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Major Indexes Up Against the Wall

Major Indexes Up Against the Wall: (SPY, DIA,IWM)

Courtesy of John Nyaradi at Wall Street Sector Selector 

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Still locked in their long standing trading range, major indexes are now again (still) up against significant resistance levels, and of course, this situation will be resolved in one direction or other, as it always is.

This week’s technical developments favored the bearish side while the fundamental news was decidedly mixed with the macro picture and earnings blinking both positive and negative signs.

We have lots of news coming this week and so quite likely could see a resolution of this stalemate in the very near future.

Looking at My Screens

As always, the charts tell the story:

Chart courtesy of www.stockcharts.com

In the S&P 500 chart above, we can see the similarities among what has become a triple top formation with the first one in June, the second in August and now the third in September. 

The first two were followed by significant declines to 1010 in June and 1040 in July.  The index will find significant support at the 200 Day Moving Average at 1116 and the 50 Day Moving Average at 1093 and breaks below these points would likely yield a drop to significant support at 1040 and then 1010.

Accompanied by a high RSI reading, weak market internals and bullish sentiment, the technical picture would point to the probability of a downside move ahead. 

However, a break above 1030-1035 would likely trigger a short selling rally that could quickly go as high as 1180.

 

Chart courtesy of stockcharts.com

The Point and Figure chart paints a similar picture with resistance holding, a “sell” signal in play and a downside target of 941.70.

Like the standard chart, a break above 1130 would yield to a potential upside of as high as 1290 with little resistance along the way.

The View from 35,000 Feet

Fundamental and macro news this week was mixed.

Good News:

The Bank of Japan spent one trillion yen in an effort to sell yen and buy dollars and drive down the price of yen, a move to which the Nikkei and global markets reacted positively.

The Federal Reserve continued their previously announced Permanent Open Market Operations to buy back assets as currently owned assets expire and keep liquidity in the system.

RIM and Oracle reported positive earnings.

Initial unemployment claims dropped to 450,000 from a previous 453,000 and continuing claims dropped to 448,500 from a previous 456,900.

Retail sales recorded a +0.4% growth rate, up from +0.3% previously.

Bad News: 

Oil dropped to a two week low on concerns for global growth

Ireland and Portugal were back in the news with the Irish/German Bund spread reaching record highs along with the cost of insurance on their debt; the story was the same in Portugal and these developments helped to drive the Euro down against the dollar.

Barclays Bank issued a memo saying that Ireland may need IMF help, a view that was promptly and vigorously denied by the Irish government, but the markets seemed to rebuff those denials as gold reached a new record high.

On the home front, Fed Ex reported seeing slower growth ahead and on Friday we saw our 125th bank failure for the year.

The New York Empire Manufacturing Index posted a huge miss for September, coming in at 4.1, down from a previous 7.1 and consensus estimate of 6.4

Industrial production declined in August to +0.2% from +0.6%.

On Friday, an unexpected drop in the University of Michigan Consumer Sentiment index to 66.6 for September took that index to its lowest level in more than a year.

Unemployment remains at a quarter century high while in 2009, the U.S. poverty rate was the highest since 1994, with 14% of Americans living below the poverty line.

In the all important real estate market, Realty Trac reported that bank repossessions hit a record high in August and now one out of every 380 homes in America are in some phase of the foreclosure process.  There is now a three year supply of distressed homes on the market and this comes against the backdrop of household wealth declining 2.8% in the second quarter and the lowest median household income since 1997.

The lumber industry is an important facet of the U.S. economy and is reflective of the state of the housing industry.  This week the Western Wood Products Association reports that 2009 was its worst year on record and that 2010 timber sales and production could be even worse.  In 2005, the U.S. had a record 2.1 million housing starts that dropped to 555,000 in 2009, the lowest number of starts since World War II. 

All of this would lead to the obvious conclusion that we could expect still lower home prices ahead.

What It All Means

From a technical standpoint, the markets are poised for a significant decline and from a macro standpoint; significant risks are inherent in the slowing economy and problems in Europe heating up yet again.  Seasonality also points to increasing danger as September and October tend to be treacherous months for market declines.

Furthermore, mutual fund cash levels are at record lows and this phenomenon was also in play before both the 2000 and 2008 market meltdowns.  With not much gas left in the tank and an ominous macro environment, it’s hard to make a bullish case in the weeks ahead.

However there’s always the possibility for upside surprises from resilient earnings reports and ever present, not so invisible hand of government intervention here and abroad.

A sustained breakout higher will likely lead to a significant rally while failure here will likely lead to a significant correction to test recent lows. 

The most likely probability is for a move lower and Wall Street Sector Selector remains in the “Red Flag” mode, expecting lower prices ahead.

The Week Ahead 

This week will bring significant news from the housing market, the Federal Reserve meeting on Tuesday and a couple of bell weather earnings reports.

Economic Reports:

Monday: 

1000: September NAHB Market Index

Tuesday: 

0830: August Housing Starts

1000: August Building Permits

1415: FOMC Rate Announcement

Thursday: 

0830: Initial Unemployment Claims, Continuing Unemployment Claims

1000: August Existing Home Sales

1000: August Leading Economic Indicators

Friday: 

0830: August Durable Goods

1000: August New Home Sales

Earnings Reports 

Monday: 

Before the Open: Lennar

Tuesday: 

Before the Open: Carnival

After the Close: Adobe

Wednesday: 

Before the Open: General Mills, Zales

After the Close: Bed, Bath and Beyond

Thursday:

After the Close: Nike

Sector Spotlight:

Leaders:  Silver, Turkey, Technology

Laggards: Oil, Yen, Russia. 

Disclosure: rwm, sh, efz, psq, sef, skf, spy put option


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