S&P 500 Declines Almost 70 points in 3 days. Will the Bloodbath Continue?

As expected, the Fed didn't announce a reduction in QE, but Bernanke did say there was still a possibility the Fed could start tapering its asset purchases later this year. The markets sold-off pretty much any and every asset class in response.

This sell reaction was stronger and more immediate than I expected. If Bernanke and the Fed were trying to gauge what type of psychological effect that the idea of reducing asset purchases would have on the market, I think they just received a rather rude answer.

Whether the selling was directly in response to the possibility of the Fed tapering before the end of the year or if it was just an excuse to push down an overbought market, the reaction was irrational in my opinion. I had actually speculated that we might see an initial response of buying that would follow the Fed announcement, but it never happened. There was no fake-out to the upside, the selling started immediately and hasn't really let up.

While price action is bearish, I do not expect the selling to continue without at least a solid bounce to the upside first. I unfortunately got stuck in a long position that has yet to give me the right opportunity to exit. Because I believe the market will reflect on the last few days of irrational selling with a rational frame of reasoning, I continue to hold my long entry in anticipation of a bounce. Friday's rebound off the lows signals that there should be additional room to move to the upside. I will look to sell 1/2 my position with a move back above 1600 on the ES.

In my last post, I mentioned a potential bottom of any correction in the 1555-1565 range on the ES (U13). That price range is not far away so it is very possible the ES trades down to my key support before we get a decent bounce. I do expect to see buying come in before that happens, we'll have to wait and see.

Bonds
I've spoken about bonds on a few occasions in the past weeks. Each time, I was looking for support to come in and each time support has been broken. Bonds have now traded lower than the most critical support level at 110 on the TLT. This break of support was not only the 3d break of a possible support level in the last month, it was also on very high volume. This is a high odds indicator of capitulation. It will be important to see a daily close back above 110 (TLT) on Monday to gain confidence in the likelihood of a reversal.

Gold
Fear of tapering by the Fed has also sent the price of Gold lower. While the price action in Gold remains bearish,  I will be watching for a capitulation type move somewhere in the 1150-1250 price range on the YG (Q13 Gold Futures Contract). I will strongly consider  buy entries when that happens.

The bottom line is that fear is rampant across most asset classes and when fear grips the minds of market participants, its often the time to take the reverse bet. I'm not suggesting to get bullish for any extended period of time, but I expect positive price action in the near-term.

Levels to watch on the ES (U13 Sept Contract):
Resistance above at: 1596-1597, 1601-1602, 1611-1612, 1618-1619, 1623-1624
Support below at: 1570-1571, 1565-1566, 1557-1558, 1554-1555

Back Above 1400 on the ES

After feigning weakness with three straight days of declines last week, buyers stepped in at the end of the week. The ES rallied 14 points off the low on Friday. That rally continued last night and got an added boost when Ben Bernanke mentioned (in comments this morning) that the Fed must consider more accommodation to aid the recovery. The ES quickly rallied an additional 5 points. Gold, which has struggled a bit lately, surged more than 1.2% immediately following the comments.

Levels to watch today on the ES:
Resistance above at: 1403.75-1404.75, 1408-1409
Support below at: 1399-1400, 1396.50-1397.50

Market Awaits News Out of the EU Summit

Markets saw some selling yesterday. Some contributors to the negativity? Rumors that today's EU summit would be canceled or postponed? Very low consumer confidence rating in the US? Ultimately it was just corrective action following a nice run-up in price. The ES didn't quite get to my 1258 target (3.5 points shy) and the fact that the move above 1237-1240 did not confirm with a consecutive higher close, suggests we may see a little bit more selling before continuing higher.

Overall I continue to be biased to the upside as I think the downside potential is limited. There is pretty good support currently in the low 1220s ES. If that breaks down we could see a move to 1210 and potentially as low as 1200, but that is a price level I will look for long opportunities.

In reality though, these levels don't mean too much as the catalyst to market action will be driven by information coming out of the EU summit later today. Look for headlines to break at or after 1:00pm EST. It is still too soon for any substantial plan to be finalized, so the key will really be to see how much cooperation and agreement there is between Eurozone financial leaders and the level of optimism at reaching a solution.

I'm on the fence right now as to how optimistic the headlines today will be. I think there is a chance that contentious viewpoints may result in more market uncertainty. Ultimately a solution will be reached, I just don't know how close they will be to that solution after today's meeting.

My overall bias continues to be bullish. I think a move down into the 1200-1210 range on the ES would be a nice buying opportunity. Looking ahead, I see a potential topping point around 1270-1275 ES where I will begin to consider short positions. We'll see how things play out.

Just want to mention the surge in the price of Gold yesterday. This is very bullish for the yellow currency metal as it closed above 1700 and above key resistance at 1688. This bullish action in Gold may be speculation that the ECB will print Euros to help fund the EFSF bailout fund. In any case, support will now have to hold in the 1680s before Gold can continue higher.

Nation in Panic Mode. Time to Buy?

