Market Volumes and Technical Indicators Signal Possible Bear Reversal; FTSE 100 Falls Below 5810

Markets continue to experience a hangover from the holiday-thinned volume conditions seen earlier this year and equity markets have seen little improvement in returning to normal volume levels.   This, along with a variety of technical indicators pointing to overbought price conditions in most of the major stock indices, suggests that the latest rallies in global equities are beginning to look increasingly vulnerable to downside reversals from their yearly highs.

Fundamentally, political disagreements in solving the Greek debt problems and implementing austerity programs are providing an underlying economic catalyst for a potentially major decline that could play out sooner rather than later.  The public rioting seen in Greece is another factor making it difficult for the government there to make sweeping changes to the budget and all of this suggestive of a deteriorating economic situation that has not been fully priced into global equity values.

Many traders have committed to fractional position sizes (which accounts for some of the declines in volume), and the first sign that we could be entering into a bear move was seen on Friday as the S&P 500 retreated from much-discussed resistance levels.  Adding to the negative risk sentiment is the downgrading by Standard and Poor’s of 34 of the 37 largest banks in Italy and this is doing little to improve on the longer term picture.

Corporate earnings produced no major headlines on Friday, but we did have Consumer Sentiment figures out of the US, which showed a drop to 72.5 against expectations of 74.3 (and a previous number of 75).  In addition to this, the US budget projection was released, which shows an expected deficit of $1.3 trillion for the rest of this year.  The US Senate has yet to pass a budget at this stage, so the news was viewed as discouraging for market sentiment on the session.

The mostly negative headlines brought buyers into the US Dollar and put pressure on the Euro and on commodities as oil and base metals all traded lower on the day.  The main positive story came from LinkedIn (LNKD) which saw gains of 17% on improved earnings figures but the overall market trend was clearly already in place.

Looking ahead this week, traders should pay special attention to volume levels in equities markets, as this could be the key determinant for how risk assets perform.  Surges in volume tend to accompany declines in prices, and with stock markets approaching key long term levels (without much downward retracement) prices could be vulnerable here and momentum could easily build if weak long positions are liquidated.

Technical Analysis:

The AUD/JPY is starting to look vulnerable to some major downside moves after prices failed at 83.50 resistance.  Prior to this, we were watching an ascending triangle, which is usually followed by an upside break, but the failure here turns our view bearish, based on favorable risk to reward ratios for sell positions at current levels.

The FTSE 100 has performed nicely relative to our bearish call made last week as prices have now fallen through key support levels at 5810.  This is ominous for the index as it made repeated attempts at clearing 5880 and the latest bull move appears to have run out of steam.  We will hold our sell position into a test of Fibonacci support at 5770, which is our profit target.

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