Saturday, September 7, 2013

Stock Market Update: Retracement rally.... now what?

In our last post we talked about the potential for a retracement rally, citing some strength in the advance - decline line coupled with the fact we happened to be at some strong short term support levels. This week we got the retracement rally we were looking for, right into the upside target/resistance level mentioned in the prior post, at 1657.50 as noted on the 60 minute chart above.
One pattern of note that since the low at 1626 the S+P 500 has seen three short term drops of 18-20 points in length, including the most recent drop on Friday morning. This for me says support should come around 1643.50 below. If the market should spend much time below and especially if it closes below this level I would say the odds are high that the previous low at 1626 will not hold.
Friday's price action to me was bearish for the short term. In my opinion the actual jobs number was potentially the worst of the outcomes, as it was weaker than forecasts but still not nearly weak enough to definitively sway central bankers from "tapering" it's bond buying program. In turn the market traded above our resistance level at 1657.50 but could not close above it.
I am going to use this level in judging next week's price action. A close above would signal to me that we are likely headed to the next upside target/resistance level coming in at 1687.50. However any continued weakness on Monday and especially weakness that produces a close below 1643.50, would have me looking for new lows below 1626.
Where might this new low come in at? Well the chart of the Dow Jones Industrial Average above shows the relative underperformance compared to the S+P. The Dow has now almost corrected as much as it had during the correction off the May 22nd high. That level is marked on the chart above coming in at 14,664.62. There is also the last swing low at 14,550 that I would not be surprised to see a test below there before reversing back upwards.

In the S+P 500 we can calculate a potential area around 1615. As each of the last two swing lows has been roughly 12 points lower which equates to 1615 on the downside. There is a much better support zone "cluster" coming in around 1600, give or take a couple points, for a variety of different reasons I have pointed out in prior posts. I am anticipating that any further weakness in the broader market would stop there and the next major move higher would begin.

Taking an updated look at the NYSE advance - decline line, it continues to show relative weakness overall. This is not a great sign for the broader markets as it shows lack of participation in the advances. I continue to monitor this as a drop below the 24,000 low would have very bearish implications.

The economic calendar this week is relatively light. Friday shapes up to be the biggest day for potential market moving economic data. All eyes will be on the following week as the Federal Reserve and it's latest FOMC statement.

Sector performance for this week actually shows some risk acceptance as Financials, Basic Materials and Tech outperform while Utilities, Health Care and Consumer Goods round the bottom of the list.

In conclusion: So far the bulls have failed to flip the short term trend back to the upside. I would remain relatively neutral on the short term direction until we get price acceptance either above resistance or below the support level mentioned (1657.50 + 1643.50). This week was week five of the correction and as we saw in last week's post, that since 2011 every correction in the Dow has lasted 5-6 weeks in length. So needless to say I am expecting a bottom soon if we haven't already.