As I mentioned in my entry of June 8th the markets looked prime for a fall. After the Spanish bailout was announced there was a brief rally but the markets then headed lower. Today rumors that the world’s central banks are going to backstop Europe caused the major averages to complete the formation of a bullish inverse head and shoulders pattern on the major indices.
If we use the SPY as an example, the head is at 127.13 and the neckline is at 134.25. A breakthrough of the neckline yields a projected target price of 141.37 which is close to the market top reached on April 2nd. The technical indicators are bullish. The RSI is above 50 and rising, positive momentum is increasing and the stochastic is overbought. The stochastic will stay overbought in rising markets so this rally looks like it is just beginning.
The VIX on the other hand has formed a bearish head and shoulders pattern. The head is at 27.73 and the neckline is at 20.83. A penetration of the neckline yields 13.93, roughly the March 16th low. The RSI is below 50, the stochastic is weak and on a sell signal and the MACD is turning down with increasing negative momentum. There is support at it’s 50 day ma which is where it is resting now and uptrend support at 19. A nice breakdown below both levels would confirm the uptrend in the overall market.
The markets are obviously anticipating a huge coordinated worldwide central bank move regardless of what happens in Greece over the weekend. Even the central bank of Canada checked in on Friday. If things don’t work out as planned however the markets could take a nosedive. Therefore we are either looking at S&P 1400 or S&P 1200 in the near future.
Gold has been acting bullishly ever since it bottomed in May. GLD is at the crossroad of the downtrend from the March major top and the intermediate minor tops. There has been talk that collateral for bailout funds for European banks will at least be partially backed by gold. If true this is an admission by central bankers that gold is a valuable asset such as real estate and this action can only be bullish for gold. If GLD can break through the current down trend resistance it should make a run to at least 174.
Conclusion: Right now is a dangerous time for both bulls and bears. If the central banks come through with their plans to prop up the European banks with liquidity the bull market should resume. If they fail to act then my original projection of S&P 1200 looks like it will be in the cards.
I seriously doubt that central banks and the Fed will allow the world financial system to fall apart so consequently they will do whatever is necessary to prop it up. My impression is that the market wants to rally and the correction may be over. All we need is some good news out of Europe and another round of QE3 to get the markets moving in the right direction.