Europe Rears Its Ugly Head -- Again

 | Nov 01, 2011 | 9:03 AM EDT
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"Just when you thought it was safe to go back in the water ..." -- Jaws 2 Tagline

The Europe-is-saved rally is falling apart on news that Greece is likely to hold a vote on whether or not to accept the European Union-International Monetary Fund bailout. Since there is a large faction of Greek voters who don't want any cuts in their pensions, the deal is now in danger of falling apart and there is an "increased risk of a forced and disorderly sovereign default" according to ratings agency Fitch.

Although few market players really believed that the European issues were solved, many were hopeful that Europe might be on the backburner for at least a little while after the bailout deal was announced last week. Obviously, there were still many issues to deal with, but at least they bought some time and maybe we could focus on other matters into the end of the year.

Unfortunately, signs of problems started popping up into Monday's close when the Greek prime minister started talking about a voter referendum. The worry picked up overnight as European stocks were slammed. It isn't helping that the Asian market struggled as the yen bounced back and factory activity hit a three-year low. The MF Global (MF) bankruptcy filing is not helping the mood either.

I have been hopeful that after the big move last week we'd see a pullback and consolidation that would help set us up for another leg to the upside. But the correction is now turning into a full-fledged reversal as dip buyers who were so anxious to buy last week are now afraid to, and the recent buyers are rushing to preserve what profits they have left.

Technically, the good news is that the very weak open this morning is taking us right back to the breakout levels around 1230 on Oct. 21. If we find support in this area and regain our footing, the damage isn't that bad; but with the European cloud hanging over us again, it is going to be difficult to rebuild trust levels. The key is finding support fast, which will help prevent panic from accelerating.

The good news is that all those frustrated folks who were underinvested as this market flew higher last week now have the opportunity to find some good entry points. The issue is whether they have the guts to jump in now that we are in free-fall again. That really has been the dilemma of this market. You have to chase extended technical conditions in hopes it will keep running, but then you run the risk of headline news like we have this morning slamming us back down without warning. It is so tough to have confidence when buying weakness because the fundamental news is so poor.

At this point, we have little choice but to wait and see if we can find support or whether this European headline news is going to create so much uncertainty that buyers will stay on the sidelines. I'm optimistic that some better chart patterns will develop out of this over time, but the choppiness of this action is going to drive away market players who don't want to deal with it.

The main complaint I'm hearing from traders this morning is that they're sick and tired of Europe, but that doesn't look like it is going to change very quickly. We'll wait and see how it develops, but patience and caution is now going to be much fun, especially when optimism about a year-end rally has been building.

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