Happy Labor Day

Continuing with the theme from my last post that markets make reversals in trend after 3-day weekends, the first chart below shows a 2-month daily chart of the S&P 500 that follows up with the first chart from my last post. The market did continue the rally after the 4th of July with two seeming doji-like days up to the 7th of July with a high of 1356.48 but sold off after that to the low on August 9th of 1101.54 and showed extreme volatility with a spike in the Volatility Index (VIX). With a brief bounce and pullback to form a double bottom the market appeared poised to rally and indeed there was both a higher low and higher high, the classic definition of an uptrend. In many markets there was put in a 5th wave bottom, or so it seemed, but not in the S&P 500 suggesting that the move off the August 9th low was a 4th wave and that the 5th wave has just begun with the August 31 high. Futures markets are poised to open significantly lower with initial support at the 1150 area and below that at the prior low near 1100. As to the theory that the market makes trend reversals after 3-day weekends, while it is true that the market did so on last Memorial Day weekend, the 4th of July did not fit the pattern exactly and as September 1st and 2nd were both down days it appears that the trend has already reversed to the downside and is not fitting the pattern either. Click on chart to enlarge.

Again as a follow up to my last post the second chart below is a 3-year monthly chart of the S&P 500 showing that we are in a 4th wave on the monthly chart. The 61.8% Fibonacci retracement level is at the 1150 area which should act as support. The problem is that if this level gets taken out with a close below this level then the whole wave count would come into question and we would no longer have a classic Elliott wave pattern. I think this level will hold and that the Fed will step in to support the market at their next meeting with some kind of further quantitative easing. The real problem is the European banks and sovereign debt. Greek two year bonds are yielding over 50% as can be seen here indicating a high likelihood of default. Compare that to the German bond yields here. Also, bonds of both Spain and Italy soared to record highs last week. Banks that hold these bonds could fall like dominoes taking one another down. The good news is that inter-bank lending as measured by the Libor has not spiked to the high levels seen after the Lehman Brothers collapse in 2008. The risk of recession has significantly risen with the last Employment Report showing no net jobs created in the month of August. Lets hope the markets don't continue with a downward spiral as shown by the left side of the chart below. Click on chart to enlarge.