S&P downgraded US debt on Friday evening and the markets gapped down big to open the Globex session last night. The final day of trading last week saw the largest volume since the 2008 financial crisis and that was on top of huge volume already traded in the preceding days. What popped out the most in my mind though, was that the markets finished almost flat on the day. This means that there were almost as many buyers as there were sellers when it was all said and done. That's a lot of buyers in what appears to be a doomsday market environment. I see this as a sign of pretty significant support forming.

Talking to people in the streets, panic is clearly in the air. I returned a rental car today and the gentleman behind the counter asked me if I heard anything about the markets. He was nervous the world was coming to an end, or at least the financial stability of the United States.

With fear in the minds of the masses along with the current market action, I can't help but feel there is a buying opportunity upon us. I will be looking for long opportunities today. There is currently support below 1170 on the ES. I still see 1150 as a potential level that could be hit. If that happens and support holds, I will be very quick to get long. I won't defend longs however if a rally doesn't begin soon after. That's what I am looking at as I write this, let's see how the market opens this morning...

Gold and Silver Futures looking strong as well. This is no surprise as rumblings come out of Europe that the Central Bank will buy Italian and Spanish bonds in an attempt to curtail the sovereign debt debacle (Europe's version of QE). Will the money printing ever stop? Probably not until fiat paper is worthless...

The Manipulation Makes My Stomach Turn

I don't have the facts yet, but seems we have more margin hikes on the precious metals. Perfect timing as the market hits a critical low. Force money out of the metals so it can flow back into equities. More on this later... Just thinking out loud without all the facts.

The Senate Will Vote Today to Pass a Debt Ceiling Deal That Nobody Likes

I have been travelling of late and so have not been posting much. However, I wanted to comment on the Debt Ceiling.

Yes, the debt ceiling will be raised following the Senate's approval, no surprise there. Economic data, however, remains weak and the debt ceiling deal is no solution.

Growth rate estimates for 2nd quarter GDP show an abysmal rate of 1.3%, unemployment continues to be a problem, the ISM manufacturing data was terrible as released yesterday, personal income and personal spending levels have come in lower than expected, and looking back to 2008, all prior stimulus programs have thus-far been failures. The current debt deal does nothing to solve any of these problems. The bill does propose to cut $2.4 trillion in Fiscal spending over the next decade, but none of these cuts go into effect until 2013. The popular phrase of late, "kicked the can down the road," applies here. The majority of the bill is just rhetoric. Spending cuts are in the writing, but that doesn't mean they will be executed. In the end, the US government is enabling the country to go into more debt. Of course it would, the United States would not be solvent otherwise.

In any case, market is currently weak. Markets should see a short-term rise from over-sold levels following the rise in the debt ceiling, but overall the market is showing significant weakness and I expect lower lows on the horizon. Its a volatile summer. Be careful if you are trading on highly leveraged accounts. You don't want to be forced out of a solid position because of a margin call.

On a side note, gold and silver continue to hold up well amidst the uncertainty. South Korea’s central bank bought 25 tons of gold over the past two months in its first purchase in more than a decade. South Korea has joined a growing list of Central Banks who are purchasing gold as a hedge against inflation. Interesting to think about for those who consider precious metals a bubble commodity.

Up, Down and Repeat... Will There Be a Sustained Move and in Which Direction?

As long as there continues to be uncertainty in regard to the US Debt Ceiling, QE3 and the risk of default on sovereign debt in the PIIGS, the markets will continue to swing up and down with speculation, optimism and fear.

There will likely be uncertainty around these topics throughout the summer. The reason I expressed concern (in the previous post) that the market could see another leg down, is because the commodity complex continues to have the potential to correct further. It would be in the Feds best interest to see this happen because it would support their case that inflation is not a problem and that, in fact, deflation is the concern. Falling commodities and a weakening stock market would be the easy catalyst for the Fed to move ahead with more stimulus. It doesn't mean another move down is inevitable, but it presents the possibility. If so, it will be a buying opportunity. The market will eventually move to new highs, but until we see some sort of confirmation that the debt ceiling will be raised and/or that the Fed will confirm another round of stimulus, the timing of catching the move will be uncertain.

Worth Mentioning
In the FOMC minutes from yesterday, some participants supported that there could be a need to provide additional monetary policy accommodation. Reaction sent the markets ripping higher yesterday morning, but the gains were not held as the choppy action continues.

Precious metals also ripped higher in reaction to the Fed comments. The difference with the metals is that they have been holding their gains. Bernanke and the Fed would prefer this not happen as they will have to find new ways to skate around the fact that inflation is not a concern. Good luck with that. With sovereign debt fears in Europe, inflation fears in China and Brazil and a continuation of loose monetary policy by the Fed and other Central Banks, global interest in the precious metals is only growing. The metals can be a risky and volatile asset to trade, but looking into the future, they are the safest asset to own. I like buying the dips in the metals for as far as I can see.

Current overall market bias: Expect choppy action to continue.