Trading Range Bounce: Weekly Market Outlook

 |  Includes: DIA, QQQ, SPY, VXX, VXZ
by: Price Headley, CFA

Just when it looks like the bears are going to drive the final nail in the coffin, the bulls pick themselves up off the mat and come out fighting again. Friday's huge upside reversal forces us to acknowledge the possibility that we may yet stave off a re-entry into a bear market.

We've got the details below; but first, let's start with the bigger economic picture.

Economic Calendar

It may have been a light week in terms of the amount of economic data, but it was plenty important... particularly on the housing front. And, the news wasn't good. Existing home sales plunged to a multi-year low of 3.83 million, while new home sales plunged to an all-time low annual rate of 276K.

Durable goods orders figures didn't help in the least. July's durable goods orders were up 0.3%, versus expectations of a 3.0% increase. And, when taking out vehicles, durable goods orders actually plunged by 3.8% last month, versus forecasts for a 0.5% improvement.

Oh, and the Q2 GDP figure is going to be closer to 1.6% when the final figure is calculated. It's better than the alternative, but nothing to shout about.

The only bright spot from last week was still a dubious one... unemployment claims dropped. New claims fell from 504K to 473K, which is still higher than the recent average. Ongoing claims fell from 4518K to 4456K, which is in line with the recent levels. No real progress is being seen on either front.

Economic Calendar


As for the coming week, it's going to be a busy one to be sure - too much on the plate to detail, and too much on the plate to try and figure one out before the next one is unveiled. Just keep the calendar above handy, and know that even neutral numbers have been interpreted as bearish lately.

NASDAQ Composite

Don't be shocked that the NASDAQ posted such strong numbers on Friday, gaining 34.94 points to close out at 2153.63. Though still in the hole for the week, the bulk of last week's damage was confined to one day..... Tuesday. Moreover, when you take a step back and look at the bigger picture, the bullishness from Wednesday and Friday starts to look like more than luck.

To be specific, the composite seems to be finding support at two former proven support lines - the horizontal floor (black, dashed) at 2100, and the lower Bollinger band (gray) at 2091.

In fact, when taking the bigger-picture look, it becomes pretty clear the NASDAQ is simply range-bound, as it has been since May, between the two dashed lines. Last week's bullishness is just an attempt to push off the lower edge of the range. And, odds are that it will be able to make good on the effort, especially considering the strong volume buy-in and strong reversal bar we saw on Friday.

As you may have been able to guess from the chart, no bullishness will mean much unless the composite can get past the whole mess of moving averages as well as the upper Bollinger band, which will be around 2300 by the time it can be retested. The upper edge of the trading range is at 2311, which we'll use as the last bullish straw.

COMP Daily Chart
082910-nasdaqClick to enlarge

As far as what could trip the bullish effort up at this point (aside from potential resistance at all those moving averages), the biggest threat is the calendar; the runner-up pitfall is the mood of investors.... even though neither really have anything to do with valuation.

The calendar-based pitfall is just the reality that we're in the midst of some weaker months (on average) of the year. Unfortunately, that weakness may be caused by behavioral habits more than rational stock pricing. Nevertheless, it's a factor.

The other pitfall is simply more worst-case scenario interpretations of bad - or even good - news. Throw in heated mid-term campaigns, and investors are really being slung around by the media.

Just stay ready for anything, as emotions have taken over the market.

S&P 500

No need to rehash everything we said about the NASDAQ for the S&P 500; just keep in mind that the same basic premises apply. Instead, we'll just detail and summarize.

* The S&P 500's lower edge of its trading range is at 1042 (blue, dashed). As you can tell, it's made good use of that floor so far over the prior three trading days, and may be wanting to push off of it again now.

* As with the NASDAQ, the SPX has an upper 'ultimate' edge of a trading range as well, also above all of its key averages. It's at 1130 (red, dashed), and the upper Bollinger band (50 day) should be below that mark by the time the S&P 500 could test and/or hurdle it. This is still the key to any real bullishness; anything else is just volatility.

* The CBOE S&P 500 Volatility Index (VIX) may be pointed lower as of Friday, closing at 24.45 after a short string of lower lows and (mostly) lower highs. It's still got major support lines at 23.10 and 21.50 (blue) though, and will need to move under both if the market is to have any chance of real bullish progress.

SPX and VIX Daily Chart
082910-sp500Click to enlarge

Disclosure: No positions.