Market Holds Big-Picture Support, but Will It Last?

U.S. equities closed on a muted note last week, all things considered. With further improvement in the labor market one would have thought interest rates and the U.S. dollar would see a bump.

But as the rate of change of improvement in the economy (including the jobs growth picture) continues to slow, it adds skepticism of a rate hike in September or even in December for that matter. Therefore, Friday’s drop in longer-term interest rates and flattening of the yield curve, coupled with a stalling U.S. dollar and choppy equity markets, makes more sense.

As this is my first missive filling in for Sam Collins, I’ll keep it bigger picture to get good perspective before looking at closer-up charts later this week.

Most private and surprisingly few institutional investors look at markets in multiple time frames. Looking at stocks, indices, bonds, commodities and currencies in different time frames not only gives market participants better perspective, but there is also a direct correlation to better risk management as it becomes clearer when a thesis is proven wrong.

For example, if we look at the benchmark S&P 500 index from a multiyear perspective using monthly bars/candles, it becomes apparent that the 10-month simple moving average has offered a tremendous amount of support since early 2012. Note that even during the October 2014 sell-off this moving average held as support at the end of the month, which was a good indication that the trend would continue higher.

SPX Chart
Click to Enlarge

To wit, last week, the S&P 500 once again held just at this moving average, although the bigger question is where the index will close relative to this moving average at the end of the month. Investors and traders can alleviate a great deal of pain by trading in the general direction of the trend and using a monthly or weekly chart in addition to daily or even intraday charts for better risk management.

Until this moving average breaks on a monthly basis, the path of least resistance from a pure price perspective remains higher in the medium term.

The small-cap Russell 2000 has a 100-week simple moving average that offers good reference and has held as support since early 2012. Last week, the index held right at horizontal support around the 1,200 mark. A break below it offers a next confluence area of support around the 1,170 mark, which is made up of said moving average as well as the support line from October 2011. Better support is around 1,040 to 1,060, which matches the lows of October 2014 and the 2009 trendline.

Russell 2000 Chart
Click to Enlarge

The biotechnology group, as represented by iShares NASDAQ Biotechnology Index (ETF) (IBB), which has been a big outperformer for the past few years and year to date, has helped hold up the broader market. But recently, it has shown some concerning price action.

IBB Chart
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The 20-week simple moving average has held as stellar support since May 2014. Last week, it was once again tested after a bearish reversal week two weeks prior. A face plant on the part of biotechnology stocks and break of said moving average would increase the chances of the rug getting pulled out from under the broader stock market for a couple months’ worth of corrective price action.

As we enter this week, keep the above indices and the highlighted lines of support and bigger picture moving averages in mind.

Today’s Trading Landscape

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

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

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