The end of last week was marked by a consolidation in stocks, a spike higher in gold and silver, rising U.S. Treasury prices, and continuing weakness in financial stocks. The European stress test (part deux) was released late Friday and eight banks in failed. Many more details were laid out in the report and analysts spent the weekend crunching the numbers to calculate their own outcome.
This week is sure to be marked with much back-and-forth from politicians in Europe as they wrestle with Italy, Spain and other bailout candidates, as well as in the U.S., with the debt ceiling deadline inching ever closer.
The nervousness among investors remains most clearly seen in sovereign bond spreads and in bank stocks. Both JPMorgan Chase (NYSE:JPM) and Citigroup (NYSE:C) failed to sustain the initial enthusiasm upon release of their earnings last week, and Citigroup, in fact, closed near the lows of the day on Friday. Those aren’t bullish signs and we remain looking for near-term bottoming clues in bank stocks.
The consolidation of stocks has now brought the S&P 500 Index down to a support area between the 50% and 61.80% Fibonacci retracements of the rally that began in late June. The index should hold this area between 1300 and 1315 on a daily closing basis if it wants to keep a higher probability of moving up again over the coming weeks.
On the other hand, we first need short-term seller exhaustion before adding defined long exposure. For example, the stochastics oscillator on the daily chart of the S&P 500 dating back to early May doesn’t give us any divergence between prices yet, which is something I would watch for to detect a bottoming process. Of course, we don’t need a divergence – rather, it is merely something to look for. But we do need either a good up day or major short-term wash out day to get a higher probability setup to add to longs again.