Volatility spiked last week on heavy volume. I pointed to 1275 as a key level of support. The market fell through that level last Tuesday and then rallied back strongly. Wednesday saw heavy selling with the S&P 500 hitting an intraday low of 1249.05. The market rallied off the lows of the week and advanced sharply into the close on Friday to finish the week with the S&P 500 just above 1279. The ongoing situation in Japan and continued tensions in the Middle East fueled several rumors and led to wild daily swings.
There has been consolidative trading for the past four weeks. The S&P 500 finished lower for the second straight week and all three major averages closed under their 4 week and 12 week exponential moving averages. This generates a negative view on the intermediate term outlook for the market.
From a shorter term perspective the S&P 500 needs to clear the previous range floor/break down point of 1294 and then needs to exceed the 50 day exponential and simple moving averages of 1294 and 1302 to improve the short term trend.
I believe the 1302 level will be stout resistance for the market. If we fail to clear that level at some point this week look for another round of selling. The S&P 500 was up roughly 1.7% at the conclusion of trading last week. That is a deceptive number. The technical landscape of the market has deteriorated significantly over the past few weeks. If you look at each stock in the S&P 500 and the secondary market the weakness in the markets is far more pronounced then you would suspect. 60% of stocks in the S&P 500 are in good shape technically. That means that 60% of the stocks in the index are either basing or advancing. That level fell from 77% the prior week. This is the lowest reading for this measure of market strength since early October 2010. The reading is worse for the secondary markets with just 55% of stocks in good shape technically. That means in just a few weeks we have gone from close to an eight in ten chance of a stock we own moving higher to just six in ten.
The dollar continues to decline sharply. This bodes well for precious metals and commodities in general. The metals complex sold off with the rest of the market in the early part of last week, I think a good portion of that was related to margin calls. The key level of support last week for the S&P 500 was 1275. That gave way early in the week and then selling intensified and drove the index to 1249. This sharp decline triggered a ton of margin calls. In my opinion these margin calls led to people selling some of their winners in precious metals to cover loses. If the dollar continues to weaken this week we should see better performance in the metals space. The energy sector is poised to continue to provide market leadership.
Key areas of resistance for the market this week are 1290-1300 for the S&P 500, 12100 for the Dow and 2690-2720 for the NASDAQ. If market strength wanes in these areas watch for the bears to again take a leadership position. Again, 1275 is a key level of support for the S&P 500 and then 1248 is critical longer term support. If the lows of last week give way at any point in the next few weeks the pullback will get nasty.
