China Rumors Added to European Debt Drama

Stocks opened lower Wednesday amid the failure of the European Union summit to
produce a plan to stem the debt crisis. But rumors that the Chinese were buying
European bonds and were willing to invest in its bailout fund led to a rush of
afternoon buying, and by the close, stocks had recovered most of Tuesday's
losses. Volume picked up Wednesday, with 1.1 billion shares trading on the NYSE
and 581 million trading on the Nasdaq. Advancers were ahead of decliners by
4-to-1 on the NYSE and 2.6-to-1 on the Nasdaq, which indicates a slight drop in
conviction from Monday, the last day stocks advanced. Wednesday was another wild
day of high volatility sparked by rumors of Chinese intervention in Europe's
debt crisis and the European Central Bank's pledge to buy bonds. There is no
way to gauge the truth of such rumors or to know the ability of the ECB to
continue with this plan without outside help, except to say that desperation is
the mother of hope, so more rumors no doubt will fly before the final outcome is
revealed. From a technical perspective, yesterday's rally off of the bottom of
the S&P 500's support line at 1,220 was a positive for the bulls. But the
close failed to exceed the highs of either Monday or Tuesday and the low was
lower. This forms a tight island that could break either way. One of our
internal indicators that acts as a gauge of commitment is the momentum
indicator, and it is falling, indicating that buying is waning. As the crisis in
Europe deepens, investors are turning to the perceived safety of gold. This
week, the SPDR Gold Shares (AMEX: GLD ) broke from a rectangle (consolidation)
that took a month to form. This break is accompanied by higher volume and a buy
signal from the stochastic. The reversion back to gold is another indication of
weak support for stocks. After a massive flight to the dollar in September, the
buck took back most of the gains during October's heavy selling. But this week
the volume declined, and yesterday the dollar tested its support at the former
breakout line. If the dollar holds at this line, look for gold to move higher
and stocks to fall. Conclusion: Technically, Tuesday's reversal following an
upside break from the support line at 1,230 was a negative. Yesterday's
failure to fully recover also is a negative, especially when coupled with
falling momentum. But after 20 months of Europe's officials kicking the can
down the road and hoping for a resolution, perhaps in desperation they will turn
to the Chinese. This is, of course, beyond the scope of technical analysis, but
not beyond the realm of possibility. It therefore is prudent to hold onto
current short positions but withdraw from further commitments until the
financial outlook in Europe is clarified.