Market’s Malaise Clouds Short-Term Trend

by Sam Collins | April 29, 2013 2:19 am

Last week ended on a flat note as the markets responded to a lower-than-expected Q1 GDP and a handful of flat corporate earnings. According to the GDP report, government spending fell 4.1% in Q1 2013, following a decline of 7.1% in Q4 2012, and is expected to decline even more in Q2 as sequestration kicks in. This, along with an underperforming materials sector, added to Friday’s malaise. (NASDAQ:AMZN[1]) fell 7.24% following a revenue miss for Q1 despite better-than-expected earnings. And Starbucks (NASDAQ:SBUX[2]) dropped 0.83% as it reported in-line earnings on record revenues for fiscal Q2, but lowered its fiscal Q3 earnings guidance.

At Friday’s close, the Dow Jones Industrial Average was up 12 points to 14,713, the S&P 500 fell 3 points to 1,582 — breaking a five-day winning streak — and the Nasdaq lost 11 points at 3,279. The NYSE traded 682 million shares and the Nasdaq crossed 444 million. Decliners exceeded advancers on the Big Board by 1.4-to-1 and by 1.6-to-1 on the Nasdaq.

For the week, the Dow gained 1.1%, the S&P 500 rose 1.7%, and the Nasdaq advanced 2.3%.

Technical analysis is based on the theory that, under similar circumstances, investors and traders will react to prior price areas as they have in the past. These human reactions can be charted, and support areas (where purchases were made) and resistance areas (where investors have sold) can be graphically illustrated.

Thus, in each chart, I include support and resistance lines and zones. These define historical buying and selling areas, so violations communicate that there has been a power shift and that a move in a different direction may be under way.

This is obviously a simplistic approach to technical analysis (there is much, much more), but support/resistance lines and zones are at heart of accurate analysis.

SPX Chart
Click to Enlarge

Trade of the Day Chart Key[3]

The S&P 500’s five-day advance from the support line at 1,540 to the lower band of resistance at the all-time closing high of 1,593 was a positive technical reversal. But in order for it to successfully follow through, it must rally above the narrow band of resistance from 1,593 to 1,597. And I’d like to see a pick-up in volume and breadth to support the MACD buy signal from Thursday, since a turn down from this level could produce a double-top.

Nasdaq Chart
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The Nasdaq’s technical picture is similar to the S&P 500’s. It too is challenging highs made within the past month. For the Nasdaq, the two tests are the 12-year closing high at 3,300 and the 12-year intraday high at 3,307. But unlike the S&P 500, it has produced a lower high, at 3,301, and a lower low at 3,155.

Conclusion: As noted on Friday[4], I remain bullish, and that means for the long term and intermediate term. But, the short-term trend became clouded with Friday’s failure to “get with it” and drive through the tops. All of our internal and sentiment indicators tell us to expect a breakout. And yet, price action failed on Friday.

Stay long but don’t chase the big breakouts of last week. This is a key week for the markets as April ends and May begins with some key economic reports and a Fed policy meeting, as well as the monthly jobs numbers.

Today’s Trading Landscape

To see a list of the companies reporting earnings today, click here[5].

For a list of this week’s economic reports due out, click here[6].

  1. AMZN:
  2. SBUX:
  3. [Image]:
  4. noted on Friday:
  5. click here:
  6. click here:

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