The Trading Game

Well the script didn't play out so well this week, least ways not my script. Tuesday started out with a strongly trending down day taking us to a retest of the 200 sma on the S&P500, which was fine. However, volume didn't show a great increase over Fridays level, (remember that was approaching the long weekend, and one of the lowest vol days of the year) and that was a concern for any downside play. Wednesday saw a partial reversal of the previous days losses, and interestingly a strong spike in volume into the close, in fact the final 60 minutes carried a significant % of the days volume, another cautionary warning for bears. Thursday completed the reversal and closed us at the 1285 level which I felt was the upside limit. Friday then had us probing above that level.
The Nasdaq followed a similar pattern and experienced rejection at the 200sma, and thus also has reached what I said coming into last week was likely to be its upside limit.

So looking ahead to this week, I still feel this is a corrective bounce in the sell-off that began May 11th. As such risk is still skewed towards the downside. The volume spike late in Wednesday's trading may have been caused by end of month activities by institutions, volume subsequently tailed off into Friday. As such I am still looking for a retest of the recent lows 1245 on the S&P and 2135 on the Nasdaq. Only a confirmed break above 2230 (200sma) on the Nasdaq would have me reassess that at this point.
Very little economic data out this week.

Well the market has moved on with some pace, to say the least. Last week I was looking for a bounce after the heavy selling encountered the previous Thurs and Fri. To say there was no bounce would be slightly inaccurate, as after an initial move lower the S&P500 did manage to close higher, but it was nothing to rave about. I said that 1301 would prove a difficult level to surpass on any bounce, well I needn't have worried there. The index never got close, only managing a high of just under 1298. Tuesday saw an early resumption of the selling, with a half hearted attempt at a bounce through lunch that fell short of Mondays high, and then it was time to head south again. The selling was quite fierce, with very negative market internals. We ended Friday with a small bounce.

The semiconductor index which had closed on it's 200 sma barely drew breath before plunging to new lows,this would have been a big warning that any bounce would struggle. This index set new lows for the year before registering a sharp bounce on Friday which erased most of the week's loss.

The Nasdaq Comp managed to hold its 200 sma on Mon and Tue, again with a weak bounce, before a big gap down Wednesday. Even the Friday bounce couldn't prevent the index from closing at the lowest level of the year.
A look at the daily charts shows the impact of the recent moves. S&P500 Nasdaq Comp Semiconductor As we can see the recent move has been dramatic, but not unprecidented, a similar move down occurred in October of 2005 with similar increases in volume. On that occaision the S&P and Nasdaq both breached their respctive 200 day sma. The current move exceeds that one slightly by about 10 S&P points, althogh at this time the S&P remains above its 200 day sma.

Looking ahead to the coming week, the market is carrying quite a bit of momentum. The ease with which the 200 sma was breached both on the semis and the Nasdaq suggests there is more to come. Friday saw a temporary pause in the selling with a bounce, but remember that was options expiry, and that event can often skew things. There is as evedenced by bounce attempts so far a reluctance to buy into this market at the moment.
If the S&P500 is unable to hold the 200 sma, currently at 1257 then I would expect a continuation to the lower wedge boundry at 1240. There is a potential support level ahead of that at 1247 which represents a convergence of prior swing highs from August 05 and swing low from the beginning of the year. I will be watching the behavoir of the market closely in this region.
Any bounce in the Nasdaq currently has in my opinion an upside limit of the 200 sma currently at 2228. I would not expect a bounce in the S&P500 to fair better than 1285. Most swing traders will be looking to sell into bounces, anyone caught long from higher levels will be looking to exit on any strength and any bottom pickers on the way down who are now negative will be lookin to do the same. All this creates an abundance of overhead supply.

