Stocks attempted to hold their ground on Wednesday, but afternoon selling pressure drove the major index ETFs below Tuesday's lows. The major index ETFs were down around 1%. All sectors were lower with technology, consumer discretionary and finance leading the way down. Relative weakness in these three reinforces the bearish argument here. Airlines were one of the few bright spots as the summer holiday season kicks into gear. Gold managed a small gain. The Euro sold off after a morning surge, but ended the day positive. Oil moved lower along with stocks and bonds surged to new highs for the year. Money continues to move into bonds even though the 10-Year Treasury Bond yields less than 3%. Talk about running scared. I heard one analyst argue that US bonds were attracting money because there are fewer AAA rated countries now. In other words, the supply of top rated sovereign debt is shrinking. Some bond funds, pension funds and money market funds are required to invest only in top rated sovereign debt and the US still fits the bill. For now at least.
There is really nothing new to add on the daily chart. The trend is down with a lower high forming near the 50% retracement and now a lower low this week. On a closing basis, SPY closed below the February and June closing low. The S&P 500 also closed below 1040. Sentiment is getting quite bearish and the index is getting more oversold, but the knife is still falling with the blade pointing down. At this point, we may need some sort of selling climax to forge a support level and build a base. I would not expect a "V" reversal at this stage of the game. Too much damage has been done and it will take time to repair. For bottom pickers out there, I would guess at 100 (SPX 1000) as a potential support level that could provide a bounce. This level marks a 62% retracement of the July-April advance.
On the 30-minute chart, SPY gapped down and then established resistance at 105 over the last two days. While a break above this level would be positive, I do not think it would be enough to reverse the short-term downtrend. There appears to be a big resistance zone around 105-107. Moreover, I would not expect the first bounce to hold. There will likely be another test of the low and we must then judge this test before anticipating a trend reversal.
It is a busy week on the economic calendar with the employment report due on Friday. The last report (June 4th) sent stocks sharply lower after non-farm payrolls grew less than expected. This report could have an amplified impact because trading may be thin on Friday. Monday, July 5th, is an exchange holiday and traders may look to get a jump on the weekend with an early exit on Friday. Hey, I am thinking that way myself!
Key Economic Reports:
Jul 01 - 08:30 - Initial Claims
Jul 01 - 10:00 - ISM Index
Jul 01 - 10:00 - Pending Home Sales
Jul 01 - 14:00 - Auto-Truck Sales
Jul 02 - 08:30 - Unemployment Report
Jul 02 - 10:00 - Factory Orders
Charts of Interest: None today.
This commentary and charts-of-interest are designed to stimulate thinking. This analysis is not a recommendation to buy, sell, hold or sell short any security (stock ETF or otherwise). We all need to think for ourselves when it comes to trading our own accounts. First, it is the only way to really learn. Second, we are the only ones responsible for our decisions. Think of these charts as food for further analysis. Before making a trade, it is important to have a plan. Plan the trade and trade the plan. Among other things, this includes setting a trigger level, a target area and a stop-loss level. It is also important to plan for three possible price movements: advance, decline or sideways. Have a plan for all three scenarios BEFORE making the trade. Consider possible holding times. And finally, look at overall market conditions and sector/industry performance.
About the author:
Arthur Hill, CMT, is the Chief Technical Strategist at TrendInvestorPro.com. Focusing predominantly on US equities and ETFs, his systematic approach of identifying trend, finding signals within the trend, and setting key price levels has made him an esteemed market technician. Arthur has written articles for numerous financial publications including Barrons and Stocks & Commodities Magazine. In addition to his Chartered Market Technician (CMT) designation, he holds an MBA from the Cass Business School at City University in London.
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