It was a relatively quiet low-volume holiday-shortened week and while the bears were rewarded with a small pullback they gave much of it back on Thursday. Both sides were able to claim some small victory as both sides continue to battle it out near some strong resistance levels.
Review of Major Stock Indexes
As can be seen in the table above, the week finished in the red for most of the indexes but the loss was minimal compared to the previous weeks' gains. Not reflected above are the volume numbers, which were low this past week, and a low-volume consolidation supports the bulls. The price pattern supports the idea we'll see another leg up in the coming week but we also need to be aware of how overbought and overloved this market is, which makes it riskier to bet on the up side.
Last week's high was achieved at a time when bullish sentiment also reached an extreme again. As shown on the CNN Greed & Fear index, it hit a high above 78 earlier in the week, a level that has been a strong warning to bulls in the past, and then it dropped sharply back below 78 into the end of the week, which shows us the bulls quickly lost interest. When you get too many bulls the market becomes vulnerable because most everyone who feels bullish is already in the market and that leaves the market without additional buyers. Oftentimes tops are formed for no other reason than that. But this index is only a warning sign and not a timing indicator for when to look for a reversal. For that we need to see what price is doing.
This past week's economic reports were mixed and provided few clues for bulls or bears to argue about. Other than the Belgium bombing it was also quiet overseas. Add in a shortened holiday week and it's not surprising to see a small weekly candlestick on the charts. But considering it was a holiday week, which is typically bullish, it was only a rally off Thursday morning's low that helped keep the week from looking more bearish. The bulls need to see the buyers continue on Monday otherwise Thursday's low-volume rally could get quickly reversed.
A Look At the Charts
S&P 500, SPX, Weekly chart
Last Tuesday's high saw the SPX up against its downtrend line from November-December 2015 and not surprisingly it then pulled back from there. After the strong run back up from February it wasn't surprising to see some profit taking at a visible resistance level (the Dow ran up to its downtrend line from May-November 2015 at the same time). Thursday morning's low saw SPX back below its 50-week MA, near 2032, but the bounce off that low got SPX back 2032 to achieve a weekly close above the 50-wma. I could argue the need for one more leg up, possibly up to the December high at 2104, but with an overbought and overloved market that would be a risky bet. But a rally above Tuesday's high near 2057 would have me looking for at least a test of the November 29th high at 2081 and then maybe the December 2nd high at 2104. For the short term, regardless of the bigger pattern (bullish or bearish), it looks like a good setup for at least a deeper pullback and hence a reason for bulls to get defensive again.
S&P 500, SPX, Daily chart
The pullback to Thursday morning's low at 2022 was not low enough to test the 200-dma, near 2017, so that's a possible support level if it gets tested on Monday. The next support levels to watch are its 20-dma, which will be near 2010 on Monday, and then its broken downtrend line from December, near 2007. Note the break of its uptrend line from February on Wednesday and it's possible we'll see a bounce back up to the broken trend line in the coming days. The line will be near 2068 by the end of the day Monday so if that level is reached we'll see if it will result in a back-test and bearish kiss goodbye.
Key Levels for SPX:
-- bullish above 2057
-- bearish below 2022
S&P 100, OEX, Daily chart
On Monday OEX had rallied slightly above its downtrend line from November-December 2015 but it was not able to hold above it by the end of the week. Thursday's rally brought it back up to the line, near 905, so it basically held on a weekly closing basis. But on the daily chart it's looking like a failed breakout attempt. In addition to testing its downtrend line from November-December, it also achieved a price projection near 909 where an a-b-c bounce pattern off the January 20th low had the c-wave achieving 162% of the a-wave. The bulls would be in more trouble, even if it's to be just a deeper pullback, if OEX drops below price-level S/R and its 200-dma, both at 895, and then its 20-dma, which is rising and will be near 893 on Monday.
Key Levels for OEX:
-- bullish above 913
-- bearish below 895
Dow Industrials, INDU, Daily chart
The Dow's daily chart below shows what looks like a perfect tag of its downtrend line from May-November 2015 (it actually stopped about 13 points short of the line). On Wednesday it dropped back down to its uptrend line from February but then broke below the line on Thursday. The rally off Thursday morning's low stopped slightly short of the broken uptrend line, leaving the possibility for a back-test to be followed by a bearish kiss goodbye. What looks bullish is the hammer candlestick for Thursday, which indicates a failure by the bears to sustain a selloff and now all the bulls need is some follow-through buying on Monday. But again, trusting an upside breakout could result in a bull trap.
