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.



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



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)


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

Nasdaq Summation Index (Ratio Adjusted) ($NASI)


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)


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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