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. 

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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.