Looks like the rally option was the direction the market took. Was putting it at 50/50 so not surprised. I was not shorting into the close today though I sort of wish I was. We hit the 1100 to 1110 area I was looking for but thought going into the holiday weekend that there was a very good chance the market will be up tomorrow and possibly open up on Tuesday. Tomorrow would normally be a very quite day with a bias to the upside. You have the bond market shutting down early and traders who will not want to be short going into a long weekend. That scenario still probably holds but comments from the French Europe's Minister reported in the Financial Times could put a damper earlier than I thought.
In reference to the Eurozone 440 billion euro debt guarantee he said:
“It is an enormous change,” Mr Lellouche said. “It explains some of the reticence. It is expressly forbidden in the treaties by the famous no bail-out clause. De facto, we have changed the treaty,” he added.
Because we are going into a holiday I don't know if this comment will be front and center but those words seem to me like a bombshell. It is incredible that this would find it's way to print. In the Financial Times no less! Not only has German politicians used tremendous political capital to get what they already have but there are a couple of lawsuits working there way through German courts saying this whole thing is unconstitutional. Here you have the French minister basically making their case.
In all these things the question is always to ask what is going on behind the scenes. Not the headlines. Why the interview, why the word choice, why now? Germany seems to already be laying the ground to evict Greece from the EU (Germany's short selling ban), is this a move by France to start doing the same thing?
Anyway, that throws open how we trade tomorrow.
In general I think we have topped or are close to doing so with a move up to the 1010area very possible. I think the extreme scenario is a rally to the 1040 but that is lower on the probability scale.
Normally I would say we would be up tomorrow and at least open up on Tuesday. I would normally have no problem not adding short exposure tomorrow. However, things are not normal and the problem is everything relies on what happens in Europe. It is possible you walk in on Tuesday and news over the weekend sent Europe crashing down on Monday and is crashing again on Tuesday and the U.S. opens down 3% plus. I don't see that as a huge probability but it is possible.
I said yesterday there were three things to watch. Euro at 1.2150. The S&P at 1055. And the three Spanish etfs. Well the Euro moved up and well away from the 1.2150, S&P gapt open and never looked back, and Spain rallied hard. Of those Spain was what drove the other two.
I think that story continues. Spain is most important. I think you can move the 1055 up to 1080. If we start breaking the 1080 area, the likelihood is that is very bearish.
It is very tricky but I think the risk lies to the downside not the upside at this point. I got my rally and the last few days removed the extreme oversold nature. In fact one measurement, the NYMO, is less oversold than when the market was at 1173. Anyway, at this point it is timing. I could very easily see another day or week of sideways action that grinds higher but those words in the Financial Times drop that probability in my mind and raises the probability that we are done rallying.