Breach in the Hull! Stocks sinking like Titanic: April 9-13

The extreme complacency in the stock market over the past few weeks was shattered with last Friday morning’s Unemployment Situation news. Many times disruptions creating an environmental change are done at odd times. To jump off the trading week prices moved approximately 50 full S&P points downward. The stock market got cocky and its unsinkable rally has ended. Monday’s key was a close below 1380. A true breakdown has a follow through of some institutional selling as the chart pattern has probably been fractured. A close below 1380 is a confirmation of the chart fracture. WOW! This is the word that came to my mind as I viewed the bond action from the low 138 price area to the high 140s with energy not displayed in many trading days. The bonds reacted with a bullish short covering rip as the unemployment situation was released. They are now in a new territory with an overbought situation. It is very important to record in your diary rare events, which could prove to be paramount. Tuesday registered a minus 1500 NYSE tick, the largest minus recorded in 2012. To reach a number this extreme requires almost sheer panic. Finally, there are sell programs instead of Fed induced buy programs. The S&P 500 close below 1380 accelerated additional selling pressure. The problems in Europe are resurfacing, creating an excuse for a very overbought market to decline. The bonds hyper extended resulting in price inflation pushing the bonds just shy of 142. The overextension in price action has carried bonds to levels not seen in weeks of trading. Too much, too fast is an apt description of the week’s action early on.

Wednesday’s rally was just able to push S&P prices to the 1370 price area where it encountered slippery traction. The stock market is still showing the affects of the severe injury from the day before. Therefore it will take additional healing for much progress, but for now the carnage has been minimized. The bonds had a revelation; gravity still does work. The early morning had a slow oozing down while the 10 Yr. Note Auction assisted the decline. 141 now appears to be the short-term resistance. Moreover, highs just short of 142 could possibly be an intermediate resistance point or even long-term.

On Thursday, the stocks were resurrected with a relentless trend up day. The majority of the time plus NYSE tick showed up, but without real excesses. The strength of the move was mostly in the morning with the afternoon maintaining the assault. The short-term is correcting the oversold condition the daily CCT indicated on Tuesday with the minus 1500 NYSE tick capitulation. The S&P went north approximately 30 points from the oversold condition earlier in the week. There is a possible longer term correction mode developing, but it is not easy to judge how powerful the move could be. There is resistance at 1380 with the next resistance up at 1400 on the S&P 500. The bonds started eroding and hit their lows on the less than stellar, 30-year bond auction news. If the bonds are indeed losing their energy, they should be able to fade back into initial support at the 139 ¼ to 139 ½ price area.

The S&P has a support area of 1350. Will this market be range bound? It will require a new stimulation to be able to rally from here. A breakdown would require gradual price erosion from these levels and sell-stops will trigger. The U.S. stocks finished underwater capping off the week. The bonds can be most aptly described as an entity on PCP. The euphoria and adrenaline is abnormal and unsustainable, but nonetheless it is present. It was Friday the 13th, but really, why are the bonds having this robust rally?