The market traded in a tight range to start the week but it didn't take long or the volatility to pick back up. The bears and bulls split Monday's session as Tech and the small-caps ended with gains but the downside action over the next 2 days would once again threaten the 50-day MA's (moving averages).
Thursday was looking like a terrible day for Wall Street as Japan's Nikkei dropped over 6% and the selloff had spread around the world before Wall Street woke up for breakfast. Futures were showing heavy losses on the open but it is always darkest before dawn as they started to improve dramatically ahead of the jobless claims report. The bulls got some good news when they came in better-than-expected as futures turned slightly positive afterwards.
The indexes still opened slightly lower on Thursday but the 50-day MA's held for the fourth time this year as the bulls mounted a serious comeback to reclaim support.
The bounce off the lows and the bottom of the trading range gave the bulls some breathing room but Friday's pullback gave the bears the edge for the week. The major indexes finished right where we expected them and the charts from our weekend homework are showing more volatility ahead this week. (read more…)
The Dow dropped 106 points, or 0.7%, to close at15,070 on Friday. The blue-chips traded to a high of 15,300 to start the week but ended 10 points lower at 15,238 after testing 15,211. Tuesday's trip to 15,086 was a warning sign 15,000 would be tested and Wednesday's low was 14,981. This capped the Dow's first 3-straight session slide all year with the index closing at 14,995. Thursday's rebound to 15,176 was encouraging but Friday's triple-digit pullback keeps 14,800 in play on another break below the 50-day MA. We have warned 14,600 and the 100-day MA would be the bears next target on further weakness but a close back above 15,200 and then 15,350 would be clues a test of all-time highs is still possible. The Dow came into the week at 15,248 and lost 178 points, or 1.2%, by Friday's close. For 2013, the blue-chips have gained 1,966 points, or 15%.
The S&P 500 slipped 9 points, or 0.6%, to settle at 1,626. The index tried to clear 1,650 on Monday's open and made a run to 1,648 but this area of resistance has been a bull headache all month. The S&P ended the session a half-point lower but tested 1,625 on Tuesday. There was further risk to 1,600 and Wednesday's low was 1,610. The bears tripped 1,608 on Thursday's open but gave back 1,625 after the index rallied 28 points to close at 1,636. Friday's pullback put the index back at Tuesday's price points. We have warned of risk down to 1,575 on a close below the 50-day MA, or 1,600, and the 100-day MA is at 1,571. A close below these levels means 1,550 on an overshoot. The bulls could gain a ton of momentum once they crack 1,650 that could take them up to 1,675 and a test of all-time highs near 1,700. The S&P 500 started Monday's session at 1,643 and was down 17 points, or 1%, for the week. For the year, the index is up 200 points, or 14.1%.
The Nasdaq fell 22 points, or 0.6%, to finish at 3,423. Tech has struggled with the 3,500 level that was last kissed at the end of May. Monday's run to 3,484 was another failed effort but the index did close higher to end at 3,473. When mentioned the bulls needed to clear 3,475 or faced risk to 3,450 again and Tuesday's trip to 3,436 proved this theory right. Wednesday's close at 3,400 posed more risk down to 3,350 and the 100-day MA, or 3,300. These levels could be tested on a close below 3,375 and the 50-day MA. Thursday's low was 3,387 before the rebound to 3,451 and the close of 3,445. Friday's pullback keeps the action near the bottom of the current trading range. A close above 3,500 is 2% away and could be achieved if Bernanke and Oracle make surprise announcements. The Nasdaq began the week at 3,469 and declined 46 points, or 1.3%, by Friday's closing bell. YTD, Tech has advanced 404 points, or 13.4%.
The Russell 2000 gave back 8 points, or 0.8%, to end at 981. The small-caps traded to of 992 to start Monday's session and ended near its high of the day after adding 5 points. We mentioned on Tuesday morning there hasn't been a close above the 1,000 mark all year and it was important the bulls made a push to this level but the open at 985 was a clue 975 would come back into the mix. Wednesday's bottom checked-in at 971 and the close at 972 kept the 50-day MA and our 950 downside target in play. The 100-day MA is at 942. The bears pushed 971 on Thursday's open but the rebound to 989 was super bullish although we knew when 990 didn't clear on the close it couldn't be trusted. Friday's peak at 990.35 on the open was just below Thursday's peak of 990.87. A close above 990 is 1% away and if the bulls can trigger 995, the Russell would be poised for its first close above 1,000 and is also just 2% away. The Russell 2000 was at 987 before Monday's open and dropped a 6-pack, or 0.6%, for the week. For 2013, the small-caps are up 132 points, or 15.5%.
