Chart Risks – Weekly Market Outlook

Last week’s strong start for the market faded rather quickly once it became clear Greece wasn’t simply going to be offered a bailout package just because it wanted one. In fact, by the time all was said and done, stocks actually lost ground last week, not to mention ended the week in near-bearish mode.  News out of Greece will likely cause some continued market swings, in both directions, until it is more officially resolved.

News out of Greece will likely cause some continued market swings, in both directions, until it is more officially resolved.

Of course, when we take a step back, none of this comes as a surprise. Although the bulls are still putting up a fight, some are clearly – now visibly – getting tired of propping the market after months and months of gains.

We’ll take that bigger-picture look at stocks right after we dissect last week’s and this week’s biggest economic news.

Economic Data

It wasn’t an especially busy week last week in terms of economic news, but it was a big week (and a bullish week) for real estate. Home sales – new and existing – soared to new multi-year high levels. Existing home sales reached an annualized pace of 5.35 million, while new homes sold at a clip of 546,000.

New and Existing Home Sales Chart
Source: Thomas Reuters

Home prices continue to move upward as well.

Also note that Q1’s GDP growth estimate was scaled back from a -0.7% to only -0.2%. It’s still a step backwards, though the nation’s economy isn’t as far underwater as it was first thought to be.

Everything else is on the following grid:

Economic Calendar

This week is going to be a little busier, though the only day’s data anyone is really going to care about Thursday’s unemployment numbers for May.

Economists believe the number of jobs created last month will fall from April’s 280,000 to 230,000, though that’s still supposed to be enough to pull the unemployment rate down from 5.5% to 5.4%. For a hint of the number of jobs the Department of Labor is going to say were created last month, however, keep an eye on Wednesday’s employment change figures from payroll processor ADP.

Payroll Growth and Unemployment Rate Chart
Source: Thomas Reuters

Stock Market Index Analysis 

In retrospect, nobody can be truly surprised the market started out on a bullish foot last week only to see that effort fade and then reverse course. Nor can we really blame the Greece debacle for the pullback. The fact of the matter is, stocks have been trapped in an up-and-down pattern for weeks. The only thing last week’s rise and fall did was repeat this pattern…. which has actually become more than a little predictable.

More important right now, based on the history of this pattern we have to assume there’s a little more downside in store for stocks. The good news is, there’s not a lot more downside in store with this pattern. There’s a floor waiting for us not too far away.

The daily chart of the S&P 500 (SPX) (SPY) isn’t a tough one to figure out currently, in terms of key support & resistance areas. The ceiling’s neat 2125, and the floor’s near 2075; both are dashed lines on our chart. Though not with perfection, this seems to be the zone the index is trapped in, content to drift from one edge of it to the other. Having just brushed the upper edge, we’re now en route to the lower boundary again.  The CBOE Volatility Index (VIX) (VXX) has also been bouncing in a range recently.

S&P 500 & VIX Daily Chart
Chart created with TradeStation

As was noted, we have to assume the lower boundary at 2075 is going to do what it’s done the last few times it was tested… which is prompt a bounceback. But, we also have to assume the S&P 500 is indeed going to fall all the way back to the floor to get the bounce started.

While it all seems logical and unconcerning on the surface (as long as 2075 holds up as a floor), there’s a subtle reason to be concerned here.

It’s easy to overlook, but the 20-day moving average line (blue) at 2103 has now decidedly crossed below the 50-day moving average line (purple) at 2107. It actually happened two weeks ago, but it wasn’t convincing until this week. Although this doesn’t inherently mean a bigger pullback is looming, it certainly doesn’t hurt the big-pullback case…. especially within the context of the concerns we have with the weekly chart of the S&P 500.

Simply put, the longer-term rally is slowing down. We couldn’t say so with confidence a month ago, but with a look at the weekly chart now, there’s no denying the new highs are a “just barely” situation, whereas they weren’t before. The distance between the older lows and the new low is also getting quite thin. The end result is a rounding shape – like an upside-down bowl – that really took an a clear form just in the past few weeks.

S&P 500 & VIX Weekly Chart
Chart created with TradeStation

The one thing keeping the index propped up in this timeframe – maybe the only thing – is the 26-week moving average line, currently at 2084. If it breaks though, with the longer-term momentum already waning, that’s a big red flag. Just bear in mind the daily chart’s floor at 2075 is also a likely floor that will have to be broken before any pullback can begin in earnest.

For that matter, bear in mind the bigger-picture trend is still technically bullish. The concerns voiced above are packed with a lots of “ifs” and “but” that may or may not come to fruition.

Yields, Bonds Now in Strong Trends

The threat of rising interest rates isn’t anything new; Janet Yellen and the Federal Reserve have been discussing the likelihood of a near-term rate hike since early this year. But, the market has all but decided it’s going to happen once, if not twice, before the end of this year. The effect on yields and bond prices (conversely) is clear. In fact, both interest rates and bond prices (TLT) are now in trends that could be tough to stop.

Both of the moving averages on the chart below are 200-day moving average lines. We’re clearly well beyond those values. Note, however, that bonds as well as yields moved back to those lines in early June to make near-perfect retests before resuming their bigger-picture trends. Those lines may serve as pivot points again in the future.

30-Year Treasury and Yield Chart
Chart created with TradeStation
Trade Well,
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