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The T3 Morning Market Call: Levels to Watch as Futures Follow China Lower

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Could we be seeing the beginning of the end for the historic 30-year bull market in bonds?

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Chinese markets finished down a whopping 5.3% overnight as interbank lending continues to dry up amid rapidly rising rates, and the People's Bank of China is choosing not to intervene to inject liquidity. If nothing else, the credit squeeze will provide a telling stress test for the nation's banking system.

European markets are down 1.5-2.0%, US stock futures are also sharply lower. S&P 500 (INDEXSP:.INX) futures are currently down 17-18 handles as we look set to break last week's. A dovish article from Wall Street Journal Fed commentator on Friday helped trigger an afternoon bounce, but that rally is proving to be quite frivolous.

Based on the recent technical action, today's downside follow-through is not altogether surprising. The first major sell signal came back on May 22 when we saw the major outside reversal after putting in an intraday high at 1687. After that, the market was able to hold the 50-day moving average twice, but after talk of QE tapering grew louder, the key was always going to be the Fed rate decision last Wednesday. Following that announcement, we got a 1-2 punch from the rejuvenated bars. We failed intraday around 1640ish as Chairman Ben Bernanke stated the pace of purchase of QE could be reduced later this year. Then Thursday morning the market opened below the 50-day moving average, hovered below it for 75 minutes (showing the bears in control), and then continued lower, breaking the bigger trend line that's been intact since the November 16, 2012 reversal.

Friday we held the 100-day moving average around 1577, but the bounce was somewhat feeble. Today we were set to open right around that spot. For today, watch Friday's low in all sectors/stocks and see if we hold it or break it. If we don't hold S&P 1577ish and close below it, the the next micro point is 1562 then 1548. The major level is 1530-1540, and the 200-day is now at 1506.

During corrective phases, you want to simplify your process. Focus only on a few key sectors and some leaders in those key sectors. On a day like today, you want to see if anything can go green and show relative strength to help lead us off the lows.

Here, I will go over some key levels in some sectors as well as high beta names.

The banks (NYSEARCA:XLF) broke down out of an upper level wedge after the Fed announcement. On Friday, the XLF broke and closed below its 50-day for the first time this year. Next support is coming in at around $18.60 where the 100-day moving average lines up with April's pivot highs.

The consumer staples (NYSERACA:XLP) led the market down on Wednesday and Thursday but were able to see a small bounce on Friday as they finished the day up 0.66% and closed right below the 100-day moving average. With today's gap down, use Friday's low as the new point of reference for this sector.

The iShares Dow Jones Transportation Average ETF (NYSEARCA:IYT) also dipped below its 100-day moving average for the first time this year after three-day sell-off. The IYT did try to bounce on Friday but the sellers stepped in again during the last 30 minutes to bring it well off of highs and close right around its 100-day. Use Friday's low as pivot, under that level the next big support area is $104.40-105.

The homebuilders (NYSEARCA:XHB) rallied on Monday and Tuesday due to better-than-expected June housing numbers, but the bounce was short-lived as the ETF got hit pretty hard amid the recent selling pressure in the market. The sector ETF is already almost at its 200-day moving average after giving up its 100-day moving average on Thursday. The 200-day moving average currently stands at $27.95.

The utilities (NYSERACA:XLU) led the market up during the first four months until it topped out at $41.44 at end of April. Since then XLU has continued to make lower lows as investors pile out of the dividend-oriented defensive sectors. XLU is now below the 200-day moving average, and the next major support comes in at $34ish.

The mixed action continues in high beta tech as some of the stronger names succumbed to market weakness late last week.

Google Inc (NASDAQ:GOOG) re-tested its accelerated uptrend that has been in place since April 18 lows and is holding this trend line so far. The market leader briefly breached below its 21-day moving average on Friday. Use Friday's low of $873 as the new point of reference to trade against. The 50-day moving average below that is $857.

LinkedIn Corp (NYSE:LNKD) also saw a two-day pull-back last week, but the damage was contained at the 100-day moving average on Friday. The stock is trying to hold its short-term uptrend that has been in place since June 5's pivot low.

Netflix, Inc. (NASDAQ:NFLX) retraced around 3% during each the last two sessions and closed right around its 50-day moving average on Friday. The recent pivot low is $214.86 then $205. The real important support spot is $197.50.

Amazon.com, Inc. (NASDAQ:AMZN) re-tested and held the downward trend line that it broke above with a powerful move on June 7. It bounced off this trend line on Friday and closed back above its 21-day moving average. AMZN is still one of the best looking charts out there. If it doesn't hold $269ish, the next key spot is $265ish.

Apple Inc. (NASDAQ:AAPL) continued to bleed lower after breaking its ascending channel around $444isn and then its major support of $419 on Thursday to put in a new low of $408 on Friday. Use this low as the new point of reference to trade around, then bigger support is at $385.

Tesla Motors Inc (NASDAQ:TSLA) held up well during this market sell-off as its still holding above its 21-day moving average after seeing small losses in the last two sessions. The $96.50 support level could be key, and if we close below it we could see the $90 area.

The iShares Barclays 20+ Year Treasury Bond (NYSEARCA:TLT) shed another 1.7% on Friday after breaking another support area of $112 on Wednesday as the head and shoulders pattern looks more valid by the day. Could we be seeing the beginning of the end for the historic 30-year bull market in bonds? The media ran with that narrative this week, but I would caution chasing a trade when herd consensus gets so skewed in one direction. Especially if the economic recovery falters and the Fed sticks around a little longer, we could get a swift snapback in bonds. If you've been short this ETF you could cover some and stay with some.

Gold (NYSEARCA:GLD) saw a big gap down on Thursday to break below its key support of $130.50, but the metal was able to find its footing on Friday. I remain bearish on the commodity ETF. If the Fed does indeed move forward with QE tapering later this year, Gold will be robbed of its greatest single price driver. The only way I see GLD bouncing from here is if we get a scenario like I mentioned before with bonds: the recovery falters and the Fed backtracks. Reactionary low was $123.33 to trade against. Below that is $122.

At this point, it's best to measure your risk and timeframe as these markets move fast. Having a plan with levels and action areas could help you. Let the market confirm what it's going to do. It gave clues that we needed to take risk off in the past month, and it will also give us clues on where to put some risk back on based on the action and composure. I remain tactical and will need to see something very compelling to even hold things overnight.

As a side note, what baffles me sometimes is that everyone been saying that rates can't stay low forever for the past few years. Now that they are starting to go up, everyone starts asking, "How did this happen?" Bulls and bears have been saying that the market need to correct. Now that we are correcting they are saying, "How did this happen?"



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