Sunday, August 7, 2011

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

Last week, I wrote the following about the market:
When we pull back and look at the bigger picture, we see that all the major averages are trading in a price range, and have been doing so for between 4-6 months. This tells us that traders are "taking a breather." The sum total of the news is not sufficient to move the market higher nor lower. The good news is that there is still hope the current slowdown is temporary. However, the bad news is the market has little patience for poor performance.
After a two-year rally, the market hit a sideways top and consolidated gain. Last week, that ended, as the DIAs, SPYs, and IWMs all broke two year trend lines on heavy volume, printing strong downward bars. From the highs in early may, the SPYs are down 12.75%, the QQQs are down 9.75% (although their high was hit over the last few weeks) and the IWMs are down almost 18%. The heavy hit to the IWMs shouldn't be a surprise, as this is where the riskiest players would go. However, the size of the drop is nearing bear market territory. In addition, all the major average ETFs are below the 200 day EMAs, indicating they are now in bear market territory.

The 5 minute chart shows a clear downward path with prices continuing to move through support, hitting new lows.

The daily chart shows the sheer strength of last week's sell off. The bars are incredibly strong -- most of the bodies are long and there are several downward gaps. The volume continued to spike, hitting very high levels and the shorter EMAs are all moving lower with the 10 day already below the 200 day EMA and the 20 just about to move in that direction.

Last week's action was the culmination of several events that all hit at the same time: the EU admitting the debt problems had moved into the larger European countries, increasingly downbeat US economic news, the markets hitting and moving through important technical triggers, adding to the selling pressure and a budget deal that does nothing to deal with the real
issues facing the country.

The volume, price action and confluence of price action with fundamental events is a clear warning sign to the markets. I would expect some type of price rebound at this point, but traders have moved from their consolidation range to a period of selling. There is clearly concern on the part of market players about the fundamental economic events driving and backing the market. Expect the EMAs to provide upside resistance to any price advance.