Sunday, July 17, 2011

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

Last week, I wrote the following about the market:
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.
In short, the market's recent price action reflects concerns about the broader economy and the accompanying slowdown in overall activity. Nothing has changed in the last week to allay my concerns about the economy. Last week's economic news pointed to more signs of a slowdown (see the upcoming economic week in review), adding further downward pressure on the markets.

The above chart shows the rally from the beginning in early 2009. Notice that prices are above key Fibonacci levels. Additionally, prices have consolidated in a sideways pattern before -- actually, a little over a year ago. Most importantly, prices are approaching key, multi-year support levels.

Above is a chart of the 2010 consolidation, which also occurred during a time of EU economic concern. Prices used the 200 day EMA as a center of gravity, vacillating around the EMA but not moving too high or low in relation to it. Also note the shorter EMAs followed prices in the same manner.

Above is a chart for the price consolidation that has occurred over the last few months. Unlike the 2010 consolidation, this is so far occurring about the 200 day EMA, which was until recently not involved in any manner. Instead, notice the 20 day EMA is now taking the center of gravity role occupied by the 200 day EMA in the previous consolidation.

The IWMs and QQQs are also in a sideways consolidation.

With all three major ETFs, I'd use the 200 day EMA as a lower support target. I'd place upside resistance for the SPYs at 137, the QQQs at 59 and the IWMs at 86.5 - although I don't expect any of the averages to hit those levels soon. For now, the markets are still waiting out the EU situation and the determination of the US' economic trend.