The Week Ahead: This Is No Vacation for Investors

by Tom Aspray

This is going to be a long weekend as we wait for the markets to reopen on Tuesday, but there are some bright spots, writes MoneyShow.com senior editor Tom Aspray.

Last week, the hopes that the economy was not really that bad were supported by some of the economic data (such as auto sales) turning out better than expected.

The tone changed Thursday, as stocks opened weak, then rebounded sharply as the ISM Purchasing manager’s report came in stronger than expected.

The rebound was short-lived. New concerns over Bank or America (BAC) and Goldman Sachs (GS) helped stocks to reverse to the downside. The very weak close suggested that the rebound from the August lows was likely over.

Then the dismal monthly jobs report hit stocks hard Friday, as stocks opened sharply lower and the major averages closed near the lows.

The rally was classic in technical terms, as the Spyder Trust (SPY) came very close to retracing 50% of the decline from the July highs. Most of the major averages traced out flag formations, which are normally seen as interruptions in the downward weekly trend. I will share some more specifics below.

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The key question is whether the support zones derived from the recent rally will hold. If they do, we could see the formation of a short-term double bottom that would set the stage for a better rally.

The other alternative is that we will crash below the August lows and head to stronger support, but well below current levels.

There are some conflicting seasonal and historical trends that may give us some insight. The chart above, from The New York Times, shows that the third year of a presidential cycle is normally the best for stocks, showing a median gain of 18% since 1946—and 94% of the time, stocks rose in the third year.

To give you some perspective, the S&P 500 closed 2010 at 1,257.64, and is currently about 6.2% below this level.

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This clearly casts a positive historical light on the last quarter of the year…but first we have to survive September.

As this second chart reveals, over the past 40 years September has been the worst month of the year by a significant margin. February was the only other consistently lower month.

The sharply lower close in the US is likely to set the stage for further weakness after the holiday. It is thus likely that the global markets may be hit Monday, so this could carry over to Tuesday’s opening in the US.

Of course, we may try to stabilize by mid-week, as the nation gets ready for President Obama’s Thursday night speech.

With the negative trend in the economic reports over the past month, the market may not be ready for the ISM Non-Manufacturing Report due out on Tuesday. The rest of the week is pretty light, with the ICSC-Goldman store sales and the Beige Book out on Wednesday.

On Thursday, we get the weekly unemployment claims and data on international trade. Ben Bernanke is also scheduled to speak in the afternoon, with Obama on tap that night.

WHAT TO WATCH

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As I discussed early last week, many of the major commodity indices and the broad-based commodity ETFs and ETNs appear to have completed their corrections.

This may have important implications for some of the emerging markets, as many have charts that are much more constructive than those of the US or European market averages. One of the best continues to be Indonesia; the chart of the Market Vectors Indonesian Market Index (IDX) shows that the early August drop just took it back to its long-term uptrend (line a)
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The weekly RS analysis is in a strong uptrend, as IDX continues to outperform the S&P 500. The weekly OBV is acting much stronger than prices, and it made a new high this week even though IDX is almost 10% below the July high of $34.99. This makes a new high in IDX very likely.

Stocks are likely to decline into the middle of the week. If stocks can then rally sharply, the technical outlook will improve.

The Spyder Trust (SPY) gapped lower Friday and closed near the lows. There is further support in the $116 to $117 area, with the uptrend (line d) in the $114.70 area.

A close below this support will suggest a decline to at least $112.40, if not the August lows at $110.27.
 

The rally reached the upper boundary of the flag formation (line c) and came within 20 cents of the 50% Fibonacci retracement resistance.

The McClellan oscillator, which hit a low of -446 in early August, rebounded all the way to +266 last Wednesday before turning lower Thursday. It closed Friday in the +60 area, and has broken its uptrend (line e).

Russell 2000

The small cap iShares Russell 2000 Index Fund (IWM) also peaked Wednesday, and followed Thursday’s weak close with a gap to the downside. There is minor support now at $66.50 to $67.50, with the lower boundary of its flag formation at $65.43.

The downside target from the flag formation is in the $56 area. There is a band of strong resistance now in the $71.40 to $74 area.

The Russell 2000 A/D line has just rebounded to resistance, and have now turned lower. It is acting weaker than prices, as it is closer to the August lows.

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