Bollinger Bands & the Market Selloff – Weekly Market Outlook

Feeling a little blindsided? That’s because you were. Things were proceeding nicely – albeit tepidly – at the beginning of last week, but some disappointing jobs data on Thursday prompted some profit-taking. Then a bearish response to an even more-disappointing jobs plan kept the sellers busy on Friday. When it was all said and done, the shortened week’s 2.0% gain at the end of Wednesday turned into a 1.7% loss by the end of Friday.

Nobody has any reason to be surprised though. As we’ve mentioned many, many times now, this extreme back-and-forth churning is going to be the norm until we work through the shellshock of August’s 17% plunge. It’ll likely (assuming history is any guide) be a few more weeks until reversals are no longer the norm…. and the market can make progress one direction or another.

We’ll look at it in detail below, but first – and very quickly – a rundown of the major economic news. There wasn’t much, but we still need to know…

Economic Calendar

There was nothing earth shattering until Thursday’s claims numbers, though they did shatter the earth. Bluntly though, the numbers weren’t that bad… traders were just looking for a reason. New claims rose form 412K to 414K (no bid deal), while ongoing claims – from two weeks ago – actually fell from 3.747 million to 3.717 million.

The only other significant data was Thursday’s consumer credit levels, though it was actually bullish. Shoppers and spenders, for the second month in a row, trounced expected increases in their credit limits. Last month’s (June) $11.3 billion increase was figured to be a fluke, so the pros posted a more normal forecast of a $5.0 billion increase for July. They were wrong again; credit availability jumped another $12.0 billion.

The implication is that credit isn’t as tough to come by as assumed, and more important, consumers are willing to tap into it. This economy may not be dead in the water after all.

Economic Calendar

The coming week has a lot more in store, but there are only a handful of data nuggets you really need to worry about moving the market.

Wednesday – Producer price inflation. Inflation is here for both consumers and producers, and is already at troubling levels…. 7.2% (not seasonally adjusted) on a year-over-year basis. Granted, it’s food and energy creating the bulk of that pain, and both have eased up on the price acceleration in recent months. The PPI figure is still at debilitating levels though.

Wednesday – Retail sales. Believe it or not, depending on whether you count automobile or adjust for inflation, consumer shopping is at record (2007) levels despite the lamentations that spending isn’t improving. Let’s see if it can persist.

Thursday – Unemployment claims. They need to be MUCH better to expect bullishness to follow.

Thursday – Consumer price inflation. The current annual inflation rate now stands at 3.6%. That’s palatable, but pushing the upper limit.

Thursday – Though investors tend to brush this off, Thursday’s industrial productivity number and capacity utilization figure are THE best long-term market/economic ‘tells’.. meaning the correlation with both of those data sets and the long-term market’s direction is very, very high. Both have been stagnant of late, jiving with the stalled market. Neither have actually moved backwards though. These figures could maker or break the market, in the bigger picture.

Stock Markets

When it was all over but the cryin’, the S&P 500 Index (SPX) (SPY) fell 19.74 points last week (-1.7%) to close at 1154.23. The move pulled the SPX right back into its 1120/1205 range (which hasn’t been an ironclad range, but it’s been pretty solid).

Of course, history is academic…. the question is, what’s next?

Frankly, it’s a coin toss at this point, as the bullish arguments are just as valid and just as numerous as the bearish arguments.

For instance, you could make the argument the S&P 500 has hit a rising support line (green) at the same time the VIX has hit a falling resistance line (orange). And, though less objective, you could make the argument that Friday was something of a mini-capitulation, with a volume spike to boot. 

On the flipside, the bears will accurately point out (as we did last week) that we already have in place a couple of the so-called ‘death crosses’ of key moving averages [50-day under 200-day, and the 50-day under the 100-day…. and the 20-day under all of them]. Even a bounce from here doesn’t mean much unless the SPX can cleat that cluster of moving averages around 1253.

There’s an X-factor here that we haven’t plotted in a long time though – the lower 20-day Bollinger band (light blue).

So far the SPX hasn’t even tested it with this current bearish move, but it’s close. What’s interesting it that it’s closely lined up with floor around 1120 (dashed, dark), and also lined up with the less-important floor at 1134 (red, dashed), where the index has hit bottom the last couple of weeks.

SPX & VIX Daily Chart

Point being, there’s more of a floor ahead that you may realize. Unfortunately, the market will have to lose a little more ground to get a nice ‘springboard’ effect. The risk in that is if the market moves just a little lower, that may spook enough traders to just go with the apparent flow and send stocks under the floor at 1120. If that happens….yikes. There’s not telling where we’ll land.

Let’s cross that bridge when we come to it though. As was mentioned above, reversals – from any levels – are more likely than continuations of a trend. Don’t forget though, even a bullish reversal is going to hit a headwind pretty quickly – at the upper 20-day Bollinger band (1232), in fact.

(Like we said, this is anything but a normal or predictable trading environment, and it’s strictly because emotions are high.)

As usual, just for a different perspective we’ll show you the weekly chart of the S&P 500 with the same basic mark-ups and indicators. The only difference here is that both sets of Bollinger bands – for the VIX as well as the S&P 500 – are now 20-week bands rather than 20-day band lines.

What’s noteworthy about this chart is just how important of a role the 20-week band lines have played for the VIX and the SPX. While both spent some outside of that boundary in early August, for more often than not the Bollinger bands have contained and/or reversed things. That’s a glimmer of hope for the bulls, even if it only means any pullback is gentler.

SPX & VIX Weekly Chart

Trade Well,

Price Headley