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Greece Debt Default On Deck.... Stock Market Anxious...

Stock-Markets / Stock Markets 2011 Sep 10, 2011 - 12:24 PM GMT

By: Jack_Steiman

Stock-Markets

Late this morning, after the market started recovering from its early move lower to start the day, there was news from Germany that Greece was likely to default by some time next week. The Dow fell two hundred points in a very short period of time as traders and investors started removing themselves from long plays. Hard to blame them, of course, as this type of news, should it become fact, would be devastating for markets around the world. The market spent the rest of the day spinning and churning once we got to -300 on the Dow. There was no collapse past that initial move lower off the news, but no real rally either.


The bulls might want to say the market handled the news just fine considering the ramifications. The bears would say this is just the beginning, as once default becomes fact, you'll wish you were out of the market. The news from Germany put the masses in a defensive posture, but the fact that the news isn't a reality yet, kept things from getting out of hand. Nothing good can be said about today's action. It was a bearish day within the bigger picture bear market. We have yet to break down, and that's the one hope the bulls can hang onto momentarily.

But the pattern in place doesn't bode very well bigger picture as today's action put a big gap in place. Getting back through it will be incredibly difficult. This gap is also well below important resistance, so you could say today was rather damaging to the bulls. There's nothing positive to claim as far as I can see. Technical damage, along with fundamental damage, is not a positive by any means, even though we're still above key support. Today's action made the bear flag in place stronger technically. Today's action tells us all to be in a very defensive mode of playing.

So let's talk about these bear flags on the major index charts. Even though the flag runs down to 1101 in price, there's a trend line that runs right through S&P 500 1155, which is where we closed. A gap down below at some point would be very bearish technically. The dollar closed up powerfully and is in a bullish trend, but it's seeing 70 RSI's getting printed. If it pulls back briefly then the market could get a weak bounce up here and hold the trend line. But that may be short lived. The bear flags are mature, and my guess is that they get a lot more mature before they break down, except for the fact that we are dealing with the Europe news.

Bear flags have no real time table as to how long they can last. With sentiment as it is, the ones in place here could last for a few more months. They're already five weeks old, and thus, it's not impossible for them to break now with the right news. Again, Europe would be that right news. If Europe's default doesn't happen now, you could be looking at ten, or even fifteen, weeks before it gives way below 1101 S&P 500. So the pattern is maturing. It can run much longer, but the news will rule the day.

Some time needs to be spent here talking about the PowerShares DB US Dollar Index Bullish (UUP). It has broken out in a big way and is acting as if the lows are in for years to come. There was a time, historically, when the dollar and the market moved together. Those days are over for now. A strong dollar is not good news for this market. The breakout in the dollar is very significant. It took out all three key exponential moving averages in days. An amazing jump up that says the dollar should only strengthen overall for some time to come.

If the current correlation holds, this would be very bad news for the stock market. Yes, it is overbought, and thus, could pull back some in the very short-term. But the power and force behind this rocket-ride higher should be taken seriously when understanding where it wants to go medium-term, if not longer-term. Unless things change in terms of how the market has been moving, versus the dollar, things do not look very good for stocks for quite some time overall.
So, what's spooking the markets and where does the market go depending on what actually does take place?

There are really two issues that matter. Sure, there are the other headaches, such as no faith in our political leaders. That does have some effect on equities, for sure, but there are much bigger issues other than the lack of confidence in our elected leaders. The two issues at hand are: Europe and defaults, and the potential for the United States to go back into recession. Our leaders can continue to do a bad job, but if these issues didn't exit, the market would be exploding higher.

Issue number one is Europe. Greece looks ready to default. Germany warned everyone of this today, and although Greece denied its truth, there is no reason for Germany to put up the red flag if it didn't see it coming. Beyond Greece, there is the domino effect. Where there's smoke there's fire. If Greece defaults, the worry will then be who's next. Even if there is no other cause to panic, the belief that there could be others to come, will cause panic in the markets. Defaults are unacceptable for this, or any, market. And it doesn't look like any white knight in any kind of armor is going to be running in to save them this time. If they do default, and no one saves the day for them, it's lights out for global markets.

Issue two is right here in our country. Recessionary economic reports are coming in. Not all of them. The message is a bit mixed. The market seems to be waiting for more clarity on this issue. The markets here could not deal with a recession. P/E's would get smoked, and thus, so would the market. It's entirely possible that no one in Europe will default. It's entirely possible that we will not see a recession in the United States.

Nevertheless, the market is falling, but not crashing, because it's looking for more evidence as to the odds of what will take place. It doesn't like what it sees, but it also doesn't know for sure. So, it's hanging on by a thread. If both events come true, look out below. If only one does, it'll get nasty, but not insane. If neither occurs, the market will ultimately blast higher. The market sees bad outcomes, but only time will tell. We let the market tell us how to respond. Right now it says extreme caution is advised.

Peace,

Jack

Jack Steiman is author of SwingTradeOnline.com ( www.swingtradeonline.com ). Former columnist for TheStreet.com, Jack is renowned for calling major shifts in the market, including the market bottom in mid-2002 and the market top in October 2007.

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