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Looking Ahead

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Barring some unforeseen event, it looks like we are going to close out the week on a mildly positive note. Lets pull out our crystal ball, and see what next week may hold for the broader market indices.

Before we get started, lets revisit Fibonacci retracement brackets for a moment. The basic premise behind these levels is that stocks, indices, or commodities tend to retrace 50% of their gains or losses. A 38.2% retracement is a mild correction, and a 61.8% retracement is a severe correction. Some times this numbers work magically, but I tend to view them more as psychological areas to monitor.

Dow Jones Industrial Average Daily chart

The Dow has been in a downtrend since late May, and the declining 50 and 200-day moving averages helps to confirm that. To get our retracement levels we can anchor a bracket to the 5/22 high, and the 7/11 low. If the Dow fails to crack 10,580, our late week rally will just be a mild correction in the overriding downtrend. If historical tendencies hold, the Dow will retrace 50% of its losses and rise to 10,752. The downtrend and 50-day moving average will be dropping down to add extra resistance if and when the Dow tests that level. We also have the heavy congestion area between 10,580 and 10,752 to deal with. This area tried to be support, but is now going to be tough resistance. If all that can be overcome, 10,870 would be the last retracement level.

S&P 500 Daily Chart

Today the S&P 500 has met resistance at the recent downtrend. Barring a late day surge, that will the S&P 500's first order of business Monday. Later in week it will have to fight its way through congestion between 1,224 and 1,241. The 50-dma will be dropping to make that move even harder. Break 1,260 by the end of next week would be most impressive.

Nasdaq Composite Daily Chart

The Nasdaq's chart isn't quite as clean. Closing above 2,080 today will close a gap, and take us past "mild correction status" by retracing more than 38% of its losses. Everything could be coming to a crux on Monday, as the downtrend, 50-dma, and 50% retracement level all converge to attempt to quash any further advances. If price prevails, and eventually clears 2,169 we go from severe correction to broken downtrend.

Jeff Canavan
Assistant Analyst

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