It was a real battle at resistance levels today with the market swinging back and forth all day.  But eventually the bears won out as volume picked up on the sell side.  Today’s distribution at resistance sets up the possibility of retesting support levels of this most recent correction.  I happen to disagree with IBD’s assessment of a new rally confirmation last Wednesday.  Yes, technically there was confirmation, but its still too soon to declare a new rally.  While the market has firmed a bit, selling volume still dominates and major resistance looms.  Until a breakout occurs above keys resistance levels I’m taking a very cautious approach on the long side.

Today the Nasdaq hit the wall at the 50 day moving average.  Today’s move sets up more weakness in the short term with a possibility of retesting the lows of this correction around 2050.  The 200 day moving average is also an area to watch, but has been an insignificant source of support and resistance.

The S&P has been lagging the Nasdaq of late.  It looked as if it might break above resistance at 1200 today, but failed after lunch.  It’s a significant move and sets up further weakness in the coming days, with a possibility of retesting the area around 1175.  Look for a trend change if it does.  Light volume selling would indicate a market that is increasingly getting stronger and set up a move for a stronger run at resistance.

The Dow is the weakest of the indices and has much work to do if it hopes to make a run at Dow 11,000 by the end of the year, especially considering it couldn’t handle the first level of resistance at 10,400 today.  If it can clear 10,400 it will still face stiff resistance around 10500 and again at 10700, before tackling the the mother of all resistance – (insert drum beats and glowing lights here) -Dow 11,000.  Note that selling continues to dominate.

Wow, the market never ceases to surprise does it.  Just yesterday the Nasdaq hit resistance as institutions favored selling once again which led to yet another day of distribution (for the sixth time this month).  That momentum continued in the first hour or so of trading.  I remember looking at the SelfInvestors Leading Stocks Index over there on the right and seeing decliners outnumbering advancers by 4 to 1 with heavy volume.  Looking over there now and you can see it has completely reversed!  This kind of move most likely signals that a bottom has been put in (at Nasdaq 2025, Dow 10233, and S&P 1168).  However, the indices still face resistance.. and very soon, possibly tomorrow.  It will be very interesting to see how the Dow handles 10,500, the Nasdaq 2100 and the S&P 1200.  Those are key resistance levels.  I would imagine that the indices will retreat from those areas with light selling volume and will need a few tries to finally push back above those levels.  Pay close attention to which stocks/industries/sectors lead in the coming days.  They will be your leaders should the market stage a year end rally.  I’ve got my eye on anything medical related and still feel like we haven’t seen the end of the oil run.  Take a look at one of the first oil companies to report this earnings season – Lufking Industries (LUFK).  Whether oil is at 70, 60 or 55, they will continue to make huge profits.

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.

Once again it was the Fisher show, reiterating inflation concerns.  On Tuesday the market was holding up just fine until the one man wrecking crew appeared to spoil the party.  Today, he returned to take care of the few stragglers that remained.  "Hey, be sure to turn off the lights.. oh, and don’t let the door hit you in the ass on the way out.  Party’s over Bulls, party’s over." 

This exerpt taken from the Dallas Morning News:
http://www.dallasnews.com/sharedcontent/dws/bus/stories/DN-fisher_05bus.ART.State.Edition2.
1395847e.html

Dallas Federal Reserve Bank President Richard W. Fisher says record energy prices have pushed inflation to the top end of central bankers’ tolerance zone.

"We now face higher energy prices and businesses’ desire to pass the increased costs on to their customers," he said, and inflation shows little inclination to go in the other direction.

The irony is that the main culprit of higher inflation, surging oil prices, have plummeted in the last couple of days, but the market has failed to respond.  Although,… I suppose it isn’t too surprising considering that the Fed seems hell-bent on ratcheting up rates.  The million dollar question is at what price of oil is there no longer a risk of it leading to higher inflation and how does the Fed implement effective monetary policy in conjuction with oil prices, with which it has no control?  Additionally, to what extent will the government ease supply concerns in order to keep the inflationary pressures of oil at bay?

