This Action Will Be a Tell

 | Jan 20, 2012 | 7:00 AM EST
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Well, it's another day and another grind higher. This Friday's action will be a tell, just like it was last Friday.

A week ago, for instance, JPMorgan Chase (JPM) disappointed folks and several European countries were downgraded by Standard & Poor's. The market went down and came right back up like a jack-in-the-box. This Friday we will have to see how the market handles the Google (GOOG) disappointment.

I would note that the market managed to bounce right back up after the JPMorgan earnings, but neither the great reaction to the Goldman Sachs (GS) report, nor Bank of America's (BAC) great earnings, have managed to take the KBW Bank Index (BKX) above last Thursday's high.

There are two trend lines on this chart. The shorter-term one, at 42.50, looks as though it will be tested and likely break. Keep in mind that such steep uptrend lines are meant to be broken, as they tend to break and then snap back toward the underside of the broken line. (See the red line in October as a perfect example.) The true support on the BKX is all the way back at 40.

The other chart to watch is the ratio of the BKX to the S&P 500, as it is coming toward a test of support. If the ratio holds above that level, it would be a bullish sign. A failure to do so would not be bearish (on a ratio chart, bearish is breaking to lower lows), but it would certainly have us wondering if the leadership in the financial space was just temporary. For now we'll call it a correction

Keep in mind, as well, that PowerShares QQQ (QQQ) made a multiyear high Thursday. If the action in Google does to the Q's what JPMorgan did to the BKX, then that high will demand attention, especially with Apple (AAPL) scheduled to report earnings next week.

As for the broad market, we haven't seen the selloff I had envisioned, but now there is a new statistic with which to contend. The total put-call ratio sank to 70% Thursday. On the chart of the S&P below, you can see I have circled the last three times the put-call dropped to that same level. I will let you decide if you believe it means we should see a correction. We already know I do.

On Columnist Conversation Thursday, there was a rather lively discussion regarding the euro. Some folks figured a rally in the euro would be bullish for the stock market. I would note that the market has rallied just fine in January without a rise in the euro, so I am not so sure there's still a correlation here. Now the Europeans also have a form of quantitative easing -- and, as you can see, the euro-dollar cross did in fact rise past the downtrend line I have been drawing in.

Now, I see decent resistance at that round number of $1.30, but try and imagine if it gets up to $1.30-ish and then pulls back. Might we not then see a small head-and-shoulders bottom developing in this currency?





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