Weekly Market Outlook – Still Not a Death Blow (But We’re Certainly Getting Dangerously Close)

Despite the steep selloff in the middle of the week, the S&P 500’s recovery on Friday was enough to bring it back to a breakeven for the week. The NASDAQ Composite? Not so – it did end up in the red, closing under a pretty important technical support level that had been acting as a pretty reliable floor. Even so, even then the NASDAQ remains above its most important floor, as does the S&P 500.

In other words, last week wasn’t a death blow.

There are certainly more red flags waving now than there week ago though. Indeed, we’re closer to a long-overdue meltdown than we’ve been in a long while. One or two more rough days could still push the whole shebang off the cliff’s edge.

We’ll point out all these lines in the sand in a moment. First, let’s look at last week’s biggest economic news and preview what’s in the lineup for this week.

Economic Data Analysis

The jobs report that was originally due on Friday of last week ended up being postponed until Wednesday of this week. So, the only numbers we actually got were the economic barometers from the Institute of Supply Management. They were good and bad, but more good than bad. Manufacturing activity was catapulted to a multiyear high, and though the services index didn’t budge from December’s level, it’s still holding above the pivotal 50 mark it fought its way back above late last year.

ISM Services, Manufacturing Index Charts

Source: Institute of Supply Management, TradeStation

This of course leans in a bullish direction, even if earnings and mass layoffs don’t make it seem like the economy’s actually firing on all cylinders.

Economic Data Report Calendar

Source: Briefing.com, TradeStation

As was noted, January’s jobs numbers will be posted on Wednesday. Economists expect a repeat of December’s figures, more or less; the unemployment rate should hold at a reasonably healthy 4.4%, and payroll growth of 55,000.

Unemployment Rate, Payroll Growth Charts

Source: Conference Board, University of Michigan, TradeStation

There’s little room for disappointment here, of course, particularly after the market flashed some serious vulnerability last week.

Before that report, though, we’ll be getting December’s retail sales figures on Tuesday. Forecasts call for a slight slowing from November’s growth pace, but progress nonetheless.

Retail Sales Charts

Source: Census Bureau, TradeStation

All things considered, retail spending remains a surprising bright spot for the economy, and by extension, for the stock market itself.

On Thursday we’ll start a streak of important real estate data, with sales of existing homes. They’ve been solidly rising since the middle of last year, and while still at low levels, this is encouraging. Just know that economists don’t believe this uptrend persisted through last month.

Home Sales Charts

Source: Census Bureau, Natl. Assn. of Realtors, TradeStation

New-home sales should be released by the Census Bureau sometime in the week after this one. These sales stabilized at levels below August’s surge. Even so, the bigger trend here is still pointed upward, even if very erratically.

Finally, on Friday look for January’s consumer inflation data. It’s still holding at the Fed’s target levels of between 2.0% and 3.0%, which -- given the FOMC’s recent disinterest in changing interest rates -- makes sense. Whatever the case, this is a “no news is good news” situation. A ho-hum meeting of expectations will be mostly met with no perceived reason to price this report into stock prices.

Consumer, Producer Inflation Charts

Source: Census Bureau, Natl. Assn. of Realtors, TradeStation

Producer inflation rates will be reported the week after this one, although it’s unlikely they’ll move much either.

Stock Market Index Analysis

It’s somewhat a tale of two markets. The S&P 500 managed to fight its way back to a breakeven before taking on too much water. The NASDAQ did suffer a bigger hit it didn’t bounce back from, but even so, is holding above one final -- and very important -- technical floor.

In both cases though, there’s growing cause for concern.

Let’s start with a look at the daily chart of the S&P 500, drawing out one very important detail. That is, once again the 100-day moving average line (gray) currently at 6,799 stopped the selling on Thursday, and provided a pushoff/reversal point.

S&P 500 Daily Chart, with Volume and VIX

Source: TradeNavigator

Still, there’s cause for concern. Chief among these worries is that the volume behind the down days remains much bigger than the volume behind the up days; Friday’s big bounceback wasn’t a majority opinion.

Zooming out to a weekly chart of the S&P 500 sheds some more light on the situation. Namely, the support line (pink, dashed) that extends all the way back to the middle of last year is still in play. But, the technical horizontal ceiling (pale blue, dashed) at 6,996 is as well. One or the other is going to need to give sooner or later.

S&P 500 Weekly Chart, with MACD and VIX

Source: TradeNavigator

The weekly chart shows us a couple of other things as well. One of these is the fact that the bearish MACD cross we first saw in November is still widening, confirming a broader development of bearish momentum. And, the S&P 500’s volatility index (VIX) appears to have bumped into an established ceiling at 23.0… coinciding with Thursday’s low and subsequent rebound.

That doesn’t the weakness is over and done. We’d expect the bulls to push back here and force the VIX to make a short-term peak; the pause is predictable. There’s still a good chance, however, that the bears will regroup and restart their effort this week. If the S&P 500 is going to break under its rising support line, it’s likely to coincide with the VIX popping above the 23.0 level. If-and-when that happens, it’s likely to start a corrective move that will be difficult to stop.

And the NASDAQ Composite is closer to doing that than the S&P 500 is. Take a look at the daily chart of it below. The NASDAQ did break under its 100-day moving average line (gray) at 23,175 on Wednesday, and didn’t claw back above it by the end of the week.

NASDAQ Composite Daily Chart, with Volume and VXN

Source: TradeNavigator

Notice on the daily chart that the NASDAQ’s volatility index (VXN) appears to have peaked at an established ceiling near 29.0 without actually moving above it; that could be a temporary pause, as is the case with the VIX.

The weekly chart of the composite shows us a little more clarity on not only how and where the VXN is bumping into a ceiling, but why. As you can see, the NASDAQ Composite itself is still finding support at the long-established technical floor that’s serving as the lower boundary of a long-term bullish channel. It was tested again last week, and held up.

NASDAQ Composite Weekly Chart, with MACD and VXN

Source: TradeNavigator

All the same, the bears are clearly testing bearish thresholds here, and doing so after the composite’s confirmed horizontal resistance at 23,820 (red, dashed), and at a time with the bearish MACD divergence is widening. One stumble could be all that’s needed to break the technical support line here, while simultaneously sending the VXN above 29.0 for a more sustained stretch of time.

We’ll only need to talk about downside targets if-and-when that happens.