Bears Remain In Charge – Weekly Market Outlook

Despite a couple of efforts to shrug it off, the market could never quite snap the downtrend that was put into place by a key reversal bar two Fridays ago. In fact, the fact that Friday’s rally efforts were thwarted at a well-established line in the sand suggests the bulls remain on the defensive.

The flipside: The bears didn’t exactly do any real technical damage when they had a chance to do so Thursday.

We’ll look at both sides of the coin, as always, after a brief run-down of last week’s and this week’s economic numbers.

Economic Data

It was a relatively modest week last week in terms of the numbers of economic news items we got, but three of them were on the important end of the spectrum.

For instance, it was a telling week for real estate. Sales of existing homes fell from a pace of 5.58 million to 5.31 million, while new home sales grew from 522,000 to a multi-year high pace of 552,000. Both are in strong uptrends. Home prices continue to rise as well.

Home Sales Chart
Source: Thomas Reuters

Durable orders, however, were disappointing. They fell 2.0% overall, and were still just flat when taking transportation orders out of the mix. Analysts were looking for at least a little ex-transportation growth.

Finally, the third and final GDP growth reading for the second quarter came in at a whopping 3.9% last week.

GDP Growth Chart
Source: Thomas Reuters

Everything else is on the following grid:

Economic Calendar

This week will be considerably busier, but with only one real highlight… September’s employment report, due on Friday. Economists expect to see total payroll growth of 205,000, up firmly from August’s disappointing job growth of 173,000. That, however, isn’t expected to be enough to move the unemployment rate dial from 5.1%.

Employment Growth, Unemployment Rate Chart
Source: Thomas Reuters

Stock Market Index Analysis

Last week, the S&P 500 (SPX) (SPY) lost 1.4%, following through on the bearish reversal effort that started to materialize late two weeks ago. And yet, though the trend is bearish, the bulls are holding a crucial line. Things could still go either way, although the bulls have more work cut out for them than the bears do.

The daily chart of the S&P 500 illustrates this idea rather clearly. We saw a streak of mostly lower lows and lower highs, since last Thursday’s gravestone doji bar… a streak that carried the index back under the 20-day moving average line. And yet, the lower Bollinger band halted the downtrend on Thursday. All it took was a kiss of that line, and the bears were stopped in their tracks.

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

Underscoring the “between a rock and a hard place” theme is the fact that the CBOE Volatility Index (VIX) (VXX) continues to find a floor at its lower Bollinger band, but is also finding a ceiling at its 20-day moving average line.

As more evidence of how feeble the downtrend is, we don’t yet have a Percent R confirmation, and we don’t yet have a bearish MACD crossunder. The confirmation from the Percent R indicator is a Percent R line that gets – and stays – below the 20 threshold.

While the daily chart of the S&P 500 looks like it still has a decent shot of shrugging off the recent weakness by pushing up and off of the lower Bollinger band, the NASDAQ Composite (COMP) doesn’t offer quite the same encouraging picture. It’s still above its lower band line, but was not only unable to move above its 20-day moving average line with Friday’s effort, but  was repelled by it… all the way back to its lower Band line. It’s different than the S&P 500’s chart, in that the NASDAQ is just one slip-up away from breaking back under the crucial support of its lower Bollinger band. [You’ll also see some major resistance is materializing for the NASDAQ at 4914, where the 50-day and 200-day lines have converged with the upper Bollinger band.]

NASDAQ Composite & VXN Daily Chart
Chart created with TradeStation

It’s also worth noting the Nasdaq Volatility Index (VXN) seems to be putting more bullish pressure in its 20-day average line than the VIX is putting on its 20-day moving average.

It matters, because the NASDAQ tends to lead while the S&P 500 tends to follow.

Or, it could simply be pointed out that we already have a bearish crossunder from the NASDAQ Composite.

The weekly chart of the S&P 500 puts a little more perspective on the market’s recent weakness. The breakdown from six weeks ago was stark, and though stocks made a respectable effort to undo the damage, they just couldn’t get that ball rolling. Last week’s close was the second-lowest weekly close of the year, and we’re still technically trending lower.

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

We’re trend followers, so we have to assume the bears remain in charge for the time being, though we also have to acknowledge that means little until both of the indices break below their respective lower Bollinger bands. If that happens, look for retests of August’s lows; we’ll reassess at that point. And if it doesn’t happen, bear in mind that each index has a thick layer of resistance above. For the NASDAQ, it’s 4914, while the for S&P 500, it’s a swath of resistance between 2000 and 2060. It will be difficult to be bullish about any upward movement from here until those ceilings are hurdled. The path of least resistance remains to the downside, though, even if just-barely.

Crude Oil Draws Lines in Sand

Without taking a closer look at the chart, it would be easy to conclude Crude Oil (USO) was back in quicksand, and headed to new lows after a short-lived glimmer of hope materialized in late August. If one takes a step back and looks at the bigger picture, however, there’s a method to the recent madness for oil, and there’s still a narrow path crude could take to bullishness. The best part of all is, the clues and lines in the sand are pretty clear.

As the chart of crude oil futures shows below, a floor has developed at $43.88, and has been verified a few times since August. That horizontal floor has been matched with a falling resistance line (green), effectively creatively a falling wedge, or pennant. This means the bulls are on the defensive, but it also gives them a way come out of this convergence bullishly…. with a break above that falling resistance line. Such a move would also hurl them well above oil’s key short-term moving average lines.

Crude Oil Futures Chart
Chart created with TradeStation

That’s still a big “if”, and even if the near-term hurdle is cleared there’s still a technical ceiling at $49.50 (dashed). But, oil still has a way to pull itself out of this funk… if it plays all of its cards right.

Trade Well,
Price Headley