Weekly Equity Market Outlook

After this week, I have to say, "What an unpredictable market!" I thought last week that if the market could get going early, things continue to improve to the upside. If it did not get going, the bears would come out swinging and knock this market for a whirl. So we started the week moving down decently though nothing aggressive. Then the bulls roared sending the market up on Tuesday. So I guess there was hesitation but it was not enough for the bears to take control. Then just when things are great, the market gets hammered on rumors Fannie Mae was going to report some dreadful things. Sure enough they did and the market rallied back to the highs! I am a contrarian trader and even this, is to confusing for me.

Short Term
So what is the outlook now? Well, I still remain on the sidelines with S&P. I took a long run at the NDX futures last week when my trend indicator turned to the upside. On Friday's close, I covered the position as the overbought button started flashing. Does that mean we can't go higher? No but the probabilities tell me that continued ownership of the NDX could result in me giving back some profits in the coming days. Given the current position of the NDX, I will probably sit out Monday's action as well and let things play out. Interestingly, the S&P is somewhat overbought but has room to move higher.

That is a good thing because come tonight when the globex session opens, the bears may be out in the market swinging looking to take the market again below the 1290 level. This has held the bounces in check over the past month and has proven to be a decent play to short the market. Now, things do not remain this obvious for long so I would imagine some sort of resolution comes quickly on Monday - either we take off away from the level or fall well below it. I think that we continue to move up and set up my short for Tuesday. Now with that said, lets review the models for the equity markets.

Intermediate Term
First, this week I had upgrades across the spectrum among the US market indexes (international is a completely different story). The move by the NDX 100 past its 65 week has set up an interesting point on the charts. It sits right below major resistance. At the same time, my power model is turning up which generally argues for a much longer rally (than a few days). Thus, it is safe to say that the NDX is at critical resistance and is overbought. If I were a short, I would probably take a chance here on the short side and have my stop on the breakout side. Thus, my outlook for the NDX (which will then guide the marketplace) is this: If the power model turns up, this market is going to accelerate as the shorts cover. 2050 would be my target. Heavy resistance though is right in front.

As for the followers of this move, the Russell 2000 has been tearing higher. I suppose you could make a case for the Russell being the leader of this move as growth breaks away from value. In this case, a breakout by the Russel would occur with a downward trending Mocu line. Essentially, those who short term trade this market will cover. Those who have longer term views will also cover. Thus, a full fledged breakout to the upside which would probably be accompanying the NDX 100 breakout. As another added support for the Russell 2000: There is a triple bottom on the weekly chart. Generally speaking those are very powerful supports.

In looking at the Dow and the S&P, I found two markets that look tired. This is where the growth (NDX and RUT) vs Value (S&P and DOW) story is showing up. The S&P climbed over the vaunted 1290 level this week but did so limping to the finish line on Friday. The Dow was a bit more convincing with its break of 11,500 but it was really nothing to write home about. The financials continue to truck higher helping things with these two names but the commodity and energy names are providing a drag. This is not to say that a rally cannot follow. However, it will lag behind the moves by the NDX and the RUT.

Long Term
Sometimes it is interesting how the long term and the short term can conflict. In this case, the long term charts of the Dow and S&P have formed what I call doji reversals over the past few months. Sure, August is a mere 10 days old so there is mcu to do in this month. However, if these formations hold, then it could imply that a sizable market rally is coming. Sizable means to me at this point like 1400 in the S&P and about 13000 in the Dow. Generally speaking, when this has occurred from the monthly chart over the past 20 years, a big move across the equity market has followed. Can an equity market rally given the current environment? Well the charts tell us that stocks had big runs when things looked bleak so I would say, given the current confused nature of the market, anything is possible.

Summary
So how does this market look at the moment. Longer term I am getting more positive. While the bear market still contains action in the world (sustainable moves reverse the signal, not short squeezes), this market is acting like it wants to continue higher. However, I am waiting and seeing so to speak. If the NDX and Russell break out, the whole equity market should follow. Given I took profits Friday in the NDX trade, I think we'll see some backing and filling before the next move up. Till then, I will keep my powder dry.

Happy Trading