Sunday, July 04, 2010

Weekly Market Commentary: Bear Flags Break

After a few short weeks of trying to push higher the bear flags which had formed in the indices broke down and left new weekly closing lows. Volume climbed to register a distribution week for some indices. Worryingly, long-term stochastics for all key indices are not oversold and it could be a few more weeks (of downside) before they eventually are.

The S&P finished 18 points off the first Fibonacci retracement (61.8%) and has a measured move target down around 940 which is the 50% Fibonacci retracement. How much will it fall?

($SPX)

via StockCharts.com

It was the same story for the Nasdaq with Friday's close leaving the index some 40 points away from the first Fibonacci retracement. The 50% retracement sits at 1,900. Volume was modest and didn't rank as distribution.

Nasdaq

via StockCharts.com

The Nasdaq Bullish Percents continue their push down, but have some way to run if they are to plumb to the depths of 2008. If we are looking at a cyclical bull market I would not expect this breadth indicator to drop much below the 30% mark; should it do so then the case for a cyclical bull market is significantly weakened and the potential for a break of March 2009 lows becomes a possibility.

($BPCOMPQ)

via StockCharts.com

The Percentage of Nasdaq stocks above the 50-day MA dropped back to oversold levels, negating the June 18th attempt at a reaction bottom.

($NAA50R)

via StockCharts.com

Although the Summation Index has reached a level of support at the broadening wedge (and is usually fairly reliable as a bounce predictor). It would give certain traders some reason to be buyers Tuesday.

($NASI)

via StockCharts.com


Finally, the Russell 2000 is just 6 points off the first Fibonacci level of 592.85 with the 50% mark at 546.12. While other indices are in the same predictament it's clearer in the Russell 2000 to see a large price void beneath current price action. Not a whole lot of 'natural' support until around 500.

($RUT)

via StockCharts.com

So for next week look for the first test of Fibonacci and gauge reaction from it; a strong response should see a relatively uninterrupted rally back to and above June highs (and above 20-day, 50-day and 200-day MAs). Should the rally stall at May-June trading range support (turned resistance) then there is a strong chance for another crash scenario. Certainly, this former trading range area will be an active area for shorts.

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