Still No Sign of a Bull

Good news regarding inflation finally rolled in on Friday as core inflation remained in check, leading to a nice little relief rally.  There continues to be no reason for the Fed to be concerned about higher oil prices creeping into other good and services and at this point appear to be just trying to match the move in oil.  It’s a difficult game to play.  Leave the rates alone for now and see where oil settles out.  In the meantime take measure NOW to reduce oil demand – greater tax incentives for hybrid car owners and use of HOV lanes.  It won’t have an immediate affect, but in two to three years it may make a difference.  See my previous post regarding oil and inflation.

With Thursday’s reversal off the lows and Friday’s continuation of the move to close near the high of the day, you’d think that the bottom is near.  Not so fast.  While the move at the end of last week offers a glimmer of a hope,  we still face a significant chance of another leg down (to Dow 10,000, Naz 2000, and S&P 1500).  I remain pessimistic based solely on the volume behind the moves on Thursday and Friday.  Volume was not impressive at all and indicates that much of the move may have just been a combo of oversold conditions/short covering.  Until the trend of high volume selling and low volume buying reverses, there is no reason to believe we have found a bottom.  The market will most likely stall out at key resistance levels in the coming days/weeks.  When the market pulls back, look for it to do so on lighter volume.  Doing so would open the door much wider for bulls to come running through.  Until then, I remain very cautious and won’t make large bets either way.

Lets take a look again at key support and resistance levels to get an idea of where we’ve been and where we might be headed.

To me, the Nasdaq looks much weaker than the other indices as tech still looks unwilling to provide any leadership.  A potential support area to watch is shaping up around 2050, but if it closes below that level it increases the likelihood of dropping to 2000, so it will be important to hold above this level.  Up above, the Nasdaq will face minor resistance at the 50 day moving average at around 2075 with much stronger resistance at 2100.  Look for the Nasdaq to have trouble getting above these levels on a relief rally in the coming days.  Looking at the volume levels, it’s clear that sellers remain firmly in control. 

With last week’s reversal, it appears that 10200 is shaping up as a support level at least in the short term.  If it closes below this level, then Dow 10,000 becomes a likely  target.  It will face significant resistance at 10400 and 10500.  Watch how it reacts to these levels in the coming days.  The two reversal days (indicated by the orange arrows) are positives as is the close near the high on Friday, but again the volume levels speak for themselves.  The bears remain in control.

Key areas to watch for the S&P:  support at 1175, resistance at 1200.

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