Bailout and Technicals Say Be Open To Stock Rally

By: Chris Ciovacco | Mon, Jun 11, 2012
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The markets made some progress last week based mainly on speculation a bailout for Spanish banks was coming soon. A June 9 story from the Wall Street Journal confirms the high probability of a bailout-related statement before Asia opens on Sunday night:

Euro-zone finance ministers will discuss a commitment to provide as much as €100 billion ($125 billion) in support for Spain's ailing banking sector on Saturday afternoon, an official from a euro-zone country said, as the currency union hustles to contain its worsening financial crisis. The official said senior finance-ministry officials spent Saturday morning and early afternoon preparing a draft statement that ministers would discuss during a conference call.

We all know stocks gained last week, but just how much progress did the markets make? From a technical perspective, maybe more than most want to believe (there are a lot of bears out there). When analyzing markets, the most important thing is price - all other indicators are secondary. Since May 23, the stock market has made some strides in an attempt to find a bottom. Recent price action in stocks reduces the probability of reaching new lows in the days ahead.

The chart of the S&P 500 below clearly shows the bulls making progress in terms of support/resistance and basic trends. On Friday, June 9, the S&P 500 closed above the downward-sloping red trendline near point C (see below). Notice how the slopes of the red parallel trendlines have improved relative to the blue parallel trendlines, which is indicative of a weakening downtrend. On May 23, the S&P 500 cleared the pink-dotted trendline near point A - this was the first sign of strength. On the subsequent decline in stocks, the market held above that same pink trendline (near point B). The pink trendline was originally resistance (to the left of point A). Now, the pink trendline is acting as support, which is a step in the right direction.

It should be noted the S&P 500 has not yet met the standard of a trend change. When the pink trendline was broken at point A, price went on to make a lower low. In the chart above, stocks have not made either a higher low or higher high - both are required for an uptrend to be in place.

Moving back to the European front, Reuters also hinted at a statement coming this weekend, but left the door open to further delays:

Several EU sources told Reuters on Friday that Madrid was expected to ask the currency bloc for help with recapitalizing its banks this weekend, becoming the fourth country to seek assistance since Europe's sovereign debt crisis began...Spanish Industry Minister Jose Manuel Soria repeated on Saturday the government's argument that it should not act until it sees a separate audit of the banking system due by June 21 from two independent assessors, Oliver Wyman and Roland Berger.

The market faces a test in the first hour of trading on Monday. If stocks can produce positive results early in the week, we will become more open to redeploying additional cash. Regardless of whether or not stocks go on to make lower lows, we have seen enough evidence to continue to update our list of potential buy candidates. Friday's close tells us to be open to more upside. In a news-driven market, things can change quickly in either direction. If we pay very close attention to what is happening, rather than what we think will happen, we will be much better off.

The video covers traditional and DeMark charts as of Friday's close. When in full screen mode, you can make the charts clearer by adjusting the resolution in the lower right corner of the video player.

Spain has been very reluctant to ask for help. It would not be surprising to see them take more time to commit firmly to a bailout. From Fox News:

Spain has denied already putting in a request for outside aid for its banks and on Friday Soraya Saenz de Santamaria, the deputy prime minister, said no decision had been made on recapitalizing bad loan-saddled institutions, adding that the government was awaiting reports from the independent consulting firms due on June 21.

The charts below allow us to see the subtle changes in market behavior that occurred last week. The thin colored lines are various moving averages that help us filter out some day-to-day volatility and focus on the short-to-intermediate term trends. In early May when the current downtrend began to accelerate, the band of moving averages clustered together and then turned down in a bearish manner (near point B below). The S&P 500 broke below the moving average cluster near point A, also in a bearish manner. The moving averages acted as resistance below point C, reinforcing the downtrend. The chart below is as of the close on Monday, June 4 - the bears were in full control.

$SPX (S&P 500 Large Cap Index) INDX

By the close on Wednesday, June 6, the bulls made some strides with price closing over the moving averages (below green arrow). Notice the moving averages began to broaden out, which often foreshadows a sharp move in price.

$SPX (S&P 500 Large Cap Index) INDX

On Thursday, the bears clawed back the gains made early in the session. The moving averages flattened out showing an even battle between up and down trends.

$SPX (S&P 500 Large Cap Index) INDX

Friday, the bulls put their stamp on the week. Price closed above the moving averages (now support) and some of the moving averages began to turn up in a bullish manner.

$SPX (S&P 500 Large Cap Index) INDX

Does this series of charts mean a bottom has been put in place? No, but it is a step in the right direction. A new trend has to start somewhere. From a technical perspective, the trend remains down until we see a significant higher high and a higher low.

How does this help us? It means we need to be open to either (a) a bottoming process that takes some time to form, or (b) that a low is already in place. To us, it means spending time over the weekend making sure we are prepared should last week's trend continue. We anticipate our short list of buy candidates will include foreign stocks; possibly India (EPI), Germany (EWG), or emerging markets (EEM). We will be keeping an eye on precious metals (SLV) and commodities (DBC) over the next few weeks. It may be early on both the stock and commodity fronts, but not too early to be prepared to "buy low".



Chris Ciovacco

Author: Chris Ciovacco

Chris Ciovacco
Ciovacco Capital Management

Chris Ciovacco

Chris Ciovacco is the Chief Investment Officer for Ciovacco Capital Management, LLC. More on the web at

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