Italian Long-Term Debt Auction a Mixed Bag

US stock futures are headed for a slightly higher open Tuesday after a good, but not great, long-term debt auction in Italy. The futures didn’t get much of a bounce yesterday morning despite lower yields on 6-month bills, and then the market sold off sharply during the session in anticipation of lackluster demand in today’s auction. Weekly jobless claims rose 15,000, but the futures have not produced much a reaction this morning. While volume spiked a bit on yesterday’s decline, expect volume to continue to dry up today and tomorrow.

Today’s auction in Italy resulted in an average yield on the 10-year benchmark of 6.98%, just below the key “unsustainable” 7% level and down from Euro-era highs of 7.56% from last month. The troubled country raised 7 billion Euros ($9 billion) of longer dated bonds with maturities from 3-10 years. While the borrowing rate fell, the fact that it still sits near 7% is extremely concerning to analysts. Yesterday’s auction sparked optimism that jitters were waning, but sophisticated investors knew today’s auction would provide the better indication.

Futures were quiet overnight, which I think is a preview of what we will see the rest of the week. There is nothing more on the calendar to alter current market sentiment, and most traders are stepping back and calling it a year. It is hard to remember a year that will begin with so much extreme uncertainty in the market. There are two drastically divergent paths that the Euro zone will embark on next year, one being a the continued barrage of massive intervention to save the Euro treaty, and the other being an abandonment of what has been largely a failed union. France and Germany, the bedrocks of the continent, will ultimately make that decision.

TECHNICAL TAKE

There were three major moves this year that could have made your year if you timed them correctly. The first move of the year was to the upside that was capped on the day we killed Osama Bin Laden. The trade changed to look like a short when the Head and Shoulders pattern triggered in August below 1250 on the S&P. The October 4th Upside Reversal at 1104 S&P signaled a short-term tradeable bottom.

Recently, some were also rewarded as there was a nice four-day methodical “Santa” rally into last Friday. On top of this all, the writing was on the Technical Tea Leaves for big shorts in Gold and Silver as we’ve outlined all the sell signals on the OFF THE CHARTS newsletter! Covering some shorts on today’s down open in the precious metals would be prudent.

So even though we are near the flat line for the year on the S&P, there were multiple tradable moves to catch for those who time the market.

The real question now is what will January bring for the market? Will everyone return from the holidays with new cash to work with and buy up stocks in the first two weeks, or will they come back and sell them? We do have a pretty tight Wedge type Pattern to watch for resolution based on the direction we take. Right now, we still are in a confirmed rally with some question marks. We’ve had two distribution days on the Nasdaq, and there has been an absence of volume and quality break outs. But, we are still holding higher above important retracement levels. The bulls are still in the game, you just can’t be overly committed.

The First Important Support to watch in the S&P will be the 1235-1240. The level that held each time during the past few corrections since October 4th Rally stands at 1228 ( the 61.8% Fibonacci retracement).

In order to ignite a move into the first quarter of 2012 we will need a huge move on Volume above 1270-1277. Then a close above 1292 will then open the door for a move to 1320-1340 for the first quarter!

I will measure each move on its own merits and switch gears based on the technical patterns and composure.

Disclosures: Scott Redler is short SLV

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