New Week… Same Story?

The market gave up 2-3% last week as the sellers were able to take control of the sentiment. As we start a new week of trading and a full week of earnings to digest, who will dictate the direction? Three days the market attempted to move higher at the open, but the sellers eventually took control and were able to erase the gains and turn them negative by the close. Let’s look at some key issues we face this week and how to play them.

Support on the S&P 500 index is 1420 as the index closed below the 1430 level on Friday. Three days last week the index rose early and two days added to the upside intraday, but in the end the results were the same… selling erased the gains. This is a classic testing activity when you look at the charts. The S&P 500 did close below the 1430 level on Friday with the key support at 1420. Don’t assume the downside is going to accelerate at this point. The testing and activity intraday shows normal signs of a pullback test. If however, we break this key support level the downside plays are posted on the Watch List.

The consumer sector rolled over, but the sentiment data was positive? Gasoline at $4 per gallon, food cost rising as commodities struggle, slowing economic picture… doesn’t matter in the sentiment survey, but investors were willing to sell into the good news. XLY, SPDR Consumer Discretionary ETF broke initial support at the $46.55 mark on Thursday and is sitting on the 50 day moving average. $45.68 would be the next support level near term. PPI was higher on food and energy, not on the balance. Good thing no one is shopping for food or buying gasoline. The inflation tax on food and energy isn’t good for the consumer and it will have an impact going forward. Watch the downside plays in the sector as well.

What are the small cap stocks saying about the outlook or current trend for the market? S&P 600 Small Cap index broke support at the 461 level and broke the May high. This is a big negative for the sector and could be a leading indicator for the broad market. This is one sector to watch on the downside this week.

Is the QE3 catalyst over? It sure feels that way, but we can’t dismiss the impact of $40 billion being added monthly to the money supply. There will be some impact from this effort by the Fed… good or bad.

Will earnings help? The initial announcements last week were quite diverse as some missed top line revenue, but posted better profits. Some missed profits, but posted better revenue. Others were just a train wreck. Thus, this week promises to be interesting as we get plenty of reports from financials and technology stocks. They will set the tone for the market overall and if they are negative look for the current test to be deeper and more worrisome for investors!

We are looking for the conclusion on the downside relative to support or move lower this week. If we bounce there are some good pattern setups worth playing, and if doesn’t the downside plays are the large indexes. The key for now is patience to let this unfold. Volume does matter on the moves at this point. The selling last week was not on big volume. Watch the test, if it breaks lower on big volume the downside plays make sense, otherwise we have to be cautious and look as short term trades. Be patient, this is a dangerous market currently and not to be underestimated.