STOCK RALLY IS IN JEOPARDY AS MARKETS FALL BACK BELOW 200-DAY AVERAGES -- TEST OF SUPPORT IS LIKELY -- RISING DOLLAR PUTS DOWNSIDE PRESSURE ON COMMODITIES -- US TREASURY BONDS ARE RALLYING
S&P 500 BACK BELOW 200-DAY AVERAGE... This is a bad time for stocks to experience heavy selling. That's because the market has been struggling with its 200-day moving average which is the defining point between bull and bear markets. Evidence still suggests that the October rebound is a bear market rally. In order to change that status, the major U.S. stock indexes need to clear their 200-day averages and then stay above them. The daily bars in Chart 1 shows the S&P 500 still struggling with that major resistance barrier. The flat line in Chart 1 also shows the S&P 500 struggling with chart resistance along its June low. Broken support levels become new resistance levels. [That's why the horizontal line changed from green to red in Chart 1). I pointed out on Monday that the 14-day RSI line (top of Chart 1) is in danger of falling below the 50 line which implies more weakness. In addition, the MACD lines (below chart) are in danger of turning negative. Chart 2 gives a closer look at the current battle going on. The S&P is back below its 200-day line. Initial chart support is at 1215. That may be tested shortly. A close below that level would signal that the rally attempt has failed. A close below its 50-day average would simply confirm that.
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Chart 1
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Chart 2
ITALY LEADS FOREIGN STOCKS LOWER... The spike in Italian bond yields above 7% has caused heavy selling in that country's stocks and the rest of the Europe as well. Chart 3 shows Italy iShares (EWI) falling back below its 50-day line. Chart 4 shows EAFE ishares (EFA) threatening that line as well. Decisive closes below those lines would turn Europe's short-term trend back down again which won't be good for them or U.S. stocks.
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Chart 3
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Chart 4
PREDICTABLE INTERMARKET REACTIONS... Intermarket reactions in other financial markets are pretty much as expected. The U.S. Dollar is jumping sharply today (Chart 5) as the Euro tumbles. The stronger dollar is pushing commodity markets lower (Chart 6). U.S. Treasury bonds are the day's big winner. Chart 7 shows the 10-Year Treasury Note Yield (TNX) trading below its 50-day average. As I suggested on Monday, that's not usually a good sign for stocks.
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Chart 5
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Chart 6
