Submitted by Mark Hanna
Courtesy of MarketMontage. View original post here.
Thus far there have been two breaks of channel from the mid November lows in the S&P 500. Unlike the two channels in 2012 these breaks have yet to mean anything as they have only led to sharp rallies afterward. The Cyprus news everyone in the financial news media is hyperventilating about does not look like it will break the current channel at the open, but certainly take stocks to test the bottom of it near 1540. This after just missing the 1565 target that the most recent mini inverse head and shoulders formation targeted. There is a gap at 1525 (not shown in the chart below) that is also an obvious “fill area” if the channel breaks.
There is also a secondary, more important “line in the sand” I connected in purple above with the lows of the last 3 significant dips; this measures around 1520 currently.
So as with any selling one wonders if its a pause that refreshes or the start of something new. Unlike the period at the last channel break in mid February safety sectors have not been leading of late, this is simply a news out of left field event so we’ll see the reaction to the news. European markets are not being crushed or anything so it seems at this point to just be knee jerk reaction selling for now.
While I don’t think anything done in Cyprus sets precedent for any other country that is what the market will worry or not worry about in the days ahead. Keep in mind there have been years of bailouts for every country not named Iceland and none involved depositors. What do Iceland and Cyprus have in common? They are tiny. They are not too big to fail. They are the only times some semblance of market forces are allowed to work because any larger entity – whether bank or country – is too important to the system. So the precedent and lesson is easy to learn – stay big and get bailed out, be tiny and it’s not so simple.
Back to the U.S. we have a FOMC meeting where nothing is expected to change and some economic data, especially in housing (starts and existing sales). This is the meeting the quarterly press conference happens so expect the market to move Wednesday on Bernanke’s Q&A. Global flash PMI data also comes in Thursday, so watch China and Europe there.
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Any securities mentioned on this page are not held by the author in his personal portfolio. Securities mentioned may or may not be held by the author in the mutual fund he manages, the Paladin Long Short Fund (PALFX). For a list of the aforementioned fund’s holdings at the end of the prior quarter, visit the Paladin Funds website at http://www.paladinfunds.com/holdings/blog
