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Morning Cup of Jo: What Once Was Support Now Becomes Resistance


For those feeling the rash pain of the markets have dealt in the most recent downturn, there is a glimmer of buoyancy on the horizon - from a contrarian point of view.


"Most times you can hear 'em talk, other times you can't."
-- Bob Seger, "Turn the Page"

Following Monday overseas action, when the Nikkei had one of its single worst daily drops – 614 points (or -4.1%) – emotions have taken control of the markets. On Tuesday, a precipitous drop in the commodity markets added fuel to the already burning fire as we experienced a smelting in the precious metals markets. Gold lost much of its luster as it also had one of its worst daily drops in history. This drop brought the shiny metal down to an intra-day low of 545 - off its high of 725 less than a month ago. The next technical support for Gold corresponds to horizontal floors & ceilings, upward sloping trend and its 200-DMA at 540 (see LT Gold chart later in 'Jo').

Wednesday morning didn't help matters much as the economic data added more wood, not water, to the inflation fire. The CPI for May was released with "in-line" expectations at 0.4%. However, Core CPI (ex-food and energy) was 0.3% vs. 0.2% expected, CPI YOY (year-over-year) was at 4.2% vs. 3.9% expected and the Core CPI YOY was 2.4% vs. 2.3% expected. The data sent the pre-market futures lower from up 0.25% to down 0.25%. As for the day, surprising to data watchers, the markets finally made a stand as the four sisters joined hands in rejoice of some supportive bulls.

Last week's Jo discussed the changes to the key technical levels in the "Eye on the Ball" section. As of Tuesday, the most recent support levels have been broken and new technical levels have been set forth. What once was support now becomes resistance. Let's review what has changed.

(Click to see larger image)

The DJIA has broken its 200-DMA on a closing basis, but remains the only sister still holding onto horizontal support (Floors & Ceilings) as evident in yesterday's action.

(Click to see larger image)

The SPX has now closed below its 200-dma and has given way to any sort of ST support from recent weeks. The only trend still intact is the LT trend. Again, yesterday it found footing at this level.

(Click to see larger image)

The NDX, the ugliest sister currently, is knocking on the door of another horizontal support and is the closest to breaking the 3-year long-term trend. Above is a weekly chart of the NDX (any shorter time frame looks like a parachuter off a cliff with no bottom).

(Click to see larger image)

The same goes for the Russell 2K – a horizontal support and the 3-Year long-term trend is certainly in jeopardy of being busted. However, the probabilities lie (after yesterday), the 200-DMA will be tested on a bounce – approximately 700.

For those feeling the rash pain of the markets have dealt in the most recent downturn, there is a glimmer of buoyancy on the horizon – from a contrarian point of view. All four sisters have been demolished since the highs set in May and throughout history markets don't traditionally go straight down. With the mass of secondary indicators being oversold the probabilities lie with a retest of the most recent breaking levels. You can see in the new "Eye on the Ball" above, most new resistance levels correspond to the respective 200-DMA's.

If and when a retest happens the technical picture will become more apparent of this being either an actual bottom – a continuation of support of the 3-year trend – or if it truly is a longer-term change in market direction. Nonetheless, the markets are approaching key technical levels. If these give way, on a weekly basis, the probabilities indicate a Major shift in long-term market direction toward a downward bias.

On a side note:

As you are all aware, we have been discussing how the market – via the Fed – is becoming more data dependent. Being as it may, we have decided to launch a new service, which our firm uses on a daily basis, called "On the Calendar." This new product highlights what we believe to be the most pertinent and potentially market impacting data coming out for the week.

(Click to see larger image)

Stay Tuned & Good Luck!

Until next time:
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No positions in stocks mentioned.

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