EU AGREEMENTS PUSH SPANISH AND ITALIAN STOCKS HIGHER -- S&P 500 ESTABLISHES KEY SUPPORT LEVEL -- ELLIOTT WAVE PROJECTIONS FOR WAVE-C IN $SPX -- GOLD HOLDS SUPPORT WITH BIG SURGE -- SPOT LIGHT CRUDE BOUNCES OFF 2011 LOW
EU AGREEMENTS PUSH SPANISH AND ITALIAN STOCKS HIGHER... Link for todays video. EU leaders delivered another grand announcement that moved markets all over the world. In short, EU leaders agreed to form a banking union in the future. They also agreed to support sovereign debt markets in Spain and Italy with easier conditions. The EU will also directly recapitalize troubled banks in the Eurozone. This news sent European stocks sharply higher with Spanish and Italian stocks surging over 5%. Chart 1 shows the DJ Spain Index ($ESDOW) breaking consolidation resistance with a surge above 255. Chart 2 shows the DJ Italy Index ($ITDOW) extending its June advance with a move above 112.
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Chart 1
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Chart 2
The Euro moved sharply higher, US stocks surged in early trading, oil moved back above $80 and gold followed the risk-on trade. These are some big moves that could affect the medium-term trends. The key, as always, is the ability to hold the gains and follow through. There is often little, if any, fade with strong moves. In other words, a truly strong move should continue higher without much of a pullback.
S&P 500 ESTABLISHES KEY SUPPORT LEVEL... Chart 3 shows the S&P 500 holding support from the mid June lows and surging above 1350 in early trading on Friday. These lows, combined with the rising 200-day moving average mark a support zone in the 1300-1310 area. The indicator window shows RSI challenging resistance in the 50-60 zone. A breakout above 60 would be bullish for momentum.
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Chart 3
Chart 4 shows the Russell 2000 ($RUT) trending higher in June with a series of rising peaks and rising troughs. This may be a corrective advance within a bigger downtrend, but the trend since early June is up as long as the most recent low holds. This low and the 200-day moving average mark support in the 760 area.
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Chart 4
ELLIOTT WAVE PROJECTIONS FOR WAVE-C IN $SPX... Chart 5 shows the S&P 500 with an Elliott Wave count. The decline from early April to early June traced out a clear five wave sequence, which means it is an impulse wave. The entire decline is either a first (I) of five waves down or the first (A) of three waves down. Either way, this means we can now expect a corrective wave higher, which would be II or B. Impulse waves subdivide into five waves, while corrective waves often subdivide into three waves. This means Wave B or II would subdivide into three waves (abc). The June high marks the end of Wave-a, the late June low marks the end of Wave-b and Wave-c is just now beginning. Should Wave-c equal Wave-a, the advance would be projected to the 1405 area. While this may seem excessive for a Wave-II advance, notice that Wave-2 in April retraced almost all of Wave-1. This is a common characteristic for second waves because they are the first counter trend moves. Remnants of the prior trend cause second waves to retrace almost all the first wave. Regardless of the count, the trend since early June is up and I will be watching support at 1300 for signs of a reversal.
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Chart 5
GOLD HOLDS SUPPORT WITH BIG SURGE... Gold is more-or-less part of the risk-on trade. Bullion moves higher when stocks, oil and the Euro move higher. Gold is also negatively correlated to the greenback and moves higher when the Dollar moves lower. Todays market movements are clearly positive for the yellow metal, but we have yet to see a major breakout. Chart 6 shows Spot Gold ($GOLD) bouncing off support in the 1525-1550 area for the fourth time since September. Overall, a large descending triangle is taking shape. A break below the May low would confirm the pattern and target further weakness below 1500. Gold is trading around 1600 on Friday and needs to clear resistance at 1650 to validate todays surge. In other words, follow through and a resistance breakout are required to show sustainable strength. This is what separates dead-cat bounces from true breakouts.
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Chart 6
Chart 7 shows the Gold SDPR (GLD) holding above its May low and surging above 154. The Aroon indicators are shown with a parallel decline in the indicator window. This reflects a consolidation on the price chart. The next one to break above 50 triggers a signal. A break above 50 in Aroon Up (green) would be bullish, while a break above 50 in Aroon Down (red) would be bearish.
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Chart 7
SPOT LIGHT CRUDE BOUNCES OFF 2011 LOW... Chart 8 shows Spot Light Crude ($WTIC) firming near the 2011 lows and surging above 82 today. Like the Spot Gold chart, this is an end-of-day (EOD) data series, which means the price data will be updated after the close. I drew a black bar to reflect todays move above 82. With this surge, $WTIC broke above minor resistance and could be poised for a corrective advance that retraces a portion of the prior decline. A 38% retracement would extend back to 90, but there is first resistance in the mid 80s from the June consolidation. Chart 9 shows the US Oil Fund (USO) breaking above minor resistance at 30.5 with its biggest advance since October.
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Chart 8
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Chart 9
TREASURY YIELDS SURGE, BUT FALL SHORT OF A BREAKOUT... With the big risk-on move today, treasury bonds are falling as money moves out of this safe haven. Treasury bonds and yields move in opposite directions, which means yields are moving higher. Chart 10 shows the 10-year Treasury Yield ($TNX) surging above 16 (1.6%) and hitting some resistance at 17 (1.7%). This is a key level to watch going forward. If this stock market advance is to continue, the 10-year Treasury Yield needs to break above 17. This would signal a continuation of the early June surge and open the door to further gains, which means treasury bonds would fall. Money moving out of treasury bonds would then become available for stocks. Failure to break above 17 could question the sustainability of todays stock market surge. Note that treasury market will be watching next Fridays employment report quite closely.
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Chart 10
Chart 11 shows the 20+ Year T-Bond ETF (TLT) declining on Friday, but still above support from the June lows. A support break is needed to signal more selling pressure in treasuries. Such a move would be bullish for stocks.
