Last weekend, in my Market Forecast, I wrote:
"For the new week, the market is in danger of breaking down into a "correction". Besides more earnings reports, FOMC meeting is on Wednesday and the Senate will determine whether Bernanke gets to keep his seat as Fed's Chairman. The week will likely be volatile, especially the beginning. Before the week even begin, AKS reports on Monday morning, which could move the miners. Miners have some downward momentum right now, so, the report will have to be overwhelmingly positive to get positive reactions. Monday after the market, we'll hear from AAPL and TXN with their earnings. On Tuesday, we'll likely be dealing with reactions to AAPL and TXN earnings, which then, takes us right into the FOMC meeting. It's going to be a crazy week as bulls and bears fight it out to establish the next direction. SPX will have to hold the 1100 level to hold the bullish trend, and Nasdaq needs to hold the 2200 level. Below these, we're looking at SPX 1080 and Nasdaq 2150 as the nearest support."
I also added,
"Be very careful this week, with VIX back above 25, things are bound to be volatile. Vix may need to come back down of Monday, after jumping 10 points in the past 3 session. I'll be looking for some quick bounces on Monday. But, before the FOMC meeting and the confirmation of Bernanke's next term, buyers will probably be shy to stay in. So, we'll have to stay nimble and will not be shy to play puts if the downward momentum picks up."
Indeed, the market was very volatile and the momentum stayed on the downside. VIX did come down on Monday and the market had a small bounce. But, on Tuesday, the market got weak again. On Wednesday, the market was still volatile, although it eked out a win after Fed kept rates unchanged. SPX was not able to close above the 1100 level. On Thursday, SPX sank down to test that 1080 support. On Friday, the GDP report was better-than-expected. However, market's strength in the morning quickly faded and turned into a selloff in the afternoon, ending the week with SPX and Nasdaq just below their support levels.
For the week, the Dow was down 105.65 points; SPX lost 17.89 points; Nasdaq fell 57.94 points. Both gold and oil continued to fall lower as the dollar rose. At the time of this writing, Asian markets were really weak and pushing below their support levels. Gold and oil were also down. Here's how the US market looks after Friday's close:
SPX
On Friday, SPX dropped 10.66 points to close at 1073.87, below the 1080 level. The MACD and daily MAs curved down.
Nasdaq
Nasdaq lost 31.65 points to close at 2147.35, below the 2150 level. Its daily MAs and MACD also went lower.
Both SPX and Nasdaq closed just below their respective support levels. VIX is hanging just below 25, which shows nervousness on the market. Dollar kept on rising and exerting more pressures on commodity sectors. Not even a solid GDP report could cheer the market up. For the new week, it looks like the market is entering into a bearish phase. Although a bearish formation is not established in its daily MAs yet, the sentiment on the market is very bearish. There is a slew of new economic data coming in next week, starting with personal spending and construction spending on Monday, and ending with the latest unemployment report on Friday. Notable earnings include XOM on Monday, BP on Tuesday, and CSCO on Wednesday. The market has dropped very fast and far in the past 2 weeks, and could be due for a quick bounce. Although depending on if there's positive news to support the bounce, the downward momentum can easily wipe out any upwards movements. What we'll be looking for is whether SPX 1080 and Nasdaq 2150 can provide support for the market to start making higher lows and higher highs. However, since the daily MAs have already started to point down, we have to be careful at the resistance levels. SPX 1100 and Nasdaq 2200 could have now become resistances. If SPX 1080 and Nasdaq 2150 do not hold, the market can fall a lot further. Unless something can change the sentiment on the market, for example, more clarity on the bank regulation issues, or substantially better economic data, the market will have a tough time holding the supports.
Sector Watch
UUP (dollar)
UUP finally broke above its resistance at $23.2. It has proceeded to ride higher on its daily upper BB. A new bullish formation could soon be formed. Although it is getting toppy for the near term, breaking above $23.6 could give it a lot more room to rise. Since the market fall in 2008, a high dollar has translated to selling pressures in the commodity sectors. So, we'll have to watch UUP very carefully.
USO (oil)
USO closed below the $36 level last week. Its 10- and 20-day MAs have turned down. The next support level is at $35. USO has an inverse relationship with the dollar. UNG (natural gas) has already been slipping. If USO falls below $35, it could definitely be troublesome for the energy stocks.
XLF (financials)
Surprisingly, XLF hung tough last week and closed above the support at $14. It tested it on Tuesday, but, bounced back. However, the daily MAs have turned lower. It has not reached a new bearish phase, but, it does show weakness. XLF will have to at least go above $14.8 to turn back to neutral. In a week and a half, GS slumped from $170 to $150. The potential new bank regulations are really casting a shadow on the financials stocks. Any clarity without big surprises could help the financials. So, we'll still keep an eye on that $14 level.
XME (metals and mining)
XME dropped from a high above $60 to now $46 in just 3 weeks. It has fallen hard and should see a rebound soon. The $50 level would now be the resistance to break on any bounce. The $44 level is a very important support.
The best scenario for the market right now is a bounce above 1100 and trade within 1100 to 1140 for a while, perhaps for a month. The worst scenario is that the market breaks below SPX 1080 and fall back all the way to 1000. In the 2nd case, I think we could see 1100 tested one more time; and, if it fails, the downward momentum can accelerate. For scenarios in between, there are soft support levels on SPX every 20 points or so.
Good night and HappyTrading! ™
