Weekly Equity Market Outlook

An interesting week came to an end on Friday with a low volume rally into the close. As I mentioned yesterday in my notes, the persistent bid that showed up at the 1265 level earlier in the week was sitting at the 1285 level on Friday. Some may call this the plunge petrol. Others may call it a lack of selling strength. With the volumes very low and tapering off as the week went on, one could argue that the shorts, who probably had a decent past three months, decided to pack it in and go on vacation. August after all is the month that most in the financial world goes on vacation. It is also one of those types of months where what happened at the beginning tends to unwind at the end. Last year we dived into the midmonth only to finish down marginally by the end - interestingly, we are seeing the same thing this year as well.

Short Term
Over the short term, I am on the offensive side of the ball. I was tripped into long positions in both the S&P and the NDX. The forward trends look like this rally could continue into the end of the week though overall it is very slow moving. At this rate of speed, by my calculations, the high of the run would be somewhere in the 1308 level going into month end. That would coincide with a high of sorts as well. In addition, that would be about 6 to 7 weeks from the low in July which some have argued would be the length of the bounce. What hurts the rally case is again the low volume of the mini contracts which has tapered off to the point that the 9 day average of volume is the lowest since the beginning off May.

Intermediate Term
The Intermediate term models are still pointing to the upside though it is tapering off. There is also a divergence as well which indicate that the rally is long in the tooth. This sort of goes hand and hand with my idea of moderating trends in the marketplace. If you combine this with my believe that the rally had potential to go towards the 1325 level, then perhaps the outlook now is towards the 1325 level through September before we head lower. In terms of the leaders from last week, the NDX and the Russell, weakness has arrived it appears. The NDX got over the resistance levels mentioned but has stalled around 1965. This is not necessarily a negative to the rally but a failure here and a move back toward 1900 could become a problem for the bulls. In terms of the Russell, it too has stalled but the upward trend remains intact. So overall, the intermediate term looks like these indexes could march towards the resistance levels before a return lower and a resumption of the bear.

Long Term
The 1350 level, combined with my bull/bear model still argues for a bear market focus. On the long term chart, the S&P is forming a nice reversal pattern but in order to confirm it, we would need a rally in September. Do I see that coming at this point? Not quite sure. A few things would have to kick in. First, the Russell would have to climb further and not stall out. The Crude market would have to collapse further and earnings would have to pick up. Do you see any of that occurring? Perhaps the idea of crude falling further is possible and the Rally in the Russell continues but earnings are just awful at this point and if crude falls lower, the one positive earnings contribution from the energy sector will be less. But, one thing working on the long term chart is the continued strength in the NDX. A rally from here over the 2000 level, could create an interesting impulsive move higher towards 2500 level. A 25% rally in the NDX would translate into sizable moves in the other indexes and it would be safe to say that the bear might be removed by then.

So in summary, I remain bullish over the short term, intermediate term and partially hopeful over the long term. The bear market remains but it is clearly showing cracks. Continued improvements in the credit markets and a stabilization in the housing market could make things very interesting for the fall.