Spanish stocks fell during the session on Wednesday, in the futures fell in turn. Looking at this chart, there is an obvious uptrend line that we have seen over the last couple of months that is currently being tested. With even more ominous about this chart is the fact that it does look like a head and shoulders pattern has now formed.
The one bright spot of course is the fact that the daily lows did respect the neckline, and did not break below in order to trigger the selloff. However, it does look like this will more than likely happen given enough time. After all, the most recent high is lower than the one before it, and this of course is always the first sign of a trend starting to die off.
Looking at the €7600 level, it is obvious to us that the support level simply must hold for this market to continue higher. If it gives way to the sellers, this market could fall rather rapidly, and we suspect it would it initially target €7200, and probably €7000 before was all said and done. This would be at least the first leg lower, as the fear settles back into the marketplace.
We cannot think of a place that is more the epicenter of trouble right now than Spain, so it would make sense that this market would be rocked by bad news. The Spanish have not asked for a bailout yet, and the world is simply waiting to find out when they will. If they do, there is a good chance a lot of Spanish companies will do quite well, as a lot of them are invested in Spanish sovereign debt. This is especially true in the financial sector, and as such we would expect Spanish banks to rally quite vigorously if that bailout is applied for.
However, right now looking at the charts we see nothing but weakness ahead, and will sell aggressively below the €7600 level. As for going long of the Spanish market, we are very reluctant to do so under the best of conditions. However, if we get above the €8200 level, we would have to admit that this strong move would have to get us going long.