By James Hyerczyk
Commodity Trading Advisor
The volatility in the U.S. stock indices this week is reflecting uncertainty ahead of this week’s option expiration. Although the main trend is down on the weekly chart, the Nearby E-mini S&P 500 traders took the time last week to stabilize the index at 1255.00, giving short-traders an excuse to book some profits following declines from the two tops at 1413.25 and 1405.25.
Based on the short-term range of 1413.25 to 1255.00, a retracement zone was created at 1334.50 to 1353.00. Baring unexpected news this week, this area should provide temporary resistance the rest of this week.
Besides the option expiration, traders are also facing uncertainty because of Sunday’s elections in Greece and concerns about Spain’s economy. The news out of Greece should be a big market mover early next week because the elections could decide whether the country decides to exit from the Euro Zone. News of an exit could mean an initial fall in demand for higher risk assets which should pressure stocks. This could be a short-term break, however, since Greece’s decision to pullout of the Euro Zone will not be that much of a surprise.
With Spanish 10-year borrowing costs at their highest level since the Euro began trading in 1999, equity traders are a little more worried about this event because of the fear of the unknown. Although the global equity markets initially welcomed the news of a possible Spanish banking system bailout, the failure to provide any details as to how it would work, who the money would go to and where it would come from, caused traders to reject the notion at this time.
While the Weekly Nearby E-mini S&P is indicating a downtrend, the market’s trend has turned up on the daily chart. Although there wasn’t a follow-through to the upside following this change in trend on Monday, the sideways trading action the next two days is indicating that buyers may be defending the market.
Based on the short-term range of 1255.50 to 1342.00, a retracement zone has been established at 1298.75 to 1288.50. This area was tested successfully following Monday’s big reversal down, signaling that perhaps buyers had found a value zone. Holding this area is important for bullish traders because it is typically the zone where a secondary higher bottom forms. Usually the first rally from a bottom is short-covering, but real buying often comes in on the retracement. This is where the market is at on the daily chart.
With weekly traders looking at a downtrend and daily traders looking at an uptrend, the market is boxed in at this time with retracement zones providing the support and resistance. Traders seem to be content with holding the market in this range until there is some clarity out of Europe. Sunday night/Monday morning will be the first trading session they will be able to react to market events when Greece begins to announce election results. The longer the E-mini S&P stays bottled up inside of its ranges, the greater the expected volatility. Keep your powder dry. I don’t think anyone is going to commit in a big way going into the option expiration.
JPM Investors Believe Dimon for Now
The recent rally in JP Morgan Chase (JPM) from the bottom at $30.83 on June 4 in conjunction with the rise in the broad market suggests that the stock has already priced in the bank’s European trading debacle. Wednesday’s strength following Jamie Dimon’s testimony is also an indication that investors believe his explanation for the bad trade.
His testimony may be enough to stabilize the stock’s price, but overall, it should not be enough to carry the stock higher. A combination of renewed confidence in the bank and stronger U.S. equity indices is what this stock needs to take it back to the 50% level at $37.54.
Even if the stock reaches this level, one can’t conclude that it is out of the woods. It is possible that investors will take the stock to a balance price at the same time the July earnings report is due. What a move back to the 50% price at $37.54 will reflect is a balance between the bulls and bears, or those who believe the trading issue has been taken care of and those who feel it is going to be worse than reported.
With bearish traders lacking sufficient evidence to continue to pound the stock and bullish investors giving the benefit of the doubt to Dimon based on the overall strength of the bank; don’t be surprised if JPM finishes its retracement before the next major investing decision has to be made. Once again, however, outside influences may derail this potential short-term rally.