I’m no economist and certainly don’t play one on TV, but it seems the Fed needs to ease up and let its 11 consecutive rate hikes take affect.  Now that oil has had its hurricane fear induced run up, lets see where it settles out and how infllation responds.  We need to get out of this cycle of extremes beginning with the internet bubble of ’99 and HOPEFULLY not ending with a housing crash in the future.  Practice patience Fed, practice patience. 

————————————————————-

Both the Dow and S&P are in serious trouble with little in the way of support between here and Dow 10,000 and S&P 1150.  After yesterday’s bit of capitulation in the final minutes of trading we may see a bounce from here up to resistance, but getting back above resistance any time soon looks like an impossibility.  Those charts are ugly, REAL ugly.  If there is any bright spot at all, its that the Nasdaq, the S&P600 and the Russell 2000 all have support of their 200 day moving averages.

I’ll take a look at the charts this weekend in detail.

The resiliency of the market was once again on display last week, by narrowly avoiding a meltdown one more time, as key support levels held up.  The action throws us right back into the trading range we’ve been accustomed to.  As traders/investors, the real money is to be made during decisive breakouts or breakdowns, so its certainly been a difficult year to make consistent money in either direction.  As the stalemate between bulls and bears continues and those support and resistance lines get squeezed comes an increasing likelihood of a major move in either direction.  With last weeks move comes hope of a fourth quarter breakout, but lets not forget where we came from.  There is work to do.  The market sustained significant technical damage just several days ago and will need time to repair.  Lets take a look at some key resistance levels the market will face in the coming days.

You see the Nasdaq holding at what has shaped up to be a very strong level of support at 2100.  Potential areas of resistance would include the downward trend line at the top (2165) as well as the 50 day moving average (2150).  If it can clear those two levels, all eyes will be on the area around 2,200 which it ran up against at the end of last year and at the beginning of August this year.  My feeling is we get one, maybe two more days max of buying here before hitting a wall and would be surprised if the market went anywhere ahead of the next Fed meeting.  Nothing wrong with light volume selling – just creates more bullish chart patterns.

The Dow held at support of its upward trend, but faces tough resistance towards a run at Dow 11,000.  As that upward trend line pushes the Dow closer to resistance levels (top of the triangle formation), the trading range becomes narrower, forcing the Dow to make a significant move one way or the other.  This action is generally bullish leading to a greater likelihood of a break out rather than a breakdown, but it looks like the market will need to meander sideways for some time before we know the outcome.

The S&P also managed to hold on to life support there last week and actually managed to close above the 50 day moving average.  Yes, its an impressive move considering where we were last week, but with end of the quarter activity, you have to be a bit skeptical.  By the end of next week, we should get a much more accurate view of the health of this market, at least in the short term.

After two days of destruction, triggered by yet another Fed rate hike and the prospects of yet another potentially catastrophic hurricane, the tone of the market has changed dramatically.  Amazing how fast that happens isn’t it.  Just 48 hours ago the tone of the market was fairly positive and the indices looked healthy.  That was then.  With significant technical damage done and last lines of defense (key support lines) confronted, it doesn’t look good for the bulls.  Granted we’re probably due for a bounce at key support levels here (which I’ll discuss below), but the intensity of the selling is indicating this rally is in big trouble.  It would take a small miracle to bounce quickly from here and hold at these levels.  Stranger things have happened.  We find ourselves in a nearly identical situation as just a couple weeks ago when the market was in danger of heading for the toilet when inexplicably, the market rallied back above support levels despite the worst hurricane in history.  It’s often said that history repeats itself, but I don’t see that happening for a second time.  This market needed an easing of interest rates (or at the very least some discussion that it might happen in the near future) and didn’t get it.  Gold is rallying.  Most consumer related industries are broken, housing is cracking and semis are on their way.  Jeez.. and to think I’m an optimist.

You can see from the chart below that the naz is bearing down on key support around 2100.  I would expect some sort of bounce around this level initially, but if it can’t hold there look for support in the areas of 2075 (200 DMA) and finally 2050.  Although yesterday’s move can’t be considered a day of distribution, the selling was still well above average.  Ugly any way you look at it.

