It was a rough week for the stock market, and the technical action favors further weakness, writes MoneyShow’s Tom Aspray. In this type of environment, he prefers a patient approach, but does see a new opportunity in the SPDR Gold Trust (GLD), which appears to be bottoming.
Last weekend’s headline in The Wall Street Journal, "Dow Notches Biggest Weekly Gain in Month,” may have encouraged some to buy, but hopefully not at Tuesday’s highs. The Dow Industrials closed Friday down 2% from those levels.
By the end of the week, the selling was broad-based, as the Spyder Trust (SPY) was down 1.9%, the PowerShares QQQ Trust (QQQ) lost 2.9%, and the small-cap Russell 2000 (IWM) was also down 2.9%.
Things could have been even worse: if you became enamored with your Keurig coffee maker over the weekend and decided to buy Green Mountain Coffee Roasters (GMCR) when it opened last Monday, you were in real pain
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The weekly chart of Green Mountain shows that it peaked last September at $115.98, then dropped to a low of $34.06 in November. The relative performance, or RS analysis, turned negative in October, when GCMR was at $92.
Despite February’s rally, in early April, both the RS line and the on-balance volume (OBV) were already breaking down, which warned of an earnings disappointment. The stock was down over 48% for the week.
- Also read: 3 Ways to Predict Post-Earnings Shocks
As I go into more detail later, the stock market is likely to be under further pressure this week. It will be important to see how the market reacts once we get down to the April lows.
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Early last week, there were some positive signs in the economy. The ISM Manufacturing Survey (chart on left) rose to its highest level since last spring. New orders accounted for most of the gain, which is a positive, as was the slight decline in inventories.
However, construction spending numbers, also released last Tuesday, were weaker than expected. The market was also surprised by the weak numbers from ADP, as they reported only a 119,000 increase in jobs. The sharp drop in the ISM non-manufacturing composite (chart on right) added to the market’s concern, helping push the market lower heading into last Friday’s jobs report.
Even though the monthly jobs report showed a slight decrease in the unemployment rate, the number of new jobs was much lower than expected. It has raised new fears that the economic recovery is losing steam.
In particular, construction employment has barely rebounded from the early-2011 lows. If the May report (to be released on June 1) is also weak, it would send an even stronger warning.
In terms of data, the markets will get a rest this week, as jobless claims and international trade numbers do not come out until Thursday. On Friday, we get the Producer Price Index and the University of Michigan’s consumer sentiment survey.
Of course, over the weekend, elections in France, Germany and Greece are likely to bring the Euro debt problems back into focus. The ECB left rates unchanged last week, which disappointed some who were hoping for another rate cut to help their floundering economies. The pro-austerity stance of the ECB is clearly a factor in the elections.
As I pointed out on April 13, the German Dax index broke below its March lows in the middle of April. This was confirmed by the breaking of the uptrend in the blue-chip Euro Stoxx 50. Therefore, we need to watch our market even more closely.
WHAT TO WATCH
As I discussed last week, the Advance/Decline (A/D) lines, which had diverged from prices at the April highs, had rebounded back to or slightly above resistance. They have all turned down sharply with Friday’s drop.
The A/D lines are now back below their weighted moving average, and very close to short-term support, which in turn could be violated on a further decline Monday. If the A/D lines decisively break below the April lows, it will increase the chances of a sharper stock-market decline.
The sentiment picture actually got a bit worse last week, as the AAII survey of individual investors saw almost an 8% jump in the number of bulls, to 35.4% as of May 3. Last fall, near the market lows, only about 25% were bullish.
The financial newsletter writers also became a bit more bullish as the rose just over 1% to 43%. It is even worse that only 20% are bearish as opposed to a reading of over 45% bearish last fall.
Many of the inverse ETFs, as I discussed on Friday, show potential double-bottom formations. This includes the ProShares Short S&P 500 ETF (SH), which I recommended on April 19. All were up sharply Friday, but have not yet completed their bottom formations.
The major market averages are likely to stabilize near the April lows. If we only get a weak rally from those levels, it will be a stronger sign to become more defensive.
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S&P 500
The Spyder Trust (SPY) gapped lower Friday, breaking below the support in the $137.50 to $138 area in early trading. The short-term uptrend (line a) is at $136.22, with the April lows at $135.75.
If these levels are broken, there is further support from early March (line a) in the $134.36 area. Additional chart support stands between $130 and $132.50. The major 38.2% Fibonacci retracement support from the October 2011 lows is at $128.90, or 1,289 on the S&P 500.
The A/D line was able to move slightly above the bearish divergence resistance (line c) last Monday, but then dropped sharply. The uptrend (line d) is now being tested, and if broken, the A/D line should drop back to the April lows. The next major support from the November and December lows is at line e.
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Dow Industrials
The SPDR Diamonds Trust (DIA) was the only major average to make new rally highs Tuesday, but closed the week lower. From the weekly chart, the next key support is from the April 23 low at $128.16.
There is additional support at $126.92 (line a), which if broken on a weekly close would complete a double-top formation. The major 38.2% Fibonacci retracement support follows at $122. DIA is in the middle of its weekly Starc bands, with the Starc- band now at $123.55.
The RS analysis improved last week, as it moved back above its WMA. This is a sign of money moving back into the higher yielding large-capitalization stocks.
The weekly OBV is now looking more negative, as it formed lower highs last week (line b), and failed to confirm the new highs. A drop in the OBV below support (line c) would generate a stronger sell signal.
The Dow Industrials’ A/D line (not shown) also did not confirm the new highs last week, and has now dropped back below its WMA. It is still above the support from the April lows.
The DIA has strong resistance now in the $131 to $132 area.
Nasdaq-100
The rally in the PowerShares QQQ Trust (QQQ) back to the resistance in the $67.50 to $68 region now looks more like a last-gasp effort. The QQQ also gapped lower Friday, reaching the $65 area and the lower daily Starc band.
The next support sits at $64.45, with stronger levels in the $63 area. The long term uptrend (line c) is at $61.80, with the major 38.2% Fibonacci support next after that at $61.48.
The daily RS line started a new downtrend in mid-April, and has just turned lower after testing its declining WMA. A drop below the most recent lows (line d) will be more negative.
The daily OBV violated its uptrend (line f) in early April, then dropped sharply in the middle of April, as selling was quite heavy. The OBV just barely made it above its declining WMA last week, and fell well short of the downtrend (line e).
The Nasdaq-100 Advance/Decline (A/D) line formed a negative divergence at the April 2nd highs and closed Friday very near the April lows. The A/D line is acting weaker than prices which is a negative sign.
NEXT: Major Top in Small Caps?, Sector Winners, GLD and Tom’s Outlook
