Weekly Market Outlook – Not Winning is Almost as Bad as Losing

The market had a chance to dig its way out of trouble last week. On Tuesday and Wednesday it even looked like it would. The fact that the budding rebound effort broke down before it gelled, however, is even worse than not trying at all. Now traders have good reason to doubt any recovery effort is going to get off the ground here.

Had stocks instead edged a little low and found support where support is most expected, it would have been easy to spin the whole thing into a bullish scenario.

Still, the market has yet to slip into major trouble. There are multiple technical floors still intact. It would only take one or two more bad days, however, for those last floors to snap. The fact that this is supposed to be a tepid time of year for stocks, and the market headed into May overbought and ripe for selling.

Take a look at the daily chart of the S&P 500. The index broke below the 50-day moving average line (purple) a couple of weeks ago, tried to move back above it last week, but failed to do so. On the flipside, the green 200-day and gray 100-day moving average lines have yet to be broken. What we’re watching most, however, is the VIX’s dance with resistance at 18.0. The Volatility Index moved briefly above that level earlier this month, but it appears to be a ceiling again now… one working in conjunction with the S&P 500’s longer-term moving average lines.

S&P 500 Daily Chart, with VIX, Volume

Source: TradeStation

The same goes for the NASDAQ Composite, although it fully tested its 100-day moving average line on Thursday. The NASDAQ’s Volatility Index also is once again grappling with its own ceiling, near 21.3.

NASDAQ Composite Daily Chart, with VXN, Volume

Source: TradeStation

Zooming out to the weekly chart of the S&P 500 adds some important perspective. Namely, we can see from here the full scope of the big rally and then the recent rollover. We’re near a bearish MACD crossunder, which for the broad market usually leads into a prolonged pullback. This long-term look also reveals that the floor near 2798 that took shape over the past couple of weeks has been a relatively important ceiling in the recent past as well. That makes it a more important line in the sand now, even if it’s since become a floor.

S&P 500 Weekly Chart, with Volume

Source: TradeStation

Though not shown above, last week’s advancers and decliners as well as the market’s up and down volume are still leaning in a net-bearish direction. It’s inconsistently bearish, but bearish more often than not at this time.

Still, this is a situation in which anything could still happen. It would be unwise to dig in deep with trades in either direction.

The good news is, the make-or-break levels are clear enough. The aforementioned floors put in place by the convergence of the 100-day and 200-day moving average lines will signal a more pronounced downtrend, while the converged 20-day (blue) and 50-day moving averages around 2878 will keep the S&P 500 in check until the bulls are ready to stage a true recovery/breakout effort.

With that as the backdrop, the annual day-to-day performance graphic for the S&P 500 below tells a tale in and of itself. May’s weakness was not only not unusual, but exaggerated by the big start to the new year. We actually should, if history repeats itself, see a bullish starts to June, but that effort stumbles. It tends to recover in July, but just barely… and then stagnates through September when a modest lull ultimately gives way to year-end-bullishness.

S&P 500 Day-to-Day Annual Performance

Source: TradeNavigator

That’s not the big take-away here though. Notice that, while the average is just average, good years move higher in a straight line through early October, and in bearish years, the S&P 500 tends to move lower in a straight line for several months. If the potential breakdown does take shape, we can’t rule out the possibility that it persists for an uncomfortable amount of time.

It still won’t be the beginning of a bear market though.

 

— Price

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