Sunday, August 07, 2011

Weekly Market Commentary: Channels Break

Okay - the title is hardly a surprise given the events of last week. Yes, bullish channels are history but a new bearish channel needs a rally to define upper channel resistance. Not to mention, an extended sideways consolidation is the more favored outcome since markets don't typically swing from one trend to another.

The US downgrade will make it interesting for Monday, but buying the bad news might be the better play, particularly if there is a gap down on the open. Last week's selling was as much about U.S. debt woes as European troubles - so the downgrade isn't really 'news', but with the weekend to stew over the news it might offer the capitulation this decline requires.

The 8% hit in the Nasdaq finished within range of 2,535 support (weekly support needs a broader brush stroke when defining areas of support and resistance). Whether support holds will depend on what is lost in the first half of the week is recovered in the second.

Nasdaq
via StockCharts.com

The Nasdaq 100 is just below converged 2007 high & channel support at 2,217. It may have done enough to register as a defense of that support - so the marked 'breakdown' may not actually be so.

Nasdaq 100 Index ($NDX)
via StockCharts.com

Nasdaq Breadth has yet to reach past lows. The Nasdaq Bullish Percents are at 36% - but in 2008 this indicator dropped to 6%. However, typical swing lows occur when the percentage of Nasdaq stocks on point-n-figure 'buys' drops below 40%.

($BPCOMPQ)
via StockCharts.com

The Percentagae of Nasdaq Stocks above the 50-day MA has reached swing low territory from early 2008, 2009 and 2010; only the late 2008 swing low was lower. This is a good marker for a swing low in the Nasdaq as of Friday's close.

($NAA50R)
via StockCharts.com

Only the Nasdaq Summation Index has yet to reach swing low territory.

($NASI)
via StockCharts.com

The Russell 2000 wasn't as lucky as the Nasdaq 100. It clean sliced through channel support and support from the 2008 swing high at 760. Next support lurks down at 595.

($RUT)
via StockCharts.com

Finally, the S&P 500 cut through multiple support levels on last week's sell off. Because of its underperformance relative to the 2007 high, it may be the index to lead out once the dust settles on current selling.

($SPX)
via StockCharts.com

Surprisingly, last week's the loss in the S&P Bullish Percents was the greatest in the past 5 years. Another good reason to suggest a swing low is in play.

($BPSPX)
via StockCharts.com

Not to mention the Percentage of S&P Stocks above the 50-day MA is below the March 2009 low, plus the 2010 swing low and only a couple of percentage points away from absolute swing low in 2008.

($SPXA50R)
via StockCharts.com

Monday will be an interesting day. From a technical perspective, it's looking like a 'buy'. However, in October 2008, technicals signaled a 'buy' but the market didn't reach a low until March 2009 - although a brief swing low did emerge. The good news is that a market bottom is likely in place. The bad news is the real market bottom may not occur until the next swing low.

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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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