Sunday, June 26, 2011

Weekly Market Commentary: Channel Support Holds

Friday's selling - selling which took the indices into Thursday's lows - typically follows with another day of selling, but the weekly picture still offers reason for optimism.

The Nasdaq is nearest to weekly channel support and is the index to watch for how channels will play as support for other indices.

Nasdaq

via StockCharts.com

The Percentage of Nasdaq Stocks Above the 50-day MA made gains on the week, but at 29% it's still oversold and stochastics are at a swing low; this is positive for a rally in the Nasdaq.

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

via StockCharts.com

The Nasdaq Summation Index is in bounce territory too - although well off the depths of despair from the 2008 bottom. But like the Percentage of Nasdaq Stocks above 50-day MA, stochastics are at a swing low where a bounce can emerge in the Nasdaq itself.

Nasdaq Summation Index (Ratio Adjusted) ($NASI)

via StockCharts.com

The Nasdaq 100 is sticking to its 2007 reaction high with the channel fast approaching. Additional, weaker support, lurks at 2,130.

($NDX)

via StockCharts.com

Small Caps haven't dropped far enough to take it to support (760 - a 2008 reaction high, or the channel). So another week of weakness might be enough to bring buyers in.

Russell 2000 Small Cap Index ($RUT): "

via StockCharts.com

The S&P enjoys a more measured rally which *should* favor support holding when the channel is tested. The flip side is the index is well off 2007 highs.

($SPX)

via StockCharts.com

The spanner-in-the-works for a successful channel test in the S&P is the break of the long standing trendline in the S&P Bullish Percent Index. However, stochastics are deep in bounce territory - so what may happen is the S&P breaks channel support, but then rallies for a couple of months.

S&P 500 Bullish Percent Index ($BPSPX)

via StockCharts.com

Given the deeply oversold condition of breadth indicators such as the Bullish Percents and Percentage of Stocks above 50-day MAs, particularly with respect to momentum indicators, the likelihood of a bounce of substance emerging soon is quite high. So although Friday's selling in all likelihood will continue Monday, this may be the opportunity to grab the knife and play for a little upside. However, breadth indicators have signaled the end of the runaway rally and what we likely have for the months ahead is a scrappy period of trading range behavior to bring in the next cyclical bear market.

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Dr. Declan Fallon is the Senior Market Technician and Community Director for Zignals.com. I offer a range of stock trading strategies for global markets which can be Previewed for Free with delayed trade signals. You can also view the top-10 best trading strategies for the US, UK, Europe and Rest-of-the-World in the Zignals Trading Strategy Leaderboard. The Leaderboard also supports advanced search capability so you can tailor your strategies to suit your individual requirements.

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