Monday, July 11, 2011

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

Last week, I wrote the following about the stock market:
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.
In short, the issue for the market was, "is this a technical bounce for an oversold market, or is it the beginning of new advance in the market?" Last week added evidence that the former is the case. First, consider this chart of the 10 day, 5 minute chart:

In the preceding week, prices advanced strongly whereas last week, prices moved sideways.

Prices have clearly advanced beyond key resistance levels and the shorter EMAs have advanced through the longer EMAs -- all of which are also rising. However, last week's candles were weaker and appeared to be stalling in their upward advance.

All of the technical indicators are showing a rally -- the A/D and CMF indicate money is flowing into the market at an increased pace, and the MACD shows increased momentum. However, consider the following two additional charts:

Neither the QQQs nor the IYTs -- which were both at important technical levels -- advanced beyond those levels.

Part of last week's action could simply be a consolidation of gains after a strong advance. This is standard market behavior. However, Friday's employment report should put the kabash on any strong upside rally in anticipation of economic acceleration in the third and fourth quarter. The pace of job growth is slowing, not advancing, and indicates there are problems underneath the economic surface. Any advance beyond resistance levels should be viewed suspiciously at this point until the fundamental picture improves.