I believe that drop in the Dow (which has underperformed the S+P) would coincide with the 1597 level in the S+P 500. I believe some strong support emerges here. Resistance now comes in at the 1675 level and 1685 level going forward. This week we hit some short term support at 1642 which we pointed out in last week’s review post.
TLT, or the very popular long term treasury etf, came into strong support this week defined as the weekly unfilled gap from July 2011. There is some strong support also in the $98 level, I think the next big short term move will be higher.
Taking a look at the 10 year treasury interest rates once again because it seems to be a hot topic of discussion right now. I have highlighted how interest rates have moved during each of the Federal Reserves Quantitative Easing programs. QE 1+2 produced a 1.41-1.55 basis point rise in yields.
So this week we have hit the “zone” in which matches the size of the rises in interest rates in terms of basis points. It is likely the next short term move is to the downside, which inversely would be good for bonds. However since I do not believe QE 3 will be completely finished until sometime next year, I think it is very likely we make our way to the next upside target around 3.37% before all is said and done.
It is worth noting that although we have just now match the size of the previous moves higher in terms of basis points, in terms of percentage moves this current move higher has been larger, basically doubling off the all time lows.
Taking a look at the advance – decline line we see a little improvement to end the week, but remain relatively weak overall.
Here’s a look at sector performance since during this current correction. It doesn’t matter which way you look at it, Utilities continue to be the worst underperformers while interest rates are rising.
The economic calendar for this upcoming week, to end the month of August, remains relatively light. Tuesday we have consumer confidence and Thursday we have a preliminary GDP q/q announcement. Saturday China comes out with their latest Manufacturing PMI reading.
In conclusion, there is no way we can tell if or when this correction will be over with absolute certainty. Personally I believe we have some more downside remaining over the next few weeks. Once we broke back down below 1700 and failed to get back above we had to assume this was the beginning of a correction. I have pointed out a strong support level for both the Dow and S+P 500 that I believe will hold going forward. I fully expect the S+P 500 to trade over 1750 in the coming months and the Dow to hit our long term upside target around 16,600 over the next 6 months or so.
But really the purpose of this post was to give readers a look at the big picture. Hopefully it will help give a little better perspective and plan of attack going forward.