After seven straight days of losses for the S&P 500 and the worst Thanksgiving week for the Dow Industrials since 1942, investors were apparently happy to forget about stocks and go shopping. After all, early reports show that Friday’s retail sales were up 6.6% over 2010’s Black Friday — the strongest increase since 2007, easily topping last year’s mediocre 0.3% rise.
The real reason for last week’s poor stock market performance had less to do with the U.S. economic outlook than Europe’s continuing debt problems. Italy’s weak bond auction, which on Wednesday produced little demand and a yield of 7.3% for its 10-year and 7.8% for its 5-year note, was a disappointment. On top of that, S&P downgraded Belgium’s credit rating, and on Thursday Fitch reduced Portugal’s debt to junk status.
The break of support for the Dow Industrials was significant because many technicians expected these dividend-heavy 30 stocks to provide some stability at the 11,600 area. Instead, the Dow folded as easily as less-dividend rich indices. Note, however, that MACD is now oversold, though not as much as at the bottom of the August sell-off, and the downward slope on the 20-day and 50-day moving averages tells us the index has not yet reached bottom.
This chart, like the chart of the DJIA, shows how easily the S&P 500 sliced through the initial support at 1,220 to 1,180, which is at the top of the major support zone of 1,220 to 1,120. Almost three months of day-to-day trading took place between 1,220 to 1,180, and yet it was pierced in just three days. Also note that like the DJIA, the S&P 500’s 20- and 50-day moving averages are turning down — a sign of further weakness. But MACD is getting close to the extreme level of August, and this could indicate that we are due for a bounce-back to the red resistance line at 1,180. It could also indicate that the support at 1,120 to 1,140 has a chance of slowing the decline.
The chart of the U.S. Dollar Index Bullish ETF should be carefully monitored, since Friday’s close rests almost exactly on the long-term bearish resistance line at 22.45. A close above 22.42, which is also the high of September, would signal that a new bull market in the dollar is confirmed. This, of course, would tell us that the decline in stocks is far from over.
Conclusion: Last week’s sell-off plunged stocks through major support zones and moving averages. The short, intermediate and long-term trends are confirmed to be down. However, our internal indicators, including the important MACD, are now so oversold that a near-term bounce is likely. Still, if the U.S. dollar jumps to new highs, stockholders may be facing a tumble that could result in a test of the October low at S&P 1,075.