Key Levels for INDU:
-- bullish above 17,670
-- bearish below 17,140
Nasdaq-100, NDX, Daily chart
The previous week's rally for NDX, into the March 16th high, had stalled at its 200-dma. Then on Monday and Tuesday it managed to close above that MA and its 62% retracement of the December-February decline, both near 4415, which had it looking like a bullish breakout. But Wednesday's selloff left a failed breakout attempt and then Thursday morning's decline broke its uptrend line from February. The rally into Thursday afternoon's high stopped at the broken uptrend line and that left us with a potential setup for a bearish kiss goodbye on Monday. If it continues to pull back further, keep an eye on a possible support level near 4356, which is its March 4th high and it's also the level where the 20-dma will reach on Monday or Tuesday. A drop below 4356 would confirm the price pattern that's looking for at least a larger pullback.
Key Levels for NDX:
-- bullish above 4451
-- bearish below 4356
Nasdaq Composite, COMPQ, Daily chart
Like the NDX, on Wednesday the Nasdaq broke its uptrend line from February but it was weaker than NDX by not being able to make it back up to its broken uptrend line on Thursday. If the buyers step back in on Monday we could see a drive up to its 200-dma, near 4866, to also accomplish a back-test of its broken uptrend line, but at the moment it's hard to argue the bull's case. As with the other indexes, this past week's high left a bearish divergence on MACD against the highs at the beginning of the month (that's not true for RSI, which leaves a question mark as far as bearish divergence or not).
Key Levels for COMPQ:
-- bullish above 4836
-- bearish below 4607
Russell-2000, RUT, Daily chart
The RUT tried hard to get through resistance near 1100, which is its H&S neckline (uptrend line from October 2014 - September 2015), and it was able to marginally break above it on March 18th but it was unable to hold it. Wednesday's sharp breakdown left a bearish divergence against its March 7th high and while it held price-level S/R near 1080 on a weekly closing basis it's looking vulnerable to a stronger pullback and potentially something more bearish. The bulls need a break above 1105, in which case I'd look for a rally to its downtrend line from June-December 2015 and its 200-dma, both currently near 1142-1144.
Key Levels for RUT:
-- bullish above 1105
-- bearish below 1040
SPDR S&P 500 Trust, SPY, Daily chart
On the SPY chart below you can see the low daily volume for the past week. Considering price pulled back on low volume one could easily argue that's bullish. Because it was a holiday-shortened week following opex week it could also be argued there just wasn't much interest in trading. MFI pulled back with price but it's essentially holding at the 70 level (69.10 close on Thursday) and that leaves the potential for another push higher to then leave a bearish divergence at a new price high. If SPY does pull back a little further keep an eye on the midline of the BB, which is the 20-dma and currently near 201. Below that would be more bearish. It has pulled back from 205, which is tough resistance at a previous chop zone, back in December, and it's entering a higher VAP above that level, all of which creates a resistance buffer.
Powershares QQQ Trust, QQQ, Daily chart
On the QQQ chart you can see the same low volume for last week and Williams %R has turned back down below -10. The last time it dropped below -10 was into the March 8th low but then a test of the 20-dma on March 10th led to another rally leg and up to the top of its BB. We could see the same thing happen again and see QQQ up to about 109 before finishing its rally. Below its 20-dma, at 106, would point to a drop to the bottom of its BB, nearing 103.
It was a relatively quiet week and while the indexes pulled back from potentially strong resistance they did it on low volume. That could be bullish with just a small pullback correction that will be followed by another push higher. The price pattern for the pullback is just a 3-wave move for a possible a-b-c pullback. That also supports the idea we'll get another leg up. It's reason enough for bears to be cautious.
In a corrective pattern an a-b-c pullback could simply be part of a larger pullback pattern so I would not hang my hat on the idea for a new rally leg. We were seeing plenty of signs of waning momentum to the upside as the indexes smacked into strong resistance levels (trend lines, Fibs, moving averages) and that made betting on the short side a better play last week. If we get a new high I'd still look at it as another shorting opportunity since the market is overbought and we have a slew of indicators that tell us the bulls are pressing their luck here.
As of Thursday's close it was a bit of a coin toss as to which way Monday will go so we'll need to see what happens on Monday. While I like the setup for at least a larger pullback, especially since the more bearish pattern calls for a very strong decline in the coming months, I'm also staying aware of the potential for another push higher before starting a deeper pullback. I think downside risk is larger than upside potential here and that's what has me looking to play the short side since this is a game of probabilities that we play. Right now the probability is for at least a larger pullback, even if we first get another minor new high.
Trade safe, have a good week and good luck with your trading. I'll be back with you next weekend.
Keene H. Little, CMT
Technicians look ahead. Fundamentalists look backward. The true language of the market is technical. - Joe Granville