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The Week Ahead: More Pain Or More Gain?

|Includes:AAPL, DIA, IWM, QQQ, SPDR S&P 500 Trust ETF (SPY)

Stocks had another choppy week, as stocks tried to continue higher early on, but then turned lower Tuesday afternoon.

After Wednesday's dismal performance, Thursday's strong close stabilized the market, even despite Friday's lower close. I was expecting the prior week's lows to be broken, but they were not.

The yields on both short- and longer-term bonds declined a bit, which gave bondholders a bit of relief after what has been a tough six weeks.

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Many bondholders are in shock, especially those in the high-yield or junk market. The chart of the SPDR Barclays Capital High Yield (JNK) shows that it hit a high of $41.95 on May 8, followed by a low on June 6 of $39.84. This was a drop of just over 7%, making its yield of 6.64% look much less attractive.

This is worse than the decline in the S&P 500 from the recent high at 1,687 to the intraday low of 1,598, which was just over a 5% decline. Many stock investors were apparently buying on the last decline, but are still wondering whether they should have waited to buy lower.

So what will the rest of the year bring for bond- and stockholders? More pain or more gain?

The completion of the weekly reverse H&S bottom formation for 30-year T-Bond yields, as discussed in my Eyes on Income column, does favor higher yields as the year progresses. Many investors are also hoping to get some clarification of Fed policy this week after the FOMC meeting, but I think the Fed will want to keep the market guessing.

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Even TIPS (Treasury Inflation-Protected Securities) have been hit hard. Lower inflation numbers and fears that the Fed would stop their bond buying has caused significant outflows, as the chart indicates. The returns have also dropped into negative territory after giving double-digit returns in 2011.

The bond market is oversold, so a rebound is likely over the next few weeks. As I mentioned a couple of weeks ago in 4 Ways to Summer-Proof Your Portfolio, I would use any rebound to lighten up on the bond portion of your portfolio, and also shorten the maturity of your holdings. I think there will be more pain for bondholders later in the year.

So what about the stock market? The sharp drop in the Japanese market has gotten most of the attention from global equity investors, but as I noted last week, some of the key Japan ETFs have reached or are very close to good buying levels.

The rest of the global markets simply appear to be going through normal corrections. The German Dax did briefly break more important support in April before again making new highs. It has continued to lead the S&P 500 since the June 2012 lows, up 36% versus a 26% gain in the S&P.

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There are no clear signs yet that the stock market correction is over. Therefore, further weakness is still likely. However, fact that the weekly NYSE Advance/Decline line did confirm the recent highs keeps the major trend positive, and further new highs in the major averages should be expected later this year.

The economic calendar was light last week, but retail sales were quite strong, while industrial production and the mid-month reading from the University of Michigan on consumer sentiment were a bit lower. All are still in positive trends, and as I discussed in A Technical Look at Fundamentals, I find it quite informative to look at fundamental data using technical analysis.

On the other hand, get ready for a full slate of economic data this week, starting Monday with the Empire State Manufacturing Survey and Housing Market Index. The latter helped confirm the bottom in the housing market a year ago, when many were still skeptical.

Then, on Tuesday the FOMC begins their meeting, and we also get the Consumer Price Index and housing starts. On Wednesday afternoon, the conclusion of the FOMC meeting comes out, as well as the press conference with Ben Bernanke, which does occasionally increase market volatility.

Of course, jobless claims are out Thursday, along with the PMI Flash Manufacturing Index, existing home sales, and the Philadelphia Fed Survey.

What to Watch
During last week, the stock market was able to please both the bulls and the bears. However, neither were all that happy by the week's close.

Last week, I was expecting the rebound in the S&P 500 to "fail in the 1,650 to 1,660 area." The S&P 500 peaked at 1648.62 on Monday, and then by mid-day Tuesday it was clear that the rally had failed.

For those who follow me on Twitter, long positions in the ProShares Ultrashort S&P 500 ETF (SDS) were established at $39.55. The first target is now in the $42.50 area, followed by $45.

With the rebound from Thursday's lows, one has to consider that the correction may be near its end, though it is not currently indicated by the technical studies. If we see two consecutive days of solid price gains along with strong A/D numbers, it could shift the outlook.

Sentiment did not change much last week, and I still think we need to see a break of the 1,585 support on the S&P 500 to create enough negative sentiment for the market to bottom out. Individual investors became a bit more bullish last week, up to 33% from 29.5% the prior week. However, financial newsletter writers fell to 43.8% bullish, down from 45.8%, and the bears picked up a few percentage points.

The number of NYSE stocks above their 50-day MAs, which I explained in a recent Trading Lesson, rose to 54 last week after hitting a low of 45. This was not as oversold as the readings at the April lows.

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The weekly chart of the NYSE Composite shows that it held above the 20-week EMA at 9,124, as well as the prior week's low. The correction has taken prices below the April high, and the weekly Starc- band now sits at 8,960.

The minor 38.2% Fibonacci retracement support from the June 2012 lows is at 8,757, and the major 38.2% support waits at 8,441.60. This is calculated from the October 2011 low.

The weekly NYSE Advance/Decline line did confirm the highs four weeks ago. It is still slightly above its WMA, and also well above long-term support (line c). If the weekly A/D line starts a new downtrend, it will signal a deeper correction.

As I reviewed last week, the daily uptrend was broken last week, and its WMA is still clearly declining. This is also consistent with a further correction.

S&P 500
The daily chart of the Spyder Trust (SPY) shows slightly higher lows over the past two weeks. The next widely watched level of support is at $159.71 and the April highs. The daily uptrend and the Starc- band are now in the $159 to $159.27 area.

The minor 38.2% Fibonacci retracement support sits at $155.94, with the 50% support at $151.89. The daily on-balance volume (OBV) is holding its uptrend (line b), but is now below its WMA. The weekly OBV (not shown) is still above its WMA, however.

The daily S&P 500 A/D line violated its uptrend (line c) on June 5, and just rebounded back to it and the declining WMA last week. A day of very negative A/D numbers early in the week will turn it more negative.

First resistance waits in the $164.50 to $165.40 area. A convincing close above $165.40 would be the first sign that the correction is over.

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Dow Industrials
The SPDR Diamond Trust (DIA) closed the week lower, but above $148.31, which was the prior week's low. It is now the support level to watch. The April highs of $148.66 were violated earlier in the month.

The daily Starc- band is at $147.51, and monthly pivot support can be found at $146.74. The uptrend (line e) at $144.50 should provide more important support.

The daily Dow Industrials A/D line closed the week just above its uptrend (line f). The A/D line does show a pattern of lower highs and lower lows, which is a sign of weakness. Resistance for DIA currently stands at $152.35 to $153.

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The PowerShares QQQ Trust (QQQ) held just above the prior week's low at $71.47, with the September high (line a) at $70.58. The 38.2% support level at $69.72 should hold on a further correction.

The Nasdaq-100 A/D line tested its declining WMA last week, and shows a slight pattern of lower highs and lower lows. The A/D line has next support at line c. There is next resistance at $73.76, with further levels at $74.21.

Russell 2000
The iShares Russell 2000 Index (IWM) stayed in a pretty tight range last week, with a high of $98.80 and a low of $96.37. The March high of $95.10 (line e) represents more important support. The 38.2% Fibonacci retracement support sits at $91.21.

The daily OBV is slightly below its WMA, but well above its strong support at the uptrend (line f). The daily A/D line has stayed in a narrow range recently, and closed the week below its WMA but well above support (line g).

Current resistance is around $99.20 to $100.38

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Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.