ITALIAN BOND ETN PLUNGES TO NEW LOW -- ITALIAN INDEX FORMS BEARISH CONTINUATION PATTERN -- EURO 100 INDEX REMAINS HIGHLY CORRELATED TO S&P 500 -- RENKO CHARTS FILTER NOISE AND SHOW SUPPORT -- SPX BULLISH PERCENT REMAINS IN UPTREND

ITALIAN BOND ETN PLUNGES TO NEW LOW... Link for todays video. The markets remain fixated on the European sovereign debt issues and, in particularly, Italian bond yields. While I cannot offer deeper insight into Italian politics, I can make a pretty good Bolognese and can analyze key charts pertaining to the Italian markets. Prices, as we know, reflect the sum knowledge of all market participants. There will be price shocks from unexpected or fresh news, but the price charts offer us the best assessment of the situation. Italian bonds should rise, and yields fall, when the outlook improves. Conversely, Italian bonds should fall, and yields rise, when the outlook deteriorates. Keep in mind that all known news is already factored into the price.

Chart 1 shows the Italian Treasury Bond Futures ETN (ITLY). Even though it is thinly traded, chartists can get an idea of the current outlook for Italian debt with this chart. The ETN broke support in early July and plunged around 10% with the first drop. This breakdown preceded a sharp decline in the S&P 500 from late July to early August. Just because there is a lagging correlation, does not mean the decline in Italian Treasuries caused the decline in US stocks. However, these sharp declines were clearly a negative for European confidence and did not help the US. Moving further out, ITLY peaked in mid August and then broke a clear support level with a sharp decline that began in late October. This second drop forged a lower high and lower low. Clearly, there is not much confidence in Italian debt right now. Look for a surge back above 19.60 to show renewed confidence that would be positive for Europe and, by extension, the US.

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Chart 1

ITALIAN TITANS INDEX FORMS BEARISH CONTINUATION PATTERN... There are a number of ways to track Italian equity markets. The Italian Milan Index ($MIB) is the main index, but it is updated at the end-of-the-day (EOD) on StockCharts.com. Chartists can follow the market during the day using the DJ Italy Index ($ITDOW) or the DJ Italy Titans Index ($IT30). Even though both move step-for-step, the latter focuses on the biggest and most established companies in the country. It is like the Dow 30 of Italy. Chart 2 shows the DJ Italy Titans Index ($IT30) retracing a little over 38.2% of the prior decline with a move above 1800 in late October. The index plunged below support a few days later and consolidated with a pennant, which is a short-term continuation pattern. A break below pennant support would signal a continuation of the prior drop. Considering this weeks news, Italian stocks are actually holding up fairly well, which means chartists should not rule out an upside breakout that could reverse the late October support break. This would be positive for Italian stocks and could also provide a lift for Europe in general and the US.

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Chart 2

EURO 100 INDEX REMAINS HIGHLY CORRELATED TO S&P 500 ... Like it or not, European and US stocks are highly correlated. Chart 3 shows the European Top 100 Index ($EUR) with the Correlation Coefficient in the indicator window. This indicator measures the relationship between the S&P 500 and the European Top 100 Index. Positive values show positive correlation, which means they move in the same direction. Negative values show negative correlation, which means they move in opposite directions. The Correlation Coefficient for the S&P 500 and European Top 100 Index has been positive for the last eight months. Most of the time this indicator was above .50, indicating a very high level of positive correlation. US and European stocks have been moving in the same direction. Chartists should, therefore, keep an eye on Europe for clues on the US.

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Chart 3

On the price chart, the European Top 100 Index reversed in the 50-61.80% retracement zone with a sharp decline to 200 in early November. The index has since consolidated the last two weeks and held support in this area. The lows of the last five weeks mark an important support level. A break below these lows would be bearish and have negative ramifications for US equities. Chart 4 shows the Euro Currency Trust (FXE) breaking down over the last two weeks. The Correlation Coefficient for the Euro and the S&P 500 ETF has been mostly positive since early February, which means US stocks and the Euro tend to move in the same direction.

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Chart 4

RENKO CHART SHOWS SPX SUPPORT AT 1230... There is no shortage of volatility in the current environment. Chartists can filter price moves, and reduce volatility, by using different charting techniques available at StockCharts.com. Renko, Kagi and Point & Figure charts filter smaller price movements by requiring specific price changes before new chart data is added. Chartists set the box size to filter out smaller price movements. Chart 5 shows the S&P 500 with 15-point Renko boxes. This means a move of 15 points or more is required for a new box in the direction of the current move. The white boxes show advances, while the black boxes show declines. Movements less than 15 points are ignored. A reversal requires a move of 30 points or more, which is at least two boxes.

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Chart 5

Chartists can apply basic technical analysis to these charts to identify bullish resistance breaks and bearish support breaks. With price moves less than 15 points filtered out, there will be fewer signals than on a daily bar chart and it will be much easier to identify key levels. This will not totally eliminate whipsaws, but it clearly reduces volatility and the number of signals. There have been just four support/resistance breaks in the last 11 months. The index broke support in early August, broke resistance in mid August, broke support in mid September and broke resistance in mid October. $SPX is currently testing Renko support at 1230 with this weeks decline. A move below 1215 would warrant another black Renko box to trigger a support break. I am also showing MACD aligned with the Renko boxes. A signal line cross would be negative.

S&P 500 BULLISH PERCENT INDEX REMAINS IN UPTREND... Chartists can also use different chart styles with certain market indicators, such as the Bullish Percent Indices. Chart 6 shows the S&P 500 Bullish Percent Index ($BPSPX) with the Renko charting style. Each box represents 5 points. Moves less than 5 points are ignored and it takes a 10 point swing for a reversal. The Bullish Percent Index is a breadth indicator that measures the percentage of stocks on P&F buy signals. The bulls have the edge when this percentage is rising and the bears have the edge when this percentage is falling.

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Chart 6

On the chart above, the S&P 500 Bullish Percent Index formed two lows at 25% and broke resistance with a surge in October. The percentage of stocks on P&F buy signals is clearly increasing as the Renko chart remains above its 5-box moving average. Keep in mind that this moving average is based on the close of the last five boxes. It would take a 10 point decline to warrant a black Renko box and reverse the current uptrend. This means the Bullish Percent Index would have to reach 65 or lower to forge a bearish reversal. This indicator level can be used with the S&P 500 level put forth above to confirm a trend reversal.