounds familiar. In fact, we could be seeing a reenactment of autumn 2008. The Lehman bankruptcy on September 15 triggered a financial crisis in the US at the end of 2008. A few weeks later, Congress passed a $700 billion bailout bill (TARP) and President Bush signed it into law on October 3, 2008. Then came the first of three Fed injections. First, the Fed announced that it would provide $900 billion in loans to banks on October 6th. Second, the Fed announced that it would spend $540 billion to buy debt from money market funds on October 21st. Third, the Fed pledged another $800 billion to buy mortgage bonds and other securities on November 21st. Carl Sagan would love all this talk about billions. Anyhow, the Fed basically tripled the Congressional bailout. Chart 10 shows the S&P 500 with these key dates. These big announcements only increased volatility in October-November 2008. The S&P 500 did not rally until the last Fed announcement on November 21st. Even then, a rising wedge formed and the decline continued in January-February. The S&P 500 did not ultimately bottom until 5 months after Congress passed the Emergency Economic Stabilization Act that contained the TARP program.

Chart 10

While all bailouts work different, this lesson from the past may be applicable to the current situation for European equities. First, the EU bailout package is unlikely to be the silver bullet. Second, passage is one thing. Implementation is another. It will take time to raise and distribute the money. Third, the market was hit hard last week and the bulls are wounded. We have all heard the old adage: once bitten, twice shy. This could apply to the Euro and European equities. As with US equities in the autumn of 2008, investors have been burned and a little healing time may be needed. Chart 11 shows the Euro Stoxx 50 SPDR (FEZ) breaking support in January, bouncing with a rising wedge and then breaking down again in April. The decline below 30 was excessive, but this chart certainly looks bearish overall. Broken support around 35-36 turns into the first resistance zone to watch. FEZ actually opened in this resistance zone and stalled today. This area also marks s 50% retracement of the April-May decline. If September-October 2008 is any guide, European equities are likely headed for a period of volatility as the markets correct from oversold levels and digest the bailout.

Chart 11