Sunday, August 21, 2011

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

Last week, I wrote the following about the market:
The good news is it looks as though the market found a temporary bottom. But we are hardly out of the woods. An upside testing of the declining EMAs is in order, followed by a retest of the 112 level. If the 112 level holds, we'll be in far better shape. But that bottom is new and still very tenuous. Any rally should be considered suspect until we see prices advance through the 200 day EMA. Any move below the 112 area should be shorted.
In short, the market was trying to stabilize in some form after an extremely tumultuous trading situation over the last few weeks. Let's take a look at the charts to get an idea for what happened.

The above chart is a daily chart. Notice we can break the candle action down into two different periods. The first occurred during the sell-off; the bars were very strong (the bodies were long) and volume was increasing, indicating more people were getting out of the market, adding to downward pressure. Last week, we see an attempted rally with small bodies that hit resistance at the 10 day EMA. But the bodies are weaker and the volume is decreasing, indicating there isn't a lot of excitement for the rally. At the end of last week, there was an increase in volume on the downward moves, but the moves stabilized a little about 112.

The EMA picture is extremely bearish: all the shorter EMAs are moving lower, prices are below all the EMAs and the shorter EMAs are below the 200 day EMA. This creates a tremendous amount of upward resistance in the event of a rally.

The 5-minute chart shows shows three advances to the 120.5/121 area in the early part of last week, only to be rebuffed. However, despite a strong gap down on Thursday AM, there was little downside follow-through at the end of the week. Instead, the markets found support a little above the 112 area, which is a technically important development. If the market holds at these levels and then advances, an important, quick-forming double bottom will have formed, from which the market can move higher.

Also note the other averages have hit important areas of technical support, adding further strength to the SPYs attempt at forming a bottom last week.

This is still not a market to go long in. The technical indicators are decidedly negative and there is concern about the economy. However, I wouldn't go short unless the market breached recently reached bottoms.