Tuesday, July 5, 2011

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

Last week, I wrote the following about the markets:
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.
I obviously did not see the strength of last weeks advance. Take a look at this five minute chart:

That is an incredibly strong rally that lasted for the entire week. All the EMAs are moving higher, prices are using the EMAs for technical support and there is a strong uptrend in place. The chart is printing a series of higher highs and higher lows -- a classic rally chart.

Prices have clearly bounced off the 200 day EMA and moved through all the EMAs. All the EMAs are moving higher, and the 10 day EMA has crossed over the 20 day EMA. Also note the strength of the bars, especially Friday's. Four of the five bars last week have very long bodies, indicating prices advanced throughout the day. There was also a nice bump up in volume for the last three trading days of the week. The fact the market did not sell-off on Friday is incredibly encouraging.

The A/D and CMF all indicate that money is flowing into the market, and the MACD indicates momentum is increasing.

The above chart shows possible support levels in case of a market pullback, which would be expected after a strong rally like that which occurred last week.

This week's rally was caused by three factors: first, we had end of the quarter fund manager window dressing, which forced managers with extra cash to put it to work. Second, the Greek vote agreeing to new austerity measures means the problems caused by the EU periphery have abated at least for now. Third, the market was oversold.

At this point, we should acknowledge that the stock market is a leading indicator. The question now becomes, was this week's advance a sign that equity traders think the worst is over, and therefore it's time to get into the action? The weakness in the Treasury market last week would bear this out, as would the rise in the oil market and copper's recent advance through key resistance areas. However, I'm personally not sold on a third or fourth quarter rebound yet. Consumer spending is weakening, global manufacturing is softening, emerging economies are increasing interest rates (US exports have been strong during the recovery) and Washington is full of idiots doing everything they can to screw up the economy. I would need to see an advance through previous highs on multiple indexes (with the Russell 2000 being one) before I'm sold on the veracity of this rally.