A Little More Downside – Prices Should Stabilize Next Week. SPY $128 Will Hold

May 18, 2012
Author: Peter Stolcers, Founder of OneOption
Author
Pete

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The price action this week has been very bearish. Stocks opened higher each day and the selling pressure started to build throughout the day. Sellers unloaded stocks and the market closed on its lows four consecutive sessions. The overnight news was light and the bleeding should continue this expiration Friday.

There is a small early bid because of the G8 meeting. Investors are hoping that global leaders will address credit concerns in Europe over the weekend. I doubt this meeting will yield any meaningful action. The EU does not know how the Greek elections will turn out in three weeks. If current politicians form a coalition and win the election, the current austerity agreements will be honored and the bailouts will continue.

I am not expecting any major decisions from the EU or the ECB until the Greek elections. They will wait for the outcome.

For the first time, contingency plans are being drafted by European officials and they are preparing for a possible Greek departure. Germany’s Prime Minister believes that contagion can be prevented. European banks have tapped the ECB for $1 trillion and the IMF has $1 trillion in its coffers.

Economic conditions throughout Europe are deteriorating (with the exception of Germany). China’s numbers have come in below estimates. Power consumption and bank loans have declined in recent weeks. Property prices also declined 1.2%. Some analysts believe that China’s GDP could fall to 7.5% in Q2 (8.1% in Q1). Next Thursday, flash PMI’s will be posted and this is the major economic news of the week.

Everyone is expecting weakness in Europe. However, growth in China is not living up to expectations and it will not offset the problems in Europe.

The momentum clearly points lower. Bulls are trying to rally stocks this morning, but the bid will soften throughout the day. When they are unable to sustain a rally, bears will test the downside. There is psychological support at SPY $130 and that will be tested. The 200-day moving average is at SPY $128 and that will attract bargain hunters.
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