 The rally last week—a gain of 5.4% on the Standard & Poor’s 500 stock index—puts the stock market in a very interesting position as earnings season starts. (Alcoa ((AA) traditionally kicks off the week and the aluminum maker reported Monday July 12.)
Instead of going into earnings season oversold—as the market was before last week’s rally—and thus ready to move up in the short-term on any good news, stocks are headed into the hurricane of earnings numbers overbought and thus with a slight propensity to go down on reports that aren’t better than expected.
The degree to which the market is overbought isn’t extreme so I wouldn’t say we’re guaranteed of a pull back as investors ask, But what have you done for me lately? of stocks that rallied last week. But the odds this week do favor the downside.
Here are the levels to watch on the S&P 500.
 Last week the market managed to climb through initial resistance at 1070 to 1078.
The 1070 level represented a 50% retracement from the June high and the 20-day exponential moving average. (See my post This stock market bounce has bought us the luxury of uncertainty for more on simple and exponential moving averages.) Those aren’t really, really major technical levels but still the market’s advance was important—if only because it meant that stocks didn’t fall far enough to make already worried investors really, really worriedÂ
The next level to the upside is 1085, and then 1093, and then 1100. None of these are hugely important numbers either but if the market can break through 1085, then optimism alone would keep it going for another 15 points.
On the downside the key number to watch is 1040. That represents support from May and June.
This is a level the really worries technical analysts since it represents what they call the neckline support in a figure that they call a Head and Shoulders Top. Suffice it to say that a conclusive break of that level—and we almost got one of those when the S&P 500 broke to 1010 earlier this month—would convince technicians that we’re headed to 950 on the index.
One important caveat, though: All this is about very short-term moves. Bigger moves, either up or down, are waiting on the resolution of fundamental worries about the financial system in Europe and the speed of global economic growth.
the question what happens to interest rates. Intc ‘s earnings could pick up the whole tech sector on Wed.. The question is what portfolio mgrs will do . The key will be volume . I f volume picks up big and banks report strong surprises . mkt could move up very quickly. Otherwise, Jim’s theory of further drops will prevail. Next few days crucial. With the mkt up 7% in 6 days , Is this the NEW NORMAL?
ruters78
The ~1010 (depending on how you compute it.. some may have it as 1008-1009) is critical as it represents the first major support for the move from Mar-09 to Apr-10. To be precise, the S&P dropped and tested that level on 2-Jul and 1-Jul. But the key is that it didn’t penetrate that level. From a technical analysis perspective, if the level has been penetrated, then more of that move will continue. Else, the move will reverse. In this case, the latter happened. Hope this helps.
Christopher…thanks a bunch! You made perfect sense and it’s comforting to know that there are others sitting on cash besides me.
I have about 50% in cash. Itching to invest
Which probably means I need to wait until Sept.
sigh
STL,
I have more then 50% in cash.
When Jim is talking about short-term moves he is talking about the price moving over a short period of time, not a “short” which is a bet against a stock. As in shorting a stock means investing in something that will make money when the thing you are shorting goes down in price. Jim’s blog isn’t about shorting stocks, and I have never seen a post by Jim about shorting anything.
My take: I expect a little more upside this week, mind you it is still a counter trend rally, IMO. Infact, the weekly chart isn’t bullish yet (yes, that means still bearish). Sure, this is volatile a market. Very good for traders.
I don’t know… the past few weeks has been all about doom and gloom. And of course last week was a vacation week, so you couldn’t read much into anything. But now, just one day into earnings with CSX and AA, all seems to be merry again. Even Cramer was all upbeat last night on CNBC saying it’s buying time. It’s ridiculous! Look at AAPL this A.M. Down 3%. On bad reports from a bad source. I can’t take this market. Nothing is sensible anymore. It’s turned out to be a gambling machine. I honestly don’t see any improvement either. It’s a shame what it has become.
Is anybody else sitting on 50% cash right now??
Also, when Jim says “very short-term moves”, that means buy and then sell quickly after it goes up a few dollars?? It’s not about buying something called “shorts”, is it??
Thanks a bunch!
Perhaps one of the readers more versed in technical anaylsis can help me out here, but what do we need to see to constitute a conclusive break? The drop to 1010 was nearly 3% below the 1040 support. Is it only inconclusive because of the subsequent rally? I just see these technical levels bandied about so much, then we smash through one and low and behold the market went… up???