The Euro Called Wednesday's Top

 | Oct 13, 2011 | 3:30 PM EDT  | Comments
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In Tuesday's column, I explained that I wasn't going to do any additional buying because the market already quite overbought -- but I added that there were some reasons to look for more of a rally. In particular, there were the 0.382 retracements in both the Russell 2000 (RUT) and in the euro, which had been approached, but still hadn't been hit. Well, what a difference a day makes. As of Wednesday's close, all that has changed.

The 0.382 retracement of the decline from the May highs to last Tuesday's lows was narrowly exceeded in the RUT. Recall that in the Russell 2000, the target was 703.65. Wednesday's high was less than 2 points above it at 705.30. The Russell 2000 settled well off the highs (as everything sold off into the close) and today it is getting smacked. It's currently selling off to the 687 level, which, not coincidentally, is just enough to fill yesterday's gap shown in the chart below. The gap, as you can see (if you look closely at the chart below) is at 688.97. This morning's low (as of 11:30 a.m. EDT) has been less than 1 1/2 points lower at 687.58.

 

Russell 2000 -- Completing Its 0.382 Retracement
Source: optionsXpress

 

 In the case of the S&P 500 (SPX), which had already busted through its 0.382 retracement at the 1187.76 level, there were some other numbers beckoning above. The resistance at the 1220 level gave the market quite a bit of trouble just a few weeks ago. Recall that the market popped up to the 1220.06 level on Sept. 16 and from there backed off more than 30 points to the 1188 level. Then, on Sept. 20, it made a fractionally higher high of 1220.39. From there, it collapsed 145 points into last week's lows. So 1220 was a level to reckon with. Yesterday's high was in between those two recent highs at 1220.25, and now look at it.

 

S&P 500 (SPX) -- Stalling at Its Recent Nemesis: the 1220 level
Source: optionsXpress

In addition to the resistance at 1220, just a couple of points higher was the 50% retracement level at 1222.67. Yesterday's high of 1220.25 was pretty close to all that. From there, the SPX has now collapsed to the 1190.58 level. That's a 30-point haircut in the SPX in just a few hours of trading.  I hope you did some selling into that resistance. At Rydex, we cut back to a range of just 25%-50% invested. Now that the market is backing off to fill yesterday's gaps, we are adding a bit to our bullish positions. At Rydex, we got the morning pricing of 1194.86 in the SPX.

S&P 500 (SPX) -- Not Quite Tagging the 50% Fibonacci Retracement
Source: optionsXpress

But the real story of yesterday's top and subsequent pullback was, no doubt, the story of the euro. Recall that in Tuesday's column, I highlighted the 0.382 retracement of the decline in the euro (on the continuation charts) from the May 4 highs to last week's lows. That level weighed in at 1.3823. Yesterday's high was just 0.0002 (that's 2/10,000 of a point) higher at 1.3825. If that's not weird enough for you, there's the odd fact that the 0.382 retracement comes in right at the 1.382 level. How 'bout them apples?

This morning, the euro (December contract) has pulled back further to the 1.3676 level, though now at1.3728 it is a bit off the lows (these prices are not shown on yesterday's chart below).

Euro -- A Bull's Eye at its 0.382 Retracement
Source: optionsXpress

 Also telegraphing a near-term top yesterday was a very bloated reading in the McClellan Oscillator, which settled at a fully overbought +230. And then there was the collapse in the Market Volatility Index (VIX) to new multi-month lows of 29.79. On this front, I was amused to hear the usual crowd talk about how "a decline in the VIX below 30" would be so bullish for the market. Well guess what? The VIX printed just below 30 for about 15 minutes yesterday. Can you guess when? Just as the SPX was topping out at 1220. So all the geniuses who were loading up on the SPY at the 1220 level (as the market was topping) might want to rethink that bit of "reasoning."

The Market Volatility Index (VIX) -- Nothing Bullish About a Drop Below 30
Source: optionsXpress

Longer term, I remain constructive on the market; short term, due to the torrid advance off last week's lows, I am still cautious.

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