Approaching some pretty important levels
The market continued to drift lower last week with a nasty close on Friday. Last week's decline was on holiday volume (very low) that cannot be totally discounted because some very recent support zones were breached and two of the three major market indices are now right on what I would consider important price support levels that date back to late October and early November. While I continue to believe psychology is probably more important than price support/resistance levels, if everyone is looking at breached and future support levels, they must be given some weight, especially given the news backdrop of geo-political tensions, higher oil and gold prices and weakness in the dollar, especially against the Euro.
My take on the market has been two fold for a few weeks now. The front side of it has been that there was the potential for an oversold bounce that would cause a retest of the early December highs. The backside of my view has been that the intermediate-term indicators suggest a loss of momentum that should make any retest rally weak and therefore temporary because it lacks momentum. Clearly, the market's action suggests that the loss of momentum on the intermediate-term is much more significant than any oversold condition over the near-term. Until Friday, the market was down, but had not breached any significant areas in my view. Friday changed that as the major market indices broke very near-term support and now need to hold the next important support levels before any interest would come in because obviously an oversold condition isn't enough right now.
Exhibit 1 - The S&P 500 appears to be right at key important support area
Exhibit 2 - The DJIA is in same position - oversold and at key support area
Exhibit 3 - The NAZ isn't as close to important support levels as other two indices
source: Baseline Inc. and Kirlin Securities
This week is sure to bring more important news and therefore greater volatility. Today the markets grapple with the Chicago Purchasing Managers Index and the rest of the week brings the Institute of Supply Management (ISM) reading and construction spending. The recent decline in stock prices has certainly created the environment of skepticism regarding economic and corporate reports, which again lends to the potential for a bounce that thus far has yet to materialize.
I am torn right now because I see what everyone else sees - weakness, breakdowns, poor news, downtrends, multilevel geo-political risks, currency weakness, higher oil and gold prices and a Fed that has limited ammunition. Wow...it was way too easy to rattle those off. Frankly, reviewing the negative forces in the market was the easiest part of writing this article. Since I know the market is smarter than I am, that means many of them have been weighing on stocks for the past four weeks, which sets the stage for even mediocre news being interpreted with a positive spin.
Throughout the advance from the October low, I have been of the view that the rally was an intermediate-term countertrend rally in the context of a secular bear market. That view hasn't changed. Once the market got extended and overbought on the intermediate-term charts, the momentum waned and the markets entered the twilight zone trade from the perception trade. In the twilight zone trade, there should be times when the market looks like it is going to break out and times when it looks like it is going to break down. That too hasn't changed. Clearly, this is one of those times when it looks like it might break down.
Frankly, the market could still grind lower because there hasn't been any significant news other than the constant drumbeat of the aforementioned issues facing the tape. The problem is that it has experienced significant weakness in three of the past four weeks and that any good news could lift the tape and allow for high sale prices. What could do that? Even slightly positive banter out of Venezuela, Iraq or North Korea could act as a catalyst, which is hard to imagine right now - and therefore possible.
Again, I am torn because I could see a further erosion, but could also see a snapback rally that would make a "smart" sale right this second not look so smart a week or two from now. One thing is for sure, this is certainly the time to remain humble and not let emotion get the best of you - because that won't help a thing.
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