Market Continues to Fall as Greek Default Fears Surge

US stock futures continued lower overnight as the focus remains on Greece’s ability to avoid default. Fed Chairman Bernanke is set to testify before Congress for the first time since ‘Operation Twist’, can he give the market a lift. European markets fell sharply Tuesday after Eurozone finance ministers said last night that they will wait until later in October than previously thought to decide whether the extend more aid to Greece.

Banks continue to be under extreme pressure as talk of major write-downs grows. A 20-50% haircut for bondholders has been mooted, and the potential write downs for banks continue to pressure all overseas indices. Many believe that this difficult step is the only way to materially solve any of the current woes in Europe. Euro finance ministers indicated a significant bondholder haircut would have to be part of a second Greek bailout.

One stock that looks at least to have ended its stretch of relative weakness is Apple (AAPL). The company is set to have a keynote event today that is presumed to be the unveiling of the iPhone 5. Combined with Bernanke’s testimony, perhaps these events can drown out some of the pessimism and produce an oversold bounce off the 1070 area in the S&P.

The Oscillator has reached -51 which is pretty oversold. Markets have bounced from this type of reading in the past but this market is very sick and very dangerous. We say “don’t try to catch a falling knife”, and it is a painful reality to use that description about the broader market. Remember that the Oscillator was -110+ before the market bottomed in August, so don’t start too early if you are looking long. I wouldn’t think think of macro longs until we are trading below 1050 in the S&P.

High beta tech stocks remain under pressure despite AAPL holding up well in the pre-market. When the market loses its momentum leaders, and you start seeing technical damage to individual stocks charts while the indices hang on by a thread, it is a sign of things to come. We saw that last Wednesday.

While this wide lower flag pattern had remained intact, a recent series of lower highs had begun to forecast the downside continuation was imminent. In the S&P we saw 1230 on 8/31, then 1220 on 9/20, and lastly 1195 on 9/27.

Yesterday we broke below 1120 and closed below the August 9th low of the Summer at 1101. The 8 week range that traders have been using as a guide to trade against is in the process of getting resolved to the downside.

If you are short this market I would think to cover into a cascade lower where 1070ish will be some support. If you are short and cover early it will put you in the right frame of mind to potential accumulate into bigger support lower. If you are waiting to put money to work, wait for a quick momentum rinse before thinking buy. Yesterday was a very controlled, steady sell-off, not the type of action that forecasts a bottom.

By John Darsie

*Disclosures: Scott Redler is long October 112, 111, 109 SPY puts and Short SPY

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