Monday, May 16, 2011

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

First -- it's good to be back. As you know by now, blogger went down at the end of last week. It's amazing -- and a bit scary -- how omnipresent Google has become.

That being said, here is what I wrote about the markets last week.
I am still very concerned about the fundamental situation. As NDD has pointed out in his weekly high-frequency posts, most of these indicators are slowing. While the latest employment report was surprisingly positive, the spike in new claims is concerning. With the austerity movement taking hold in Washington, the "G" part of GDP is going to be weak for at least one more quarter. Although commodities moved lower last week, their overall prices are still high. In short, I don't see any strong fundamental reason for the markets to move higher right now.
I have no reason to alter my opinion at this time. As I will write throughout the week, it appears the economy is most likely moving into a soft patch which will remove upward momentum from the market. Important foreign markets (China, India and Brazil) are experiencing higher than desired inflation which is leading their respective central banks to raise rates. Gas is nearing $4 gallon which is dampening consumers and the federal fiscal situation is chaotic creating a tremendous amount of uncertainty decision markets. As such, there is little fundamental reason for markets to move higher.

Let's go to the charts:

The 10-day, 5-minute chart shows that prices have been consolidating in about a two-point range (between roughly 133.6 and 135.6) for the last 8 days. Notice that all strong advances are followed by consolidation lower.

The daily chart shows prices consolidating around the 134 level, which has operated as a center of gravity for trading for the last few weeks. Also note the 10 day EMA is now moving sideways and the 20 day EMA's advance is weakening. The 50 day EMA is still moving higher, indicating the longer-term trend is still up.

The technicals are weakening. The A/D line has moved lower as has the CMF while the MACD is dropping (indicating weaker momentum) and has given a sell signal.

None of the other markets are showing a divergence with this analysis:

While the transports have advanced to a new high, the chart appears to be forming a double top. Prices have recently moved through the 20 day EMA in a strong downward bar.

The QQQs have been trapped by the 59 price level.

After breaking out, the IWMs fell back to the 50 day EMA and are currently consolidating.

In short, none of the other markets are giving us any hope for an upside break-out. I would treat the equity markets as currently consolidating we they wait to see what the overall economic direction is.