Buckle your seatbelt it could start to get bumpy! Up until Thursday the S&P 500 inched its way higher to finally hit the 1300 level. The NASDAQ was rebounding quickly towards its early January highs. While the Dow Jones Industrials were calmly hovering near 12,000. It looked like bulls were in control and end of month window dressing would rule the day. Yet the chaos in Egypt acted as a catalyst for investors to start taking money off the table. Worries over the government toppling and control of the Suez canal suddenly up for grabs sent oil higher. Meanwhile Q4 earnings data continued to pile in but some of the high profile reports were a disappointment. Both Amazon.com (AMZN) and Ford Motor Co. (F) plunged on their results. Positive economic data failed to buoy markets as well.
The Q4 GDP estimate came in at +3.2% but Wall Street was hoping for +3.5%. It was the sixth consecutive quarter of positive GDP growth. The move was fueled by a +7.1% surge in sales. This was the biggest move for the sales component in over 25 years. Unfortunately, the report was something of a letdown in spite of the numbers. The January consumer sentiment data was completely ignored for the Egypt news. If you were curious, the consumer sentiment survey came in at 74.2, which was better than its initial reading of 72.7 and above expectations.
The biggest headline on Friday was the riots in Egypt. Tens of thousands of citizens violated curfew to protest across Cairo, challenging President Mubarak's 30-year reign. The details of the situation in Egypt are beyond the scope of this newsletter. All that matters right now is that the stock market has chosen it as a catalyst to spark the stock market correction lower. At least that's what it looks like. Friday's bearish reversal was ugly and fueled by big volume but for now it's just a one-day decline. We need to see some follow through lower.
The S&P 500 index managed to finally hit round-number, psychological resistance at the 1300 level and then couldn't get past it. With Friday's failure it only reinforces this level as overhead resistance. On a short-term basis I would look for support near 1260 or 1250. A drop toward the 1250 area would qualify as a 38.2% Fibonacci retracement of the December-January rally. Meanwhile a -5% correction from 1300 would pull the S&P 500 down toward the 1235 area, which is close to the 50% correction.
Daily chart of the S&P 500 index:
The NASDAQ Composite was seeing a pretty strong rebound earlier in the week but it was a big underperformer on Friday with a -2.4% drop. Now the move higher and the failure near the early January highs looks like a bearish double top pattern. I wouldn't be surprised to see a little bounce from the 40-dma near 2675 but that probably won't hold as support. A pull back toward the 2650 level would qualify as a 38.2% Fibonacci retracement. A -5% correction would mean a drop toward the 2626 area.
Daily chart of the NASDAQ Composite index:
I continue to watch the SOX semiconductor index. Thus far, in spite of all the volatility, the SOX is still respecting its bullish channel higher. I don't think it will last much longer. When the breakdown happens I'm looking for a sharp drop toward 420 but that's probably not the bottom.
Weekly chart of the SOX semiconductor index:
The small cap Russell 2000 index has gone from out performer to under performer but that's normal for the more volatile small caps. The $RUT has clearly broken its uptrend and shares produced a new lower high this past week. Nimble traders may want to launch short-term bearish positions on this index. I don't see any changes from my comments last week. The 765 level could offer some support but I'd much rather see a dip toward the 740 level.
Daily chart of the Russell 2000 index:
Looking ahead we're going to have a huge week of headlines in front of us. There is a full parade of economic data from PMI data, auto sales, the ADP employment report, factory orders, the ISM and ISM services indices, and of course the U.S. non-farm payrolls (jobs) report for January on Friday. At the same time Q4 earnings will continue to roll in. Yet all of this is likely to take a back seat to headlines in Egypt if the situation doesn't improve soon.
Overall when the market wants to go down it will find a reason to go down. While the violence in Egypt is troublesome I am encouraged that the correction appears to have started. The next two or three weeks could offer a great entry point to launch new bullish positions.