23 Oct 2011 - Binary Market

The fate of the financial markets rests on the Europeans solving their sovereign debt problems. Meetings are being held this weekend and Wednesday this week. The world is not hopeful particularly when the news is released like this. Despite this, risk continues to rally since the Oct 4th reversal low and closed at a high on Friday Oct 21, 2011. Not only did prices close at the highs on Friday but the SP500 finally broke out higher from the two month long consolidation between 1100 and 1220 (for the SP500 cash). Technically this is bullish and suggests prices are now targeting 125.60 for the SPY (about 1255 - 1260 SPX cash) which equals the emotional mid March low made during the Japan earthquake / tsunami event. That is the 1st target. The range trading that has taken place between early August and early October has been very volatile which means that the breakout from this range could go much further than simple projections suggest. A higher target of 1310 is a distinct possibility. And most likely if the SPX is trading at 1300, we will see the nasdaq100 index NDX trading at new multiyear highs which will wake up many more "highs for the year" bulls. The wall of worry is certainly in place thanks to Europe. EURUSD key resistance lies at 1.4000. Above 1.4000 for EURUSD and the bullish US equities scenario will unfold. Below 1.4000, and US equities fall back into the trading range. Its that binary and when I look at correlations across asset classes, everything is 70% to 90% now. Its all one big trade.

Lastly I should note, Friday Oct 21st is not to be ignored. Major turns in the markets have taken place on the 21st of the month over the years as shown in this older post. If Friday turns out to be a 21st of the month top, it will be a false breakout on the chart which often has violent consequences. For example, the Oct 4th low was a false breakout to the low side and has resulted in a fast 12% rally off the low! The monthly chart is on its way to making an engulfment pattern for the SP500 emini's. A close above 1212 will complete this. This is the key level I am watching for false breakout if the SP500 is indeed topping out on Oct 21st. Otherwise, continue to be bullish biased.