- Thursday just a blip as market suffers more relative carnage.
- VIX trying to break its range.
- Big Bank Tax may not be 3%. Time to celebrate?
- Exxon discovery should help our leaders discover we can wrest energy independence from our enemies versus taxing gas an extra dollar to make us buy cars we don’t want.
- Market again oversold, approaching next resistance. Another downside move to start the week sets the stage for a better relief bounce.

MARKET SUMMARY

If only Thursday had sold some more . . .

It appears that Thursday was just a blip on the screen or a relief valve. It released some of the downside pressure after it tapped the bottom of the SP500 trading range and faded. Friday there was simply more carnage to the downside. Stocks opened lower as the premarket indicators were all down. It sold off hard and tried to rebound. They did cut their losses to less than 1% in the afternoon. Then, as quickly as they rebounded, they turned parabolic and sold off close to session lows. NASDAQ, -1.5%; SP500, -1.4%; Dow, -1.4%; SP600, -1.6%; SOX, -1.7%.

There were even butt-kickings across the board. Looking at the indices, there was a complete reversal of that blip to the upside. The market made it seven out of eight sessions to the downside and sharply sold. If Thursday had opened similarly to how Friday opened, we would likely have a rally ongoing as of Friday. The problem is that Thursday started higher and it did not finish the job. It was kind of like Desert Storm. We kicked the Iraqis back to Iraq and had them on the run. We could have destroyed the entire army, but we decided not to. Then we had to come back later to finish the job — although that is debatable. It did not finish the job with the selling on Thursday. Instead it started to the upside which let all of the pressure off. When no good news came, the market sold one more time.

Just like that, the market is once again as oversold as it was on Wednesday — indeed, even more so. The SP500 is down 7.3% in a six-week period since it peaked in late April. The selling has been back-end loaded with the past two weeks delivering most of the carnage with a 5.5% loss to start June. In the bigger picture, this is not major. It is not even a 10% correction level. Consider the impressive run out of August 2010 that no doubt started with the Fed coming in with its QE II. This selling is not even taking the market back to the March reaction low after the Japan earthquake and tsunami. Even though you can say this is nothing in the longer run, this is a significant selloff in the short term. It does not mean the market is not down hard and oversold based upon these past two weeks.

The pattern does not look that promising overall. There is a potential head and shoulders here, but I have a big caveat with that. Head and shoulders in the indices are not reliable patterns. Everyone likes to cite them and everyone can see them forming a long way off, but they typically are not reliable. You have to look over years for the indices to really see major tops called by head and shoulders. Looking at a weekly chart, there is this topping point. This is significant. There is a potential left shoulder and potential head — they are only potential at this point. They are forming at other past support and resistance levels. That is always something to watch bigger picture.

I will get back to near term. The news on Friday was that the big bank tax may only be 2.2-2.5% versus the 3% originally discussed and endorsed (unfortunately) by Ben Bernanke and the Federal Reserve. The fact that a lower number was leaked helped “rally” the financial stocks. They were up on the day. That would have helped trigger a move upside in the market if the pipes had been flushed out properly on Thursday. Some people may say that is just speculation, and it is. It is just a theory since it did not happen, but I have seen it happen that way many times before. You have to finish the job.

What is likely to happen? There is more work to be done. No doubt that the rubber band to the downside is stretched over the near term. You have the indices breaking the old trading range and then closing in on the March lows. NASDAQ is close to its 200 day EMA and the SP500 is getting there. If things work out correctly — and that may seem perverse to you at first when I discuss it — we would see a further selloff on Monday and maybe through Tuesday. I would expect to see a turn at some point either on Monday afternoon or on Tuesday. That would be near the March reaction low to the Japan tsunami back in this range around the 11th of March. The move down to that point would coincide roughly with the 200 day EMA on SP500. If we get that, we should have a reversal and a very legitimate, tradeable rally that would take the indices back up towards either the early-April peak or the February peak where the SP500 failed two weeks ago and started this tumble to the downside.

Again, any rally likely will not end up at a new high. It will fail at this important resistance range and start to roll back over. It will likely give a pretty decent, reliable rollover signal. I say that noting that in February the market just gapped lower. Again in the start of June, it rallied right up to the start of the month and then showed an engulfing pattern the next day. You may get that kind of a signal, but you know to be on watch when the market gets back up into the range described.

MONDAY

Next week is a full week. As far as news, economically we have Retail Sales out on Tuesday. The PPI is also out on Tuesday. CPI and New York Manufacturing are out on Wednesday. Also out Wednesday are Industrial Production and Capacity Utilization and Inventories. On Thursday we have Initial Claims followed by Housing Starts and Building Permits and our current account balance. The Philly Fed is always important. On Friday we have Michigan Sentiment and Leading Indicators.

