Saturday, July 17, 2010

Weekly Market Commentary: Bear Flag Backtest

Markets were poised for gains Thursday but then a slew of poor earnings estimates and sagging consumer confidence stuck a knife through the heart of the rally. On weekly charts this was flagged as gravestone doji on the backtest of former bear flag support - a bearish confirmation signal.

The S&P closed at 1,062 which marked former long term support but is also the neckline for the head-and-shoulder reversal which - despite the week's advances - finished on the line (keeping the reversal in play). Weekly volume rose to confirm a distribution week and with stochastics not oversold it could be another long week for the S&P.

($SPX)

via StockCharts.com

The Nasdaq is a little stronger only because it's above the reversal head-and-shoulder neckline, but like the S&P looks set to close lower next week

Nasdaq

via StockCharts.com

The Percentage of Nasdaq Stocks above the 50-day MA dropped below the 30% trigger line - the scrappy action is making for a volatile low, much like it did in 2006 and late 2007. But in each case, a tradable low did emerge.

Nasdaq Percent of Stocks Above 50 Day Moving Average ($NAA50R)

via StockCharts.com

The Nasdaq Summation Index has spent another week honoring broadening wedge support - another check in the 'buy' column.

Nasdaq Summation Index (Ratio Adjusted) ($NASI)

via StockCharts.com

Finally, weakness in the Percentage of S&P stocks above the 50-day MA didn't do enough to reverse a 'buy' trigger and is not far from a MACD trigger 'buy' (a stochastic 'buy' is already in place).

S&P 500 Percent of Stocks Above 50 Day Moving Average ($SPXA50R)

via StockCharts.com

So while Friday's torrid close was enough to undo the week's work for the bulls, leaving markets primed for yet another down week next week. Breadth indicators suggest there is a tradable bottom in place and some more upside can be expected.

Holding the Head-and-Shoulder necklines will be key...

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