U.S. stock futures point to a lower open Monday, following losses in European markets as the initial excitement fades over the euro zone rescue package. Last week stocks soared after European officials hammered out a deal, but now investors are left to ask questions about whether the plan will provide a long-term solution to the ongoing sovereign debt crisis.
After such a rapid ascent in October, this could be a case of traders simply locking in some gains. Our stated target zone on the S&P this year was 1,250-1,300, and now that we have nearly reached the upper end of that level, it is certainly a prudent time to take profits. We are currently set to open just below the 200-day moving average this morning, and it will be important to see how hard bulls fight to hold onto that important technical level.
While last week’s resolution takes calamity off the table for now, questions still remain in Europe. Italy, the region’s third largest economy, is second to Greece in terms of debt to national income, and its debts dwarf the $1.4-trillion U.S. new-and-improved EFSF. Italian 10-year yields remain above 6%, and a poor debt auction on Friday has led to renewed concerns over the the country’s footing.
Also factoring into the equation is heavy foreign exchange intervention from Japan, which sent the yen sliding lower versus the dollar and other currencies. The Euro soared against the dollar last week after the rescue plan was agreed upon, paving the way for strong equity gains, but it will be interesting to watch whether that trend continues.
We have a few events to get through this week, with ISM tomorrow, jobs report on Friday and the G20 summit, so let's reiterate that now is not that time to get greedy long. Now we need to see if the commitment to the rally remains the same. We do that by watching retracement levels. So far, the markets never retraced more than 25% of each move over the last month. We are allowed to pull in more than that and still make a new highs on the year, but the speed and trajectory can change a bit.
First S&P support is at the 200 day, but we are opening a bit below around 1274. On Thursday I mentioned we can test the 1,256-1,246 area and still be considered very strong. 1,238 is the Fibonacci 25% retracement. This type of pull back held each time since the October 4 low.
Resistance is 1,292, which was Thursday’s high. The next area to potentially watch would be 1,314-1,316, then the the major zone would be 1,343-1,356.
Lots of stocks have hit historic and new highs, paying investors to hold, and some nice double digit gains across the board for some sectors and groups off the low.