The Dow is also bearing down on its trend line (it actually broke through a bit) as sell volume surges.  If it can’t hold here, there is minor support at 10,200, but Dow 10,000 becomes a very real possibility.

While the S&P also plummeted below the first line of defense of the 50 day moving average, it still has support (just barely) of the intermediate trend line.  Expect a continuation of deterioration this morning below this key support level, but its important that the S&P close the day above this line today.  Note the increasing sell volume as institutions head for the exits.

"A market shrouded under the mystery umbrella of Greenspan and Co. gave way to certainty as the bulls roared ahead toward new highs on news that rates (for a moment) will stay in place. "

That’s not the most likely headline for tomorrow, but hey I’m an optimist. I believe that at this point, the upside potential of the market is far greater than the downside potential.  With one more trading day before the Fed decision, the major indices are in decent shape as both the Dow and S&P surged off support on Friday.  The Nasdaq looks a bit weaker, but all in all still looks fairly healthy.  Sure, much of the volume surge on Friday could be attributed to options expiration and S&P reshuffling, but the way the market escalated higher without turning back after lunch on Friday was impressive and the confirmed breakout of the market on September 6^th remains intact.  We await the Fed….. but with another hurricane bearing down, the uncertainty will remain.  Lets just pray that it spares the coast from another round of destruction.  Until next time….

In the past several days, the major indices have been hanging on to support by a fingernail.. until yesterday afternoon.  A late day surge in crude and renewed inflation worries sent stocks reeling and the major indices below key support levels once again, settting the stage for further deterioration.  With the number of distribution days beginning to pile up (3 in last 2 weeks and 5 this month by my count) its clear insitutions have been taking profits off the table in August, typically not a good month for the market.  Despite the overall weakness, leading stocks have actually fared quite well (if you’ve been looking at the SelfInvestors.com Leading Stock index lately you’ve noticed that selling volume to the downside has been light), but if yesterdays move isn’t just a quick head fake, then it wont be long before market leaders take a significant beating as well.  Don’t be on the wrong side of that move.  Be vigilant about preserving cash for next move up.  Happy trading!

Lets take a look at the charts.

The Nasdaq violated its intermediate upward trend line several days ago, but has been finding support at the 50 day moving average.  With each day of distribution though, it becomes unlikely that the next level of support can hold.  While, the Naz is hanging on to the 50 day, yesterdays high volume reversal indicates that support level is in danger as well, setting the stage for a drop to the next important level – 2100.

The Dow just flat out looks ugly.  It broke key support around the convergence of the 50 and 200 day moving averages with heavy volume.  There may be support around 10,200, but that hasn’t been a major level of support in the past.  At this point, you certainly can’t rule out a 4 to 5% move to major support around Dow 10,000.  I’d certainly be betting that the Dow will hit 10,000 before it hits 11,000 at this stage of the game.

The S&P also violated a key support level yesterday, when it broke below the area around support of the 50 day moving average and the upward trend line.  The move makes it very likely that we will see a test of the next level of support in the area around 1190 – 1200.

After a fairly abrubt, unorderly pull back off the highs in the first couple days, this latest consolidation is actually shaping up to look fairly healthy.  Friday’s big drop wasn’t a major concern considering volume levels were below average and less than the day before.  In addition first level support levels are holding for now despite soaring crude prices which is very encouraging.  Let’s take a quick look at key support levels to keep an eye on for the following week. 

You see the Nasdaq bouncing off the first level of support of the upward trend line on Friday around 2150.  The Naz looks as though it will hold that level, but if not the area of previous resistance around 2100 becomes the next major level of support.

The Dow continues to trade in a fairly tight range and maintains a position above support where the 50 and 200 day moving average converge around 10,500.  I’d like to see the Dow break out of this range, providing a signal that the market is firing on all cylinders.

The S&P appears to be settling in at previous highs around 1225 and its shaping up to be a fairly strong level of support.  If it can’t hold here, keep an eye on that upward trend line, which would provide the next level of key support.