The first day of a fresh trading week saw the S&P 500 INDEX, RTH start off on a weak note. Financials including Bank of America (NYSE:BAC) and JP Morgan Chase (NYSE:JPM) led the broader market lower while defensives like consumer staples, utilities, and healthcare outperformed on a relative basis. Bonds also rallied as one would expect on such a day so all in all it was a classic and much needed consolidation day where risk aversion and profit taking for those fortunate enough was the name of the game.
Spying at the S&P 500 we note that with yesterday’s sell-off now brought the index right back to the downtrend line where on July 1 it broke higher from and right to the second area of support near 1320 that I discussed yesterday. Next support is at 1,310 followed by the 1,300 area. Technical analysis 101 here would dictate that a retest of the blue downtrend line would now lead to higher prices again. Given that this is a fairly obvious level however I would not put too much weight on it but rather see 1,310 and 1,300 as more trustworthy bounce levels.
It so happens that those two levels also coincide with the 50% and 61.8% Fibonacci retracement levels. And if you’ve read my analysis for a while you know that I prefer to see a multitude of technical indicators come together at any given level to make it more trustworthy as support or resistance.
The most troubling chart of the day? JPMorgan (NYSE:JPM). The stock’s 3.22% slide yesterday took it right back to the June 28 lows and as such nullified a quite hopeful breakout from earlier last week. Citigroup (NYSE:C) too snuck in a curveball and got hammered lower to the tune of 5.33%. What do those two stocks have in common you ask? They both report earnings later this week.
The potentially most interesting and bearish action for stocks yesterday took place in the currency markets where the dollar index rose and is now just ticks away from successfully completing a higher high and breakout of the narrowing trading range on the chart below.
The flip side to this of course is displayed in the weakness of the EUR/USD cross currency rate, which yesterday took a significant tumble out of its narrowing trading range (blue lines).
Gold meanwhile last week confirmed its support at the blue uptrend line originating from November 2010 and is getting suspiciously close to break out of the consolidation range we note in the gray box on this chart here.
While I like using much longer term charts when looking at the long end of the bond market, the 30 year Treasury Bond Future is coming into a resistance line that originated back in August 2010. I am keeping a close eye on this chart as a break and hold higher could mean smart money is fleeing to safety before equity markets get wind of it.
So there you have it, mixed signals as usual but if I tally it up I remain with my view from last week; Stocks while immediate-term over extended might still have some upside left if a healthy consolidation over the next couple of days doesn’t meaningfully break 1,300 on the S&P 500. Looking beyond a few weeks however the signals from the currency, metals, and bond markets give me more troubling signs for stocks.
One last thing, I wouldn’t be too surprised to see a few earnings warnings hit the tape sometime this week.
Get Serge Berger’s trade of the day: Autozone (AZO)
Serge Berger is the head trader and investment strategist for The Steady Trader. Sign up for his free weekly newsletter.
