Graham Summers’ Weekly Market Forecast (Time for the 200-DMA? edition)

Last week I
forecast that the stock market would likely rally to test its 200-DMA. We
didn’t quite get there, but that’s
largely due to the fact that no one was actively trading the market last week.

Indeed,
thanks to a holiday week that entailed both Labor Day and Rosh Shoshanna,
market volume was truly abysmal. In fact, last week saw even lower market
volume than during April 2010 top, which should give you an idea of just how
few participants were involved:

 

Due to the
light participation, the market was essentially tossed this way and that by a
handful of traders/ institutions, which made for a volatile week in terms of
intra-day action with stocks often swinging 1% on the intra-day.

Indeed, the
only truly significant developments from a technical perspective were that the
S&P 500 broke above resistance at 1,100 and then rose to challenge 1,110.

Which brings
us to today.

First off,
the most important item to note is that it’s options expiration week. And it’s
not just any options expiration week, it’s quarterly options expiration week.
So this is THE week for Wall Street to thrash the market to insure the greatest
number of contracts expire worthless. So the likelihood of an extremely
volatile week is very high.

The most
obvious pathway would be for stocks to finally challenge and perhaps even break
above their 200-DMA at 1115. If volume stays light, then this outcome becomes
even more likely.

Depending on
just how aggressive Wall Street gets, we could even see a test of 1,131 on the
S&P 500. As noted in last week’s forecast, this would represent an 8.8%
rally similar to that which occurred during the early July ramp job.

From today’s
levels (1,109), a rally to 1131 would only mean stocks going another 2% higher.
We’ve certainly seen that kind of action during other options expiration weeks
before.

The primary
issues that could dampen a break out like this are the Euro and Europe’s
continued banking problems.

The European
banking crisis has now spread to Ireland where the Anglo Irish bank is to be
broken up after suffering the largest loss in Irish history. This was
accompanied by announcements that Deutsche Bank, Germany’s largest bank with
net assets almost equal to Germany’s GDP, would need to raise $10+ billion in
additional capital.

This latter
story is of MASSIVE import. Germany is largely held to be one of, if not THE
most financially solvent member of the European Union. If its largest bank
needs to raise a capital amount equal to one sixth of its total equity, then
you can only imagine how undercapitalized some of the less fiscally prudent
banks in the less solvent countries of the European Union are.

I would also
like to point out how the Deutsche Bank story echoes what occurred in the US
banking system in Spring 2008. Remember how the Wall Street CEOs kept
proclaiming that “the worst was over,”
while their banks were frantically raising capital time and again?

Looks to me
like the European banking system has taken a page straight out of the US
banking system’s playbook. If the ultimate outcome is similar for Europe’s
financial system, then we’re well on our way to a full-scale systemic Crisis
over there.

Indeed, the
Euro has both broken below and failed to reclaim its 50-DMA: a very bearish
development. As I write this, the currency is just sitting on the trend-line
that has supported it for most of the last month.

There is the
potential for a “pop” here to re-test the downward sloping trend-line of the
larger wedge pattern. But given the shakiness of the European banking system
it’s just as likely we’ll see a break below support at 127 too. And if the Euro
takes out 126, then we’re back in Crisis mode and likely going to 122 and
ultimately re-testing the June low of 118.

In conclusion,
my overall forecast for this week is that stocks will likely test their 200-DMA
thanks to the usual options expiration week ramp job. We could even see a spike
above the 200-DMA and re-test of the August high at 1131 on the S&P 500.

However, all
of this bullish action hinges on things not crumbling in Europe. So keep an eye
on the Euro and all things European banking this week for clues as to whether
we’re heading lower sooner rather than later.

Intermediate
term, I am SUPER bearish. But I have to respect what the charts are telling us.
And right now the charts are telling us that stocks may have some additional
room to the upside before they go back into Collapse mode.

However, I
continue to anticipate a full-scale Collapse/ Crash this Autumn. All the
ingredients are there: low volume, my Crash indicate is “On,” multiple
Hindenburg Omens, and a massive Head and Shoulders patterns in the S&P 500…
the issue is simply waiting for the “Lehman” event to kick everything off.

Given that
the Sovereign Debt Crisis is presently occurring in Europe, that’s where the
“Lehman” even will likely come from. And since Europe has already followed the
US’s “phony stress test accompanied by claims that the ‘worst is over’ while
simultaneously raising huge amounts of capital” playbook, I have a feeling the
“Lehman” event is coming sooner rather than later.

Good
Investing!

Graham
Summers

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Comments

[RoRoTrader]

Appreciate the analysis. Thank you.

[tamboo]

Rosh Shoshanna? is that a joo holiday where seinfeld boinks

shoshanna lonstein for old time's sake? looks like she landed

an even bigger fish, how surprising.

http://en.wikipedia.org/wiki/Shoshanna_Lonstein_Gruss

[doolittlegeorge]

When Creditanstalt collapsed in the 20's which started the Depression it wasn't the US Dollar that was the world reserve currency, it was the Pound, yes?  Not that one British Bank isn't "Sailing to Philadephia as if we're talking nothing more than chop" in what has been a financial Hurricane going on two years now.  Still...the dollar being that reserve makes a difference, yes, yes?  I mean how would you like your Bank of America position if they were suddenly forced to buy the US Postal Service?