Weekly Market Outlook – Not Exactly a Convincing Recovery Effort

As expected, last week the market bounced back a bit from the major setback suffered two Fridays ago. As feared, it wasn’t much of a bounce (relative to the sheer size of that one-day stumble anyway). It’s just too soon to say things are on the mend. The S&P 500’s 1.8% gain for the week didn’t actually clear any major hurdles, and certainly did unwind the prior week’s loss. Stocks could still easily slip into more serious trouble from here.

The good news (still) is, it’s crystal clear where that selling will reach a point where it’s going to become self-fueling. And it’s not too far away from where stocks ended last week’s action.

We’ll look at these levels in some detail in a moment. Let’s first talk about the economic data we’re not getting, and what we might finally get next week.

Economic Data Analysis

News flash! The federal government is still shut down. Investors don’t see to care much. They’re still moving as if it doesn’t matter (and perhaps it doesn’t). Due to the shutdown though, we didn’t hear last week’s scheduled reports on inflation, retail sales, housing starts and building permits, and capacity utilization and industrial production. We’re also still missing September’s jobs report.

Everything we did hear -- which isn’t much -- is on the grid.

Economic Data Report Calendar

Source: Briefing.com, TradeStation

This week’s pretty light. In fact, the only news we’re going to get is on the real estate front. On Tuesday we’ll hear Thursday’s sales of existing homes for September from the National Association of Realtors, and on Friday, we might hear last month’s new home sales data from the Census Bureau. Forecasts calling for a slight improvement in existing home sales, although it will still be alarming low. Meanwhile, new home sales are expected to peel back from August’s strange surge. The buyer’s incentives that spurred this swell of purchases isn’t sustainable.

New, Existing Home Sales Charts

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

On Friday we’ll hear the third and final look at the University of Michigan’s sentiment measure. It should be down slightly from September’s final figure, which isn’t particularly encouraging.

Consumer Sentiment Charts

Source: Conference Board, University of Michigan, TradeStation

Look for the Conference Board’s release of consumer confidence next week. It’s also been trending lower, and given the backdrop, it seems unlikely this is going to change this time around.

There’s also apparently some expectation that we could hear last month’s consumer inflation report on Friday of this week, or maybe even by Friday. Economists also seem to think it’s going to be as firm as August’s, if not slightly higher. We’ll see.

Stock Market Index Analysis

We’ll start this week’s analysis with a look at the daily chart of the S&P 500, since it tells us the most about what’s happening now… and not happening. As could have been predicted, the bulls did push back following the prior Friday’s steep selloff, never letting the index slip below the 50-day moving average line (purple) at 6,564. However, they never actually got the index back above the proverbial hump… the 20-day moving average line (blue) at 6,676. The S&P 500 briefly traded above the pivotal level on Wednesday and Thursday, but ultimately met too much resistance. It ended up closing higher on Friday, but remains on the wrong side of a few too many technical ceilings.

S&P 500 Daily Chart, with Volume and VIX

Source: TradeNavigator

Also notice that none of last week’s “up” days were on higher volume, while Wednesday’s and Thursday’s intraday setbacks were on higher volume.

The weekly chart puts last week’s action in more perspective. From this vantage point we can still sense and even see that the bullish momentum that had been in place since April suffered a significant blow two weeks ago that wasn’t unwound last week; notice the MACD lines are still inching their way toward a bearish cross. The only thing that needs to happen to push the bearish effort past the tipping point is a move under the rising support line (blue, dashed) that extends back to May.

S&P 500 Weekly Chart, with MACD and VIX

Source: TradeNavigator

That being said, notice the VIX peeled back from Thursday’s and Friday’s surge. It was an expiration day, which might explain the above-average slide. Still, to the extent it wasn’t caused by a wave of option expiration, this pullback loosely works against the bearish thesis here. Perhaps fear has run its course… at least for the time being.

And the NASDAQ Composite’s chart looks just about the same, although it may be even a bit tighter. That is to say, the composite fell back to a long-established rising support line (red, dashed) that extends back to May, but appears to be finding a firm floor there now. The NASDAQ’s 50-day moving average line (purple) at 22,110 is right below there, ready to lend a helping hand as support.

 NASDAQ Composite Daily Chart, with Volume and VXN

Source: TradeNavigator

Even so, like the S&P 500, there was clearly more bearish volume than bullish volume from NASDAQ-listed names last week, and it’s not like the composite dished out a decisive bullish recovery move. It may have merely been unable or not ready to dish out any more downside after such a rapid and sizable selloff two Fridays ago. The bears could have easily regrouped since then, and now stand ready to take control again early this week.

Bottom line? Things could still easily go either way from here, largely because the market is still just too high, and overvalued. But, the technical trend is still bullish.

The good news is, it’s becoming clearer and clearer where a more concerning degree of selling can (and likely will) start. For the NASDAQ Composite it’s the 50-day moving average line currently at 22,110, and for the S&P 500, it’s also the 50-day line (purple) at 6,564. In both cases, however, we’d really need to see the VIX and VXN move above their recent technical ceilings to say the tide has truly taken a turn for the worse. Just bear in mind even “for the worse” doesn’t mean we’re entering a full-blown bear market. It’s only going to be starting out as a much-needed corrective move, and reset of the longer-term advance.