After a couple of high profile declines, the Dow managed to recover with a weekly gain of +157 points. The indexes refused to move lower but it remains to be seen if they can actually move higher.
The Dow declined -258 points at the open on Friday but rebounded to end the day +200. That was a 458-point recovery from the lows. On Monday, the Dow fell -312 points to end near the lows of the day at 16,001. It was a very volatile week with large triple digit moves every day.
The most positive event was the hold at support at 16,000. For seven days that level has halted further declines. When an index fails to go down the bulls begin to get anxious. Friday's rebound from a significant low at 16,013 to close at 16,471 was spectacular.
The morning saw numerous buy programs lift the Dow off its lows. Once it turned positive, the short covering accelerated to push it back over 16,400.
The challenge for the Dow is maintaining the positive momentum through the late August resistance at 16,666. The pre Fed bounce punched through that level but was quickly sold when the Fed did not hike rates. That 16,666 level should now be strong resistance again.
There was a lot of short covering in the Dow stocks on Friday. It may be tough to continue higher without that price chasing on Monday.
On the longer-term chart the outlook is not so good. The 50/200 moving average death cross is fully involved with the 50-day average in almost vertical descent. The Dow has more than 2,000 points to recover just to return to the highs and earnings are not likely to provide much lift.
You have to ask yourself this question. If the chart below were a stock, would I buy it? I suspect the answer would be no. Most investors would want to wait until the price moved back over the 16,666 level before putting their money at risk.
The S&P has the same problems as the Dow. The Friday rebound was mostly short covering with a 40 point gap between Friday's close and the nearest strong resistance at 1,990. Without additional short covering or buy programs there is little in the way of headlines on the calendar to push it higher.
The resistance band from 1,985 to 2,005 is strong but I am only showing the 1,990 level. A failure in that resistance band that produces another decline could be severe. Bullish sentiment would be trashed and the bears would come back in force.
The Biotech sector saw significant short covering on Friday after several analysts upgraded or reiterated buys on their favorite stocks. Unfortunately, the chart is still broken. The rebound could just be another short squeeze, bear market bounce and we could see another failure similar to the mid September bounce.
It would be hard to make a bullish case for the biotech chart. More time needs to pass and the direction confirmed before we assume the worst is over.
On the positive side, the sector did bounce at the 3,280 level, which was support last December. That is the right spot and that may give investors hope.
The Dow Transports closed barely positive for the week with a minimal gain of 23 points. Spiking oil prices weighed on the carriers as well as additional spending cuts in the drilling sector. Everything is pointing to a continued decline in railroad traffic other than auto shipments. If oil continues to raise it will pressure the airlines. FedEx already warned about global headwinds and falling currencies around the world are going to impact earnings in all international airlines and shippers.
The Transports have strong downtrend resistance at 8,200 and intermediate resistance at 8,000. The index did have a successful retest of the 7,640 low from early September. A violation of that low would likely point to a significant decline.
The NYSE Composite Index came very close to a complete retest of the August panic low at 9,509 with a decline to 9,565. For many analysts that would be close enough to claim. The Friday rebound was mostly short covering. I looked at several hundred charts and they all looked the same with major spikes after a week of declines.
The index has significant overhead resistance at 10,250 and again at 10,600. If this were a stock, I would not buy it.
The Russell 3000, the 3,000 largest stocks in the market, had a successful retest of the August lows and rebounded +4% from the Tuesday lows. This was the closest example of a textbook retest of all the major indexes.
The +1.47% rebound on Friday was clearly short covering and out of character with recent moves. The index has major resistance in the 1182-1189 range and it would take a convincing rally to move all 3,000 stocks past that resistance. Again, if this were a stock, I would not buy it. However, I would be tempted to try a long trade above 1,165.
The Nasdaq Composite completed the retest of the "post" panic lows at 4,530 with the dip to 4,517 on Tuesday. I am using the post panic lows since more than 1,200 stocks either failed to open or were halted for trading immediately after the open on August 24th. There were no quotes so the indexes reflected that in their prices rather than the true values. I am not using that panic low in my calculations.
The Nasdaq saw significant short covering on Friday with biotechs, semiconductors and China stocks all rebounding strongly.
However, it is a long way to real resistance at 4,900. There is significant congestion in the 4,800 range and it could be a battle to move higher.
I want to be bullish for next week but the charts do not support it. One day or even one week does not make a trend. Volatility has returned to the markets with large triple digit swings on a daily basis. This is the trademark of a market that is either topping or trying to find a bottom. Indecision is rampant and end of year portfolio restructuring is also moving the markets.
I am in the "show me" camp for next week. I would like nothing better than to see a continued Q4 rally but there is no apparent catalyst on the calendar for next week. Earnings warnings could be a challenge now that the quarter is over.
Enter passively and exit aggressively!
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