Stocks Still Consolidating in Front of Likely Volatility

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The end of last week was marked by a consolidation in stocks, a spike higher in gold and silver, rising U.S. Treasury prices, and continuing weakness in financial stocks. The European stress test (part deux) was released late Friday and eight banks in failed. Many more details were laid out in the report and analysts spent the weekend crunching the numbers to calculate their own outcome.

This week is sure to be marked with much back-and-forth from politicians in Europe as they wrestle with Italy, Spain and other bailout candidates, as well as in the U.S., with the debt ceiling deadline inching ever closer.

The nervousness among investors remains most clearly seen in sovereign bond spreads and in bank stocks. Both JPMorgan Chase (NYSE:JPM) and Citigroup (NYSE:C) failed to sustain the initial enthusiasm upon release of their earnings last week, and Citigroup, in fact, closed near the lows of the day on Friday. Those aren’t bullish signs and we remain looking for near-term bottoming clues in bank stocks.

The consolidation of stocks has now brought the S&P 500 Index down to a support area between the 50% and 61.80% Fibonacci retracements of the rally that began in late June. The index should hold this area between 1300 and 1315 on a daily closing basis if it wants to keep a higher probability of moving up again over the coming weeks.

On the other hand, we first need short-term seller exhaustion before adding defined long exposure. For example, the stochastics oscillator on the daily chart of the S&P 500 dating back to early May doesn’t give us any divergence between prices yet, which is something I would watch for to detect a bottoming process. Of course, we don’t need a divergence – rather, it is merely something to look for. But we do need either a good up day or major short-term wash out day to get a higher probability setup to add to longs again.

Most sector charts look similar to the S&P 500, such as the health care sector, as measured by the SPDR-Health Care (NYSE: XLV) exchange-traded fund. One solid up day could flip this daily chart back into bullish territory.

The energy sector is showing much more hope than it did just a couple of days ago. As a proxy for the energy sector, the weekly chart of Exxon Mobil (NYSE:XOM) dating back to January shows potential for an upside breakout. Energy is an important sector, and if it breaks higher would speak positively on the margin for the broader market.

As pointed out last week, gold and silver are gaining upside momentum again. Gold broke to new all-time highs and silver overcame important technical resistance zones. For the week, the iShares Silver Trust (NYSE: SLV) closed up 7% and the SPDR Gold Trust (NYSE: GLD) up 3.30%. Of utmost importance to the direction of equities and metals remains the dollar. Last week’s corrective move again kept the dollar index from making a higher high, but it is still making higher lows.

Earnings season moves into high gear next week and those announcements will be wrestling for center stage with all the political posturing mentioned above. Earnings reports from major technology, industrial, and banking firms also will add to market volatility. Important stocks such as Intel (NASDAQ:INTC), Apple (NASDAQ:AAPL), Bank of America (NYSE:BAC), and Caterpillar (NYSE:CAT) may determine the market’s direction for the next few weeks when they announce earnings next week.

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Serge Berger is the head trader and investment strategist for The Steady Trader. Sign up for his free weekly newsletter.


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