This week saw the market spending almost all of it’s time trading below last week’s close. And although none of the “Big 4” indices actually put in a lower low, the rallies haven’t been stellar either. Next week we have an FOMC statement and press conference with Fed Chairman Ben Bernanke. Because of this, it’s likely we get more clarity on direction in the short term this week.
Either way, this is what I am looking for. The chart above is a monthly chart of the Dow Jones Industrial Average. Since the 2011 low the Dow has put in two corrections of about 1200-1300 points. We also have the 2007 bull market high coming in around the 14,200 price level, which would coincide with another 1300 point drop from all time highs. I conclude that any further weakness will most likely be contained in that strong support zone.
The next major move in the Dow will take it into what I perceive to be strong resistance in the (16,580.54-16,711.30) price zone. It is from this zone that I believe there is a very strong chance of seeing a good 10% – 20% correction begin.
A weekly chart of the S+P 500 is above, it has a similar setup to the Dow also. There has been three corrections noted on this chart, 2 corrections of 130 points and 1 correction of 150 points. I do not believe this pattern will be broken on this correction and that any further weakness in the major average will be contained by the 1530 area and the rising trend line. The next major move in the S+P 500 will take it up to the 1750 price level.
This chart above is the cumulative advance – decline line for the stocks trading on the New York Stock Exchange. This chart has put in a lower low this week, so there is a signal of short term weakness “under the hood”.
This chart shows the performance of each of the S+P 500 sectors this week. Financials underperformed immensely by over a 2 to 1 margin to the next weakness sector, that being Energy. Technology being the third weakest sector for the week.
So in conclusion, in the short term the internals do suggest some further weakness. However if Ben Bernanke suggests no tapering of it’s QE3 bond buying program, I would assume the market would take that well and that any short term internal readings would be made null and void.
In either case, overall, the Dow and the S+P 500 are headed for one more all time high before the possibilities of a deeper correction are realized.