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)

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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

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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)

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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)

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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)

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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)

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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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