Sunday, June 26, 2011

Equity Week in Review and Preview of the Upcoming Week/Month

Last week, I wrote the following about the market:
The IWMS and QQQs are both down ~ 9.5% from their peaks, while the SPYs are down ~ 7.25%, meaning the sell-offs are still in standard correction territory. This week, the most important developments will occur regarding the 200 day EMAs. The QQQs have already moved through this key technical area, while the IWMs and SPYs are holding their ground. If we see the IWMs and SPYs break this important level, the sell-off could get much worse.
There are two issues for the financial markets right now. First, for the last month the pace of economic deceleration in the US has led to concerns about the long-term implications for the recovery. Secondly, there is the issue of Greece; last week, the EU went through another white knuckle round of measures related to the Greek fall-out. Both of these events have led to bearish sentiment and market action over the last two months.

The chart above of the 5-minute/10 day price action shows that most of the action occurred in a very narrow price range. While prices twice attempted to move higher, they were unable to maintain upward momentum, and returned to their previous trading range.

The daily chart shows that prices are wedded to the 200 day EMA. The 20 and 50 day EMAs are both heading lower, but the 10 day EMA is now moving sideways. Also notice the slight uptick in volume over the last week and a half. While not significant enough to indicate a selling climax, it could indicate a price pause at the 200 day EMA level.

The technical indicators show that inflowing money more or less stalled in March. While we saw a slight uptick in May, it was hardly enough to justify a strong upward move. The CMF confirms this view, while the MACD indicates that momentum has been declining over the same period. Overall, this chart has strong bearish implications.

While the QQQQs dropped below the 200 day EMA, they are now about the 200 day EMA.

The IWMs have bounced off the 200 day EMA and are now entwined with the 10 and 20 day EMAs.

Right now, the 200 day EMAs are providing enough technical support to allow the markets to "catch their breath" from the recent sell-off. Traders have understandable concerns about the pace of recovery and the Greek debt situation. However, the disciplined pace of the sell-off and the stalling of the descent at the 200 day EMA indicate there is enough bullish sentiment to give the market pause -- at least for now.

However, a strong, multiple market break (involving 2 of the 3 major averages) below the 200 day EMA would be a watershed moment for this market. Should that happen, I would wait for a rebound into an EMA and then short.