Friday, October 4, 2013

Weekend Update: Government Shutdown Weighs on Markets

For the first week of the 4th quarter markets remained under pressure due to concerns over the government shutdown and looming debt ceiling deadline. While damage was limited due to seemingly endless Fed liquidity throughout the week, the markets continue to trade back near significant support levels. We haven't seen unrepairable damage done yet, we will be watching to see how the next couple weeks' headlines out of Washington will impact the underlying uptrend.

More or less we in the same position we ended last week and are still waiting for major supports to be challenged. Therefore there is not too much to discuss this week but I do have a couple things that should be on your radar moving forward. 3rd quarter earnings will begin to trickle in as we are approaching another earnings season. So far estimates for earnings have been fairly positive and analysts are expecting strong quarters. Normally I prefer to see estimates being revised down and expectations lowered, not raised. These situations often create an under promise, over deliver and stocks are surprised positively. When good news is expected, companies have to really blow out the numbers for the positive surprise and typically these increased expectations lead to disappointment. So something to watch for in the next couple weeks will be to see how the market digests the early earnings reports. Next we will be keeping our eye on the uptrend support and rising wedge pattern in the SP500. It will be very important for the support to be defended if we are to believe the rally is still intact. Lastly we will be keeping an ear on Washington. The markets right now are expecting a last minute resolution with the debt limit and a failure to compromise would likely create major issues for stocks and the economy. While it will be important to be mindful of the news out of the capital, of most importance will be the technical indications the market sends as to its most likely next heading.

Lets take a look at a few charts of interest for next week:

SP500 (weekly chart)
We are still within the channel and rising wedge pattern. While we saw weakness this week, the S&P still was able to close well off the lows and above the 20 WMA. The two most significant levels to be watching will be the 20 WMA/uptrend support at 1,660 and the prior swing low at 1,627. Above those levels, everything is okay.


HD
 Home Depot has continued to weaken technically since our exit 6 weeks ago. Once price was rejected at the 20 WMA we have seen a possible right shoulder formation building that would complete a major top in HD. The 20 WMA has begun to turn lower and price is below that line, those two criteria do not lead to high probability successes as investments. This is one of the more troubling signals under the surface of the market and one we will need to watch very closely. Home Depot will reflect the health of the home building sector as well as a confident consumer. A top here and the market also will likely be headed lower. $72 is a VERY important level to hold.


PPG
 PPG continues to be a market leader, and shows why we seek out strength in the market. Even when the major averages struggle, strong stocks can buck the trend. PPG closed at a new weekly high this week and is still showing tremendous Relative Strength.


WFC
 Wells is on high alert at this point. We are seeing an uptrend breakdown and prices below the 20 WMA. However it has held its prior low at $40.80 for now. Also the long term uptrend on the Relative Strength indicator is still intact. We will continue to watch this closely as a signal is very possible in the near future. For my shorter term accounts I reduced positions in WFC by half this week after the uptrend violation, but am continuing to hold until the RS proves the move is over.

Russell 2000 (small cap index) Daily Chart
Here is the Daily chart for the small cap index, Russell 2000. We were looking at this prior high breakout a couple weeks ago and while the SP500 and DJIA have both traded well below their breakout levels, the Russell 2000 has managed to hold its breakout level. This shows tremendous Relative Strength from a "risk on" indicator and suggests a bullish stance going forward.


That's about all I have this week folks. We are still in wait and see mode as Washington headline risk will continue to have traders attention. As always we will continue to follow price and trend to determine the best path. How the market handles the support tests near current levels will likely tell us a lot.


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