A Thoroughly Expected Downgrade

 | Apr 27, 2012 | 6:00 AM EDT
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Since there is not much new to add to the commentary on the U.S. market, I will simply note that the breadth was good enough to turn the McClellan Summation Index upward, and that the Russell 2000 is keeping pace with the rally.

The major indices are at obvious resistance now, as the S&P 500 sits at 1400 and the Russell is at a downtrend line. Some choppiness or a breather to the downside would be typical and not unexpected, especially since the market will be short-term overbought by early next week. However, with some of these intermediate-term indicators having improved, the downside should be limited for now.

I would like to comment on the after-hours downgrade of Spain by Standard & Poor's. First of all, who could possibly be shocked by this? What's more shocking is that it took S&P this long to do this. What you do need to keep in mind is that Italy has a bond auction scheduled for Friday morning, and those results could move the markets, even if the Spanish downgrade is not a shock.

The iShares MSCI Spain Index (EWP) is not a large ETF, but it ought to give us a good guide on what to watch. Let's begin with that pattern you can see below, which was broken where I drew in the line. The high of the pattern is around $32, and the low is at about the $28 level. The difference is $4, so we then subtract that from the break at $30 to get a downside target of approximately $26. The fund is now trading in that area, and that means EWP ought to start to hold here.

EWP -- Daily

If EWP does not make a lower low on this news -- or news out of Italy -- then I believe it will have a chance at rallying back up into resistance above $28.

Banco Santander (STD), one of the largest Spanish banks, is showing a similar pattern in its chart. In this case, let us look at a shorter-term chart in order to see the potential for a teensy weensy head-and-shoulders bottom in the chart.

Banco Santander (STD) -- Daily

If Banco Santander can stay above $6.25, there will be potential for this pattern to develop. It will not be the news but, rather, the reaction to the news, so failure to make a lower low should be considered a positive sign. Of course, in order to complete the pattern, the stock would need to cross over $6.75 – but, with the news coming from Europe, this should be a good test of these two charts.

As for Spanish bond yields, they have been hovering around 6% for a few weeks now. Let's watch that short-term uptrend line (A in the chart below). A break of that line would imply a test of the downtrend line just under 5.50% (B). A bounce from it would mean at least a test of 6.1%.

Yields -- Spanish Bonds



Overbought/Oversold Oscillator -- NYSE

Overbought/Oversold Oscillator -- Nasdaq


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