Caution lights flash as major U.S. stock indexes and ETFs encounter technical resistance and fundamental headwinds
After a good start to 2012, major U.S. stock indexes and exchange traded funds have run into serious resistance on a technical basis and mixed fundamental indicators with the U.S. economy improving and Europe still offering headline risk. Markets are overbought and overextended and storm clouds still hang over Europe. Caution lights flash.
On My Wall Street Radar
Chart courtesy of StockCharts.com
The S@P 500 (NYSEARCA:SPY) has stalled at the 1370 level for the last ten days, unable to break higher and continue the up trend started in December.
A glance at the chart of the S&P 500 (NYSEARCA:SPY) is instructive as, in addition to the stall at resistance, we see confirming indicators of overbought conditions and the onset of further weakness.
In the top red box we see RSI in overbought territory and turning down. Next level down we see MACD rolling over to a “sell” signal. Below that we see Stochastic also rolling over to a “sell” signal from overbought levels.
Charts of the Dow Jones Industrial Average (NYSEARCA:DIA) show similar readings while the Russell 2000 (NYSEARCA:IWM) has diverged sharply from the other indexes, declining approximately 3% from February’s high and now approaching its 50 day moving average. Small cap stocks represented by the Russell 2000 (NYSEARCA:IWM) are oftentimes leading indicators for the major indexes and so we have to ask, “if things are to turn lower, how low can it go?”
In the S&P 500 (NYSEARCA:SPY) we can see support levels at the horizontal lines near 1340 and then 1300, along with the 50 day moving average at 1317. So there’s plenty of support not too far away, with the bottom end of major support some 70 points or 5% away from current levels. However, a drop below 1300 would set up a scenario for a quick drop to 1260 or 110 points from today, a more significant drop of approximately 8%.
The S&P 500 (NYSEARCA:SPY) and the Dow Jones Industrial Average (NYSEARCA:DIA) and the Russell 2000 (NYSEARCA:IWM) are flashing strong caution signals of a sell off just ahead. Over the next few days and weeks, we’ll see just how deep such a sell off might be.
The Economic View From 35,000 Feet
Last week’s economic news was mostly positive with initial jobless claims staying below 400,000 and reaching low levels not seen since spring, 2008. Pending home sales were up, consumer confidence climbed and Dr. Bernanke told Congress that the recovery was continuing and that rates would stay low for the foreseeable future.
In Europe the news was mixed as the Long Term Refinancing Operation entered its second phase with 530 billion Euros going to European banks virtually for free which adds enormous liquidity to their financial system. They might need it as after the close on Friday Moody’s downgraded Greece to “C,” its lowest level as bond holders are going to get a 70% haircut this week that Moody’s calls “a distressed exchange, and hence a default.” Bloomberg