Without Technical Oversold Condition the Bulls Have No Case

OVERNIGHT CHANGES THROUGH 6:05 AM (CT): S&P 500 +1210, DOW +100

While the European markets were attempting to fan concern over the upcoming European Bank stress tests, that mentality didn't prevent European equity markets from starting out higher for the day. In fact, overnight strength was reportedly the result of gains in bank and mining stocks and that suggests that the US equity market is capable of starting out on a mostly positive footing today. However, the US could see sentiment dented in the wake of scheduled data from the ISM Non manufacturing report, as many analysts expect that report to show a minor contraction. We suspect that the markets were overly negative toward the US economy into the key unemployment report last week and we also think that the markets were obviously overly negative toward the Euro zone bank condition and that any gains in the markets today are simply short covering or relief rally gains. In other words, we don't see the basis for a sustained upside move in equities unless the Chinese provide something positive from a leadership perspective, or the US looks to be poised to bring forth some fresh stimulus package. Therefore, traders should be highly skeptical of the current bounce in stock prices.

S&P 500: The S&P comes into the new week under a somewhat surprising head of short covering steam. With the Commitments of Traders Futures and Options report as of June 29th for S&P 500 Stock Index showing the Non-Commercial and Non-reportable combined traders held a net short position of 23,746 contracts and the S&P from the report market off date falling another 32 points, we suspect that the net spec short in the S&P reached some of the most oversold levels seen since the beginning of the sub-prime crisis. In other words, the market was overly bearish toward the Euro zone situation and perhaps toward the US economic condition last week but once the oversold condition is remedied today, the fundamentals hardly justify sustained upside action. We see solid resistance up at 1029.40 basis the September S&P.

DOW: With a noted analyst scheduled to appear on a key business channel this morning and that analyst typically very bearish with his views on the current situation, it is possible that scheduled data flows and dialogue from the Press will serve to knock the US equity market back away from its initial highs. However, the Commitments of Traders Futures and Options report as of June 29th for Dow Jones Index $5 showed that the Non-Commercial and Non-reportable combined traders held a net long position of only 8,870 contracts and the Mini Dow at times last week was as much as 300 points below the level where the COT report was marked off. Therefore the net spec long position in the Dow might have been close to being leveled and that might be cause for a bit of short covering buying today. We suspect that market will be limited to close-in resistance of 9,691 in the September Mini Dow contract. 

NASDAQ: The September Nasdaq saw some merger/acquisition news at the end of last week in the face of the US Non Farm payroll report and that might be adding into the short covering bounce this morning. We suspect that the September Nasdaq will attempt to test quasi even numbers up at 1750.00 this morning but we doubt that the market is poised to fully throw off the mostly bearish trend that was put in place last week. With the Commitments of Traders Futures and Options report as of June 29th for Nasdaq Mini showing the Non- Commercial and Non-reportable combined traders were already holding a net short position of 10,641 contracts and then seeing the market fall another 66 points, it is likely that the net spec short at least temporarily reached an extreme level. However, we don't see the fundamental justification for a sustained rally in stock prices and this morning's action might be the extent of the upside effort.

STOCKS TECHNICAL OUTLOOK:

Note: Technical commentary is based solely on statistical indicators and does not necessarily correspond to any fundamental analysis that may appear elsewhere in this report.

S&P 500 (SEP) 07/06/2010: Daily stochastics are trending lower but have declined into oversold territory. A negative signal for trend short-term was given on a close under the 9-bar moving average. The daily closing price reversal down puts the market on the defensive. The market's close below the pivot swing number is a mildly negative setup. The next downside objective is 996.38. The market is approaching oversold levels on an RSI reading under 30. The next area of resistance is around 1025.15 and 1039.77, while 1st support hits today at 1003.45 and below there at 996.38.  

S&P E-MINI (SEP) 07/06/2010: Momentum studies are declining, but have fallen to oversold levels. A negative signal for trend short-term was given on a close under the 9-bar moving average. The downside closing price reversal on the daily chart is somewhat negative. The market tilt is slightly negative with the close under the pivot. The next downside target is now at 996.19. Some caution in pressing the downside is warranted with the RSI under 30. The next area of resistance is around 1025.12 and 1039.68, while 1st support hits today at 1003.38 and below there at 996.19.

NASDAQ (SEP) 07/06/2010: Daily stochastics are trending lower but have declined into oversold territory. The market's short-term trend is negative as the close remains below the 9-day moving average. It is a slightly negative indicator that the close was lower than the pivot swing number. The next downside objective is now at 1688.13. The 9-day RSI under 30 indicates the market is approaching oversold levels. The next area of resistance is around 1739.25 and 1760.12, while 1st support hits today at 1703.25 and below there at 1688.13. 

DOW (SEP) 07/06/2010: Daily stochastics declining into oversold territory suggest the selling may be drying up soon. The market's short-term trend is negative as the close remains below the 9-day moving average. The market's close below the pivot swing number is a mildly negative setup. The next downside objective is now at 9547. Some caution in pressing the downside is warranted with the RSI under 30. The next area of resistance is around 9734 and 9815, while 1st support hits today at 9600 and below there at 9547.

MINI-RUSSELL 2000 (SEP) 07/06/2010: Momentum studies are declining, but have fallen to oversold levels. The close below the 9-day moving average is a negative short-term indicator for trend. The downside closing price reversal on the daily chart is somewhat negative. The market's close below the pivot swing number is a mildly negative setup. The next downside target is now at 579.1. Some caution in pressing the downside is warranted with the RSI under 30. The next area of resistance is around 604.5 and 618.0, while 1st support hits today at 585.1 and below there at 579.1. 

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