The S&P 500 Volatility Index ($VIX, 17.15, up 0.74) followed the prior weeks' pattern as we said any closes above 17.50 would lead to a possible test to 20. Monday's session was flat for the most part and Tuesday's push to 17.14 was a preview of things to come. Wednesday's high was 18.60 and the close was at 18.59. The bulls held check as Thursday's high was 18.58 and the close at 16.41 set them up for a possible push back below 15. However, Friday's finish put the VIX back in neutral territory. A close above 20 favors the bears and a break out of the current trading range. A close below 15 would favor the bulls for another run at all-time highs.
There were a number of streaks that were again in play last week as the bears made another attempt at cracking major support. The Dow's Tuesday loss streak reached 2-straight after 20-straight wins and was sandwiched in between the bears first 3-day win streak against the index.
We mentioned mid-week the test to the lows was the fourth attempt by the bears this year to crack major support and the second in 2 weeks. We have talked about the current trading range for weeks but the charts are showing more important technical developments.
As you can see from the red lines on our chart work, Symmetrical triangles are forming and they are often points of indecision. The indexes have been making lower highs and lower lows in recent weeks off the May highs and the attempts to push higher have been met with selling pressure.
This week, the indexes will need to push higher highs and higher lows on heavier volume as there is a tendency for weak volume while symmetrical triangles take shape. The good news is that these patterns or formations usually lead to an explosive move in the direction of the trend which has been bullish all year. Of course, technical patterns can fail and a series of lower highs and lower lows again this week could push the indexes out of their symmetrical triangles the other way.
The Friday/ Monday closes also turned bearish as the Dow ended both days lower last week. A lower M/F close this week would show more money is moving to the sidelines. The Dow has not finished lower on three-straight M/F sessions this year so it will be important for the bulls to get off to a good start this week and finish in positive territory.
The headlines from the upcoming week should be enough to rattle the indexes out of their current technical patterns with the FOMC meeting and some noteworthy earnings announcements. The Fed will release their decision on interest rates on Wednesday and there is little to no chance in a change in policy. Ben Bernanke will once again be the focal point of the news and with all of the tapering talk, he will need to soothe the fears that the Fed isn't still fully committed.
We aren't sure how or why there is such a tapering tantrum going on because Big Ben has said he doesn't plan on cutting quantitative easing until the unemployment rate reaches 6.5%. We believe the Fed won't taper or cut back their $85 billion monthly tab until at least 2014 and if Benny were to say this, the market would explode higher.
Bernanke has done well playing his poker hand and while he may not say this, he will say something bullish because he cannot afford to let the market go into a tailspin.
As far as earnings, FedEx (FDX, $99.12, down $0.46), Jabil Circuit (JBL, $19.42, down $0.29), Micron Technology (MU, $12.76, down $0.15), Red Hat (RHT, $45.81, down $0.04), Oracle (ORCL, $33.77, down $0.48) and Darden Restaurants (DRI, $52.54, down $0.74) will confess their numbers to Wall Street.
June option expiration is this Friday and it will also be mark quadruple expiration. This is when stock index futures, stock index options, stock futures and stock options all expire at the same time and can lead to extreme volatility.
Over the past 15 years, the Dow ended lower on the opening Monday 9 times. This puts the odds at 60% the bears take the session but June option expiration week is usually bullish in bull markets. In recent years, on Friday June expiration weeks, the market has finished split with the bears and. Bulls winning 7 apiece. Given the history it wouldn't be surprising to see a flat week with the bears winning the first half and the bulls taking the back half.
We are still in the bullish camp but we mentioned last Thursday if major support is broken then we would put on our Bear hats and start nibbling on put options. The levels to go short are: Dow 12,800; S&P (500) 1,595; Nasdaq 3,375; and Russell (2000) 960.
All of these levels are just below the prior week's lows and should trigger the next wave of support we covered with the indexes, or the 100-day MA's. A close above resistance before the Fed comments would be bullish.
Futures look like this as we head to press: Dow futures are up 55 points to 15,043 while the S&P 500 futures are higher by 7 points to 1,625. The Nasdaq 100 futures are advancing by 712 points and are at 2,949.