New Support Zones Following Egyptian Crisis

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Several weeks ago, we saw a ripple of concern hit the world stock markets as China moved ahead with programs designed to slow their economy. Then, just over a week ago, it was reported that Tunisia was embroiled in a revolution that some said could spread to the moderate countries of the Middle East. Several of the major indices (S&P 500 and Nasdaq) suffered their first weekly loss after eight consecutive gains. But on Friday, when Egypt erupted in revolution, the fear of a major reversal hit the U.S. and world’s markets with a burst of equity selling not seen in months as investors headed to safety while oil and gold surged.

Daily Stock Market News

Dow: -166 at 11,824
S&P 500: -23 at 1,276
Nasdaq: -68 at 2,687

Volume and Breadth

NYSE: 1.3 billion; decliners ahead 5.2-to-1
Nasdaq: 645 million; decliners ahead 5.1-to-1

Futures and Related ETFs

March Crude Oil: +$3.70 per barrel at $89.34; Energy Select Sector SPDR (NYSE: XLE) -31 cents at $71.11
February Gold: +$22.30 an ounce at $1,340.70; PHLX Gold/Silver Sector Index (NASDAQ: XAU) +0.91 points at 202.83

What the Markets Are Saying

For weeks, I’ve warned that it was unforeseen crises in very overbought markets, as measured by our internal and sentiment indicators, that could lead to a sharp correction. And on Friday morning, I noted that despite encouragement from the Fed’s purchases of Treasurys, the major indices were “hemmed in by sellers at the psychologically stiff band of resistance at Dow 12,000 and S&P 1,300.” 

By Friday afternoon, the danger of such an “overbought” situation was made clear. World markets tumbled from heights that were the result of the Fed’s QE2 program and the European Central Bank’s injections of cash into the world’s security markets in an attempt to keep interest rates low. Their goal was to provide capital for growth in sluggish economies, but stock prices have been driven too high, too fast. And yet there were those who opined that as long as the Fed would buy bonds, the market would rise.

The real danger of sudden, deep corrections comes not just from overbought markets (with closely evaluated economic uncertainties that slowly turn sour) but from unforeseen calamities that smash into the best laid economic plans. The unthought-of of catastrophe of terrorists smashing into New York’s World Trade Center on 9/11 resulted in days of suspended trading and cratered a market that was primed for recovery following the dot-com bear market. And the surprise invasion of Kuwait by Iraq in August 1990 dropped stocks over 20% in less than a month. And then there is the May 6, 2010, “flash crash” of 1,000 points in six hours caused by “a market so fragmented and fragile that a single large trade could send stocks into a sudden spiral” (Joint SEC/CFTC “Findings”). Who could plan for such events?

On Friday, the stock market’s “fear gauge,” the VIX, leapt to the highest level in two months. Investors flooded the currency markets with orders for the U.S. dollar and government markets with orders for Treasurys. And gold jumped over $22.  As one trader put it, “Egypt was the catalyst in an overbought market” (The Wall Street Journal). There is now no current need for the Fed to lower rates — fear has done the job for them.

Where do the markets go from here?

This morning, the markets appear flat despite Moody’s downgrading of Egyptian bonds and a million-man march planned in Cairo tomorrow. But with 3% of the world’s goods and 33% of its oil sent through the Suez Canal, there is reason for concern.

Technically, the next support for the Dow industrials is at the 20-day moving average at 11,800, with 11,740 being a stop-loss point for traders. But the zone 11,545 (50-day moving average) to 11,450 is the major support zone and a penetration of that zone would cause a change in trend. 

For the S&P 500, the first support at the 20-day moving average was broken on Friday, so the near-term trend is down. The next support is at 1,271 and then the major support zone at 1,260 to 1,225 with the 50-day moving average at 1,250.

The technical signals are very clear: Investors appear to be holding their breath waiting to see which way the political situation in Egypt plays out. But aside from that, there have been several technical violations and indicators are still overbought. Volume on Friday’s selling was the highest in more than a month. It is clearly time to be defensive. 

Intermediate investors should either take profits or write options/buy puts on long positions, and traders should be aggressive sellers. 

The SPDR Gold Shares (NYSE: GLD) are weak this morning, but could rally if the crisis deepens and close the gap previously noted at $132.10 to $133.40 where holders may cover their longs or, if the current Middle East crisis turns worse, even head up to the next gap at $136.28 to $137.88. Crude Oil is higher this morning with some experts saying that $100-per-barrel oil is very likely.

For a safe way to play oil and hedge Middle East tensions, see the Trade of the Day.

Today’s Trading Landscape

To see a list of the companies reporting earnings today, click here.

For a list of this week’s economic reports due out, click here.

If you have questions or comments for Sam Collins, please e-mail him at samailc@cox.net.


Article printed from InvestorPlace Media, https://investorplace.com/2011/01/technical-analysis-new-support-zones-following-egyptian-crisis/.

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