Today's new low occurred on lessening downside breadth, dwindling down volume and a decrease in NYSE Ticks (intra day). There was also a clear divergence at today's low between the VIX, which remained beneath its May 21 extreme (48.11), and both the Dow and S&P, each of which made new intra day lows beneath the lows of that day.
There remains an open gap at 1115.05 in the S&P from May 19 (10,444.40 in the DJIA). Prices may try to fill this gap before rolling back to the downside. A 60% retracement is 1120 (S&P), which is just above the late high on May 19 (10,488.00 in the DJIA). So the rally should ideally end in the 1090-1125 area in the S&P and the 10,200-10,522 area in the Dow. A break of 9853.30 in the Dow and 1050.93 in the S&P would indicate that another selling phase to even lower lows was underway.
Current head winds in the Euro zone offer considerable headline risk. A crises of confidence can arise at any time, and derail any short term rally. Also the potential of escalating war of words in the Korean peninsula can destabilize markets and the world economy at any time. North Korea's clear act of war has gone under reported.
Markets in my view have not properly priced in the true effect of rising taxes on small business, or the cost of increased regulations and the effect on future employment. The Presidents threshold of $250,000 for higher taxes will impact the small business sector more then any other. With no bailout or access to capital because of higher lending standards, I expect additional layoff's to come in 2011.
Hang on to your seats, because this ride is not done.
Eduard Hamamjian
GeaSphere LLC
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