ForecastSTOCKS:
The European debt contagion remains front and center. Spanish and Italian short-and-long term bond yields have moderated moderated recently given the ECB looks to step in to buy’em. This shall support stocks in the short-term, but won’t solve the overriding debt and fiscal problems...kicking the can down the road. So enjoy it while it lasts; a day of reckoning will come after the initial euphoria surrounding ECB debt purchases.
STRATEGY: The S&P 500 remains above long-term support at the 160- wma at 1209; which delineates bull/bear markets. However, the 200-dma support zone at 1266-to-1278 remains the bulls “Maginot Line,” while overhead resistance at 1340-to-1360 was extended above on Friday. This, coupled with the S&P 500 bullish weekly key reversal higher all suggest higher prices are ahead towards 1450-to-1500. Obviously this is tradable; but at that point we’d expect a larger decline to develoip.
WORLD MARKETS ARE HIGHER ONCE AGAIN THIS MORNING as “hope” persists that the ECB and Fed (and now the Bank of England as well) shall be suppliers of that wonderful monetary elixir that releases the brain’s endorphins – of which always leads to higher asset prices. Such is the feeling right now; and the higher stock prices go – the more they will have discounted. Spanish and Italian stock prices are sharply higher this morning; although their short-term bond yields are higher, while long-term yields are lower. Quite simply, the trends are higher for the time being. There is nothing else that needs be known at this juncture.
TRADING STRATEGY: Quite simply, the trend is higher although it is erratic in doing so, but this “erratic-ness” if you will has allowed investor sentiment to remain bearish although the S&P is approaching its March high. Also, August is nearly always a positive month during a Presidential election year – hence collectively, the technical background suggests we’ll see more of the same trading…higher for the time being. Therefore, optimistically speaking – we look for the S&P to trade higher towards the 1450-to-1500 zone or even perhaps a bit higher before this bear market rally ultimately fails.
That said, we are adding in smaller increments given the nature of the current rally, which means today we’ll add to our US Steel (X) position as it has broken out of a bullish double bottom. Certainly yesterday was a good day for the stock; and we look for it to mean revert to its previous March highs in the low-$30 range. A breakout above the $25.25 level (200-dma/trendline resistance) would confirm this move.
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