No Change in Trend But Perhaps a Temporary Short Covering Bounce

OVERNIGHT CHANGES THROUGH 6:05 AM (CT): S&P 500 +690, DOW +56

While the market is showing some initial recovery action in Europe and in the early Wednesday US action, we get the sense that the bounce is mostly a technical balancing move and not a sign of improved sentiment. However, with the Euro climbing slightly in the wake of a 3 month tender overnight, there is a tempering of anxiety toward the Euro zone situation, which still looks to have a major crossroad on Thursday when the 442 billion in 1 Year Euro loans become due to the ECB. In short, the tender action tempers anxiety, but to see the market shift back into a definitive upward track on the charts probably requires a sweep of better than expected US numbers or news of a return to quantitative easing by the US Fed. However, given the ongoing high anxiety levels in this market, news that the Fed is moving to turn back on the stimulus, might initially undermine investor sentiment. Therefore we can't rule out a weak attempt to rally today and in the event that the Euro zone debt is rolled over without incident, it is possible that the US equity market could end this week with a series of gains, as the equity market can sometimes get a lift into the 4th of July holiday.

S&P 500: In the last COT positioning reports, the S&P was net spec short in excess of 20,000 contracts. Since the COT report mark off date, the September S&P was down as much as 60 extra points and that has to leave the S&P futures at the most oversold spec level since the early part of 2008. While we aren't confident in the US economic outlook improving its data anytime soon, we do think that the Euro zone fear is overdone and that the stock market might bounce into the July 4th holiday window. Therefore traders might consider the purchase of July E-Mini S&P 1080 calls for around 11 points.

DOW: We aren't overly optimistic toward the equity market today, but we do think that the market has made too much out of the Euro zone debt rollover situation. However, we aren't as upbeat on the pace of the US economy, or we would be interested in playing for an upcoming bounce in a long futures play. Nonetheless those that want to make a bet on the trade getting beyond the Thursday Euro repayment window and into a positive pre-holiday mode, might consider the purchase of E-Mini calls for a 2 to 3 day long side play. Given the risk from the Euro zone situation, the use of calls is advised over the use of long futures.

NASDAQ: The Nasdaq is showing signs of a corrective bounce but unfortunately we don't see the prospect for a dramatic shift in sentiment. However, we do think that the market has over extended on the downside off the Eurofears and that a bounce might be in the cards over the coming 36 hours of trade. In fact, seeing the September Nasdaq regain the 1780 level could prompt some technical stop loss buying. As suggested in the Mini Dow coverage, we like the idea of a risk defined look at the long side through the end of the week and that suggests the purchase of near to expiration just out of the money call options.

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) 06/30/2010: Stochastics trending lower at midrange will tend to reinforce a move lower especially if support levels are taken out. A negative signal for trend short-term was given on a close under the 9-bar moving average. There could be some early pressure today given the market's negative setup with the close below the 2nd swing support. The next downside objective is 1000.00. With a reading under 30, the 9-day RSI is approaching oversold levels. The next area of resistance is around 1057.50 and 1088.00, while 1st support hits today at 1013.50 and below there at 1000.00. 

S&P E-MINI (SEP) 06/30/2010: Momentum studies trending lower at mid-range could accelerate a price break if support levels are broken. The market's short-term trend is negative as the close remains below the 9-day moving average. The defensive setup, with the close under the 2nd swing support, could cause some early weakness. The next downside target is now at 999.38. The market is approaching oversold levels on an RSI reading under 30. The next area of resistance is around 1057.50 and 1088.37, while 1st support hits today at 1013.00 and below there at 999.38.

NASDAQ (SEP) 06/30/2010: Stochastics trending lower at midrange will tend to reinforce a move lower especially if support levels are taken out. The close below the 9-day moving average is a negative short-term indicator for trend. The market is in a bearish position with the close below the 2nd swing support number. The next downside target is now at 1692.82. The 9-day RSI under 30 indicates the market is approaching oversold levels. The next area of resistance is around 1805.12 and 1861.31, while 1st support hits today at 1720.88 and below there at 1692.82.

DOW (SEP) 06/30/2010: Declining momentum studies in the neutral zone will tend to reinforce lower price action. The close below the 9-day moving average is a negative short-term indicator for trend. The defensive setup, with the close under the 2nd swing support, could cause some early weakness. The next downside objective is 9851. The next area of resistance is around 10060 and 10167, while 1st support hits today at 9902 and below there at 9851.

MINI-RUSSELL 2000 (SEP) 06/30/2010: Momentum studies trending lower at mid-range could accelerate a price break if support levels are broken. The market's short-term trend is negative as the close remains below the 9-day moving average. The market is in a bearish position with the close below the 2nd swing support number. The next downside objective is 586.8. The next area of resistance is around 629.7 and 652.9, while 1st support hits today at 596.7 and below there at 586.8.

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