Another week of consolidation finally appears to have brought a breakout to new highs in the S&P500 on Friday. The closing high of 1325.76 represents the highest close on that index since 15th Feb 2001 The Dow too has achieved a similar feat, and it now seems likely that the Dow's all time high at 11,750 should at least be touched. Market sentiment whilst still bullish has given some creedence to the "sell in May" addage, and there has been increasing talk in the media of an impending correction, all this sort of talk tends to fuel gains since markets seldom do what the majority expects, when they expect it.
That said however, the interesting points for me about this breakout are, the absence of a marked increase in volume (volume actually declined on the NYSE on Friday), and the lagging Nasdaq. This would lead me to doubt the validity of the move, and I would wonder if it is simply a move to wrong foot the crowd in the wake of increased speculation of declines, ie to squeeze any weak shorts out of their positions.
This weeks news will be dominated by the FOMC meeting which delivers it's interest rate decision on Tuesday.

Last week finally saw a break to the some month long trading range occupied by the S&P500. As highlighted in the last few viewa the index was trading in a 'neutral zone' between 1310 and 1295 give or take a point. On Wednesday a clear break below this level was achieved. The index briefly dipped below the 50 day sma, before apparently finding temporary support there. Volume increased on the break, though in fairness I would have to say, not quite to the level I would have expected. Overall volume levels in my opinion still remain quite light for the time of year. I would now expect the lower border of that trading range to act as resistance on any rally attempt. S&P500 daily
The Nasdaq Composite also fell below it's breakout point around 2332, again I would expect that level to provide some resistance to any advance.
With earnings season kicking into full swing there will be no shortage of news for investors and traders to sift through

In with a bang and out with a whimper.
On the 3rd of Jan the S&P500 roared into the new quarter tacking on 19 points, and by the end of the first five trading days had advancd 41 points. This week saw the end of that quarter with a sloppy choppy range for the entire week of just 19 points.
However in fairness it must be stated that S&P did turn in a solid 3.7% gain for the quarter, matching the Dow Jones Industrials, whilst the tech heavy Nasdaq secured a 6.1% rise.

So what for the week ahead, and a bright shiny new quarter? Well needless to say, given the narrow and choppy range, not a lot has changed since last week, indeed the S&P sits a mere 7 points lower than it did this time last week, and as such the levels to watch on that index remain the same, 1310 on the upside, and 1295 on the downside. See last weeks view

So lets take a look at the Nasdaq weekly chart Again as with the S&P, a rising wedge has been formed, its origin in late 2004. The upper boundary is possibly a little shallow, but rising nonetheless. What sets this chart apart from the S&P of course is that the wedge has been breached to the upside. The Nas rises out of the wedge, falters, and retests the upper boundary from above. In keeping with the principle that old resistance, once breached, becomes new support. We can see that the index, after a few failed attempts to break decisively away, has been consolidating along the top of the upper boundary. Zooming into the daily chart Nasdaq daily As we can see from the daily chart, the Nasdaq has been in a rather choppy congestive range between around 2240 and 2340 for some months now, upside momentum has been hard to come by. Just this week the index attempted to breakout and has managed new multi-year daily closing high. It will be crucial in the coming week that the index remains above that former high of 2331. A definitive break-away here leaves little definable resistance until the 2500 area. Failure to hold the breakout would leave a lot of bulls trapped in new open positions.

If the Nasdaq advance is to be sustained then the Semiconductor index (SOX) will have to play a key role. It has often been a common saying "As the SOX goes, so does the Nasdaq." The basis of this lies in the fact that the SOX makes up for about 25% of the Nasdaq weighting, and as such is incredibly influential in the fortunes of the Nasdaq.

Bearing this in mind, if we now look at the Semiconductor Index we can see that in the bigger picture on the weekly timeframe the index has made a possible double top with the high established in Jan 2004, and the most recent one this Jan. Zooming in to the daily chart and compare this to the Nasdaq, we can see that the SOX has diverged since mid-March. This divergence cannot continue, either the SOX must step into line and rally to join the Nasdaq, or I fear the Nasdaq advance is in trouble. Currently the SOX is experiencing resistance in the 510 area to add to its woes, it has fallen beneath the 20 and 50 day smas. Unless the SOX can rally from here I feel the 200sma, currently at 481, beckons and that would truly be the line in the sand.

Economic highlights this week