Rally Suffers a Setback

After an early pop based on [non]news that China would allow it’s currency to fluctuate a bit, this week has gotten off to an ugly start (for equity longs). Two consecutive days of retreat capped by a nasty drop into Tuesday’s close have brought the SPX back under the 200 day. Market breadth was very poor, and there are no major divergences to encourage us.

Looking at inter-market data, there is a clear return of the now familiar risk on / risk off trading pattern – equities and commodities down, the Dollar and Treasuries up. The 2 year auction sold at astonishingly low yields yesterday. A simply awful housing sales report appears to have spooked the markets.

With deflationary winds still blowing, and stoking fears of a double dip recession, the Fed policy meeting getting underway today should bring little change, and isn’t likely to move markets – barring some surprise. If there is a surprise, my guess is on the side of easing.

Bulls and bears are fighting it out here, so open positions should be watched carefully. As Dave Fry notes, the SPX looks like it is forming a “head and shoulders top” which is bearish for stocks. I am quite bearish on the broad indexes in the longer term, but long for the near term, mostly in oversold energy stocks. Near term support should be in the 1085 area, which is our low so far today. If it holds we can feel more confident, but if it breaks, we will probably re-test the lows in the 1040-1050 range.

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