Some of the polls out like the Rasmussen Poll show that Consumer Confidence dropped eight percentage points just in the past week. Of course, that came after the jobs report when everyone was concerned about the state of economy. It is very important data, and it is having an impact on the psyche of the American citizen. There are the high gas prices, weakening economic conditions, and the stock market selling back. Things are piling up, and it does not help the already beleaguered consumers when Sentiment starts to decline. The economic calendar tonight is courtesy of briefing.com.

I believe there will be some continued downside to start next week. After all, the market closed just about on its low on Friday. It was looking very weak and unable to rebound and further the Thursday move. Thursday was a flawed move because instead of opening lower and clearing the system for a move higher, it opened higher. That just invited the sellers to come back in. Indeed, they invited their cousins and aunts and uncles, too; they all crowded in and pushed volume to the upside on the Friday downside session.

I do believe that there is an oversold condition that will be released to the upside. That is why we were taking a little bit of gain on Friday from some of our positions. We will let the others (SPY, QID) continue to the downside. If this baby rolls as I think it will and starts to bounce back up, on Monday we will take some more of those gains. At some point on Monday afternoon or Tuesday, if it starts downside, it will start to make the turn. We can then close out some more of our gain on our downside positions. Then maybe we can take some upside positions once more and see if they will work this time.

I believe there is a tradeable rally coming off of this. I have seen it many times before in these kinds of setups. It does not mean it will move to a new high or take out the old highs. It just means I think will it bounce from around the 200 day EMA on SP500 back up into the early-April peak or the early-March peak. It even could be the February peak before it would stall out. That is a very tradeable move that can make us money. We close out our downside, after a good surge that is down again, that comes near the March low or the 200 day EMA and starts to hold and looks like it will bounce. Then we can pick up some upside. We let our continuing upside plays run. The ones that are holding after this kind of carnage will locally hold up. Many on the report are doing that. They may give another head fake down through support, but then they reverse. The odds are they will reverse after this kind of selling and at least give us a better exit point. We might do quite well on some of them.

We will let them rally. When that move peaks out, as I would expect in this range, then you sell those that are not some of the aberrations that are just holding up well and are streaking higher. Then you get ready for a downside play again. That is the market we have. That is the life we are living now, given that the trend to the upside looks to be in jeopardy. It is in jeopardy for a number of reasons. There are weakening economics and a Fed that will not go on with a QE III. It should not do that. This move, and indeed the move before it back to March 2009, is all rather false. It is all a liquidity move fed by the huge injections of liquidity that the Federal Reserve has put in the system.

We have not had any real economic growth to justify this move. Economic growth is stalling. There are two sides to this story. It is either fading into oblivion right now, or this is just a summertime pullback and things will be better. In reality, it is likely somewhere in between. I doubt we are going into a Great Depression, but things could be very ugly given the food situation as I discussed in the Thursday report. There are other problems, too, like our debt. If we do not take major steps and get back to capitalism, we are likely to lose the dollar as the reserve currency. The dollar would then plunge, similar to when the British pound lost 90% of its value after losing its status as the reserve currency post-WWII.

It is not a pretty picture. If those scenarios transpire, it could get truly ugly. We just have to take things as they come. We have to play the market with what it gives. Right now it does not look great. It looks like it is topping out for a deeper decline. Before that, we know it will not go in a straight line. After this kind of selling, you get a tradeable move. That is what we will look for to the upside. Then we will play a tradeable run to the downside that may take out that March low and ends up giving back this entire December-February run. We will just have to see what it brings us.

Things are negative now, and we are going to play from a defensive, downside standpoint. We are looking to make money on runs upside and downside. Just being aware that we are not in this kind of trending market anymore. This is a bigger top. That was a quick top, rolled over, sold and went into a base. Here we tried to base, and that base broke out but failed. We have a bigger top here. Nothing like we have had on the move up off of the March 2009 low. That is what suggests something is significantly different this time around.

With that in mind, let us keep our heads in place. Know what the market is doing and do not get too upset about the fact that the market is up or down. Just use the market to make money. That is why we have the downside plays in place. We are using it to make money as it is sold. After we get this rebound, it will probably be a lot more downside, and we probably will not have much more upside. Although, there will be defensive areas we can play such as the healthcare stocks. They have been holding up well, and then there are others that may perform.

Energy might be a sleeper. It may be surprising how well it holds up because of the discoveries we have that show we still have a lot of energy around us. It may actually become popular in the US, if we can beat the propaganda, to try to gain relative energy independence using fossil fuels. The US citizenry could discover that we do have significant amounts of oil still within our borders. Of course we should not been giving our rights away to Brazil. The idea that we would want to sell our rights to them and then buy the oil back is insane. But a lot of what Washington does right now is insane; it makes insanity seem almost normal.

Long story short, energy could be positive. We will have to see what the market yields. We will see what groups hold to the upside that we can play in what looks to be an otherwise negative market in the foreseeable future. I am not talking about years out, but just as we plan for the summer and into the fall.