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Week Ahead Market Outlook

|Includes:DIA, QQQ, SPDR S&P 500 Trust ETF (SPY), VXX, VXZ
Stocks ended last week in the red – the first losing week in the last three, but the fifth loser in the last nine. Though not due for a complete implosion, stock remain overbought and ripe for a decent correction.

S&P 500 & VIX Chart
112009-spx-vix

Had it not been for Friday’s 0.32% dip, the S&P 500 would have actually ended the week with a gain. Instead, the close of 1091.4 was 2.10 points under the prior Friday’s close, down 0.19%. Even if the index had closed higher though, the standing problem would no have been resolved.

We plotted the arc-shaped support at resistance last week; they are still very much in play. We did have to adjust the upper one slightly higher to accommodate the slightly higher high of 1113.70 from Monday, but the zone still stands… the SPX is still hitting resistance at that line. Assuming the pattern repeats, the S&P 500 is still headed toward support around 1031.

This time the bears have an ally though. The VIX finally brushed its lower 20 day Bollinger band (2 SDs) at 19.59, and pushed off of it to close at 22.19 on Friday. With no room to move lower and plenty of room to move higher, the VIX is another strike against the bulls.

NASDAQ Composite Chart

112009-nasdaq

The NASDAQ closed even lower for the week, losing 21.84 points (-1.01%) to end Friday at 2146.04… the biggest loser among the major indices. While the NASDAQ’s version of the VIX (the VXN) isn’t pushing off its lower Bollinger band, there are still plenty of bearish clues for the chart.

The biggest is the stochastic indicator at the bottom of the graph. Overbought? Yes, but more importantly, the composite is starting to correct that overbought condition – the evidence comes in the form of stochastic lines that are falling back under the 80 threshold. While stochastics is far from a perfect tool, we’ve seen the index peak and bottom in perfect sync with stochastics since September. The fact that the ebbs and flows also occur at the now-established (and diverging) support and resistance lines augments the recent run-in with the ceiling.

Bottom line? We have to assume the NASDAQ is headed for the floor around 2000.

DJIA Chart
112009-dow-jones-industrial-average

Nothing particularly new or significant here, though it’s worth noting the Dow ended the week with a slight gain. On the flipside, the Dow’s heaviest volume came on Thursday and Friday – the only two days the market lost ground last week. In fact, Friday’s volume was higher than Thursday’s. That’s a bearish sign, in that traders are really not interested in ‘taking them home’ over the weekend. Indirectly it points to low confidence and conviction.

We’re looking for the Dow to mirror its counterparts and head back to support lines. For the blue chip index, that’s around 10,025, though there are a few support lines to choose from.

Economic Calendar

It was a very busy week in terms of economic data, and next week promises to be nearly as hectic.

By and large the news was good, even if it didn’t push stocks upward. Retails sales were up, inventories were down, capacity utilization was up, and inflation was tempered. Normally that’s the kind of fodders the buyers respond to. And, eventually they will as long as those basic trends remain in place.

As for next week, the biggies are Monday’s existing homes sales, followed by Case-Shiller, GDP and consumer confidence on Tuesday. Don’t worry too much about GDP, though the other two items could shake the market up a bit. New home sales on Friday will be a big one too.

By the way, since we look at it in way too much micro (short-term) detail, here’s a longer-term look at capacity utilization to offset the knee-jerk reactions to this past week’s announcement. It’s been rising since hitting a multi-year low in June. That’s an outstanding long-term sign; most major bullish periods are accompanied by rising capacity utilization rates.

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Stocks: SPY, QQQ, DIA, VXX, VXZ