Market Direction Debate WIll Focus On These 2 Areas
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The major
indexes were able to snap their multi-week losing streak and finish higher last
week, despite mixed economic reports and oil finishing at a new all-time high.Â
Perhaps a shortage of negative news from corporate America was behind the gains,
or it could have simply been equities bouncing from oversold conditions. Either
way, the feeling early in the week was that the sellers were exhausted, and
there simply just wasn’t as many left who wanted to sell.
The
September SP 500 futures closed Friday’s session with a gain of +0.75 point,
while the Dow futures tacked on 19 points. Both contracts finished the week
with gains of +15.50 and +185 points respectively. On a weekly basis, the ES
posted a market structure low off of its 200-week MA. Looking at the daily
chart, the ES posted a bullish engulfing line, but still remains below its 38%
Fib and 20-day MA resistance as it forms an inverted cup and handle. For you
3-Line Break followers, the ES needs to close above 1102.75 to break long on
the daily chart. The YM also posted a weekly market structure low and was able
to squeak out a close above its 20-day MA, but continues to form an inverted cup
and handle. In the small caps, the Russell E-mini (ER2) posted a weekly market
structure low and continues to form an inverted cup and handle as it tests its
38% Fib retracement of its July down move.
               
September
bonds (ZB) posted a weekly hanging man and are back up to test the broken
neckline of the head-and-shoulders pattern broken earlier in the week. The
Semiconductor Index (SOX)
posted a weekly hammer and market structure low
off of its lower channel line and finally confirmed its daily AB=CD pattern with
a break of its daily downtrend line.
               
Last week’s
strength essentially erased the prior week’s declines, as the magnitude of the
movements were virtually identical. It’s important to note that nothing has
changed from a fundamental standpoint, other than the fact that crude oil is
roughly 3% higher than last week. This clearly is not a positive, but all of a
sudden bad news has not mattered as much to the markets. It seems like the
weakness seen in the last 4 weeks has gone a long way towards lowering
expectations. Not only have expectations been lowered with regard to earnings,
but they have also been lowered towards economic data, as was evident on Friday
when the GDP figures for Q2 were well below estimates.Â
Moving
forward, the debate over market direction will be focusing on whether the
economy has simply transitioned into a slower growth period, or about to roll
back over into a recession. A period of slower growth may largely be reflected
in stock prices already (as measured by the SP 500). On the other hand, a
reversion back into recession would send corporate profits into a tailspin.Â
But, from everything we’ve seen and heard, it’s hard to imagine a recession
starting anytime soon. Also, economic growth for the next 2 quarters should at
least be decent (above 2.5%). While the trend is still by all means down, I
still believe a decent summer rally could pan out when market players realize
that economic activity is not going to fall off a cliff in the months ahead.
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Please feel free to email me with any questions
you might have, and have a great trading week!
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