9:00am (EST)
The battle between the bulls and bears got heated last week as both sides tried to make a break for support and resistance but remain stuck in a trading range. The bears made a statement early in the week as Japan’s nuclear crisis and the unrest in the Middle East worsened as they pushed the market lower by nearly 5%. The Dow was down a staggering 500 points by Wednesday, intraday, from the previous week’s close but started to bounce once the headlines got better.
There were a number of events that transpired, quickly, which helped the bulls regain their footing as they recovered over half of the losses by Friday. Although there are still a lot of unknowns, Japan’s road to recovery has begun as it appears they will be able to prevent a nuclear meltdown. The situation in Libya turned on a dime after the United Nations approved a no-fly zone resolution that has already led to an attack on Libya’s air defense systems.
The Dow was up 150 points on Friday and hit a high of 11,927 before finishing with a gain of 84 points, or 0.7%, to settle at 11,858. The index fell to a low of 11,548 by Wednesday and ended the week with a loss of 185 points, or 1.5%. We said if the bears took out 12,000 and 11,800 then a breakdown could spell 11,500. This area is still near-term support with 12,000-12,200 acting as short-term resistance.
The S&P 500 started the week above 1,300 but closed below this level on Monday which let us know a test down to 1,250 was coming. Although we were hopeful 1,275 would hold this level was breached on Tuesday. By Wednesday, the index traded to a low of 1,249 and a point below our target of 1,250 before bouncing back and making another run at 1,300. The index traded to a high of 1,288 on Friday but ended the week down 25 points, or 1.9%. These levels will continue to act as support and resistance over the near-term until we get a breakout or breakdown.
The biggest concern for the bulls has to be Tech, though. The Nasdaq was the weakest link in helping the bulls hold support and lagged its counterparts on the rebound. The index gained a mere 7 points, or 0.3%, on Friday and came nowhere close to challenging 2,700. There was a little support at 2,675-2,650 like we mentioned but Tech fell to a low of 2,603 by Wednesday. As much as we were looking for a close back above 2,700, we said 2,500 could be tested on further downside momentum and Tech looks awful right now. For the week, the index fell 72 points, or 2.6%.
The CBOE Market Volatility Index (VIX, 24.44, down 1.93) was also on the move and we said to watch 23 as a key level. We said a close above 23 would be bearish and although the index held this level on Monday, it was taken out on Tuesday. Usually, a VIX reading under 20 indicates confidence and calm while a reading above 30 indicates nervousness and panic. The index reached a high of 31 on Wednesday which means we saw a 50% spike during the week. For those of you who want to trade the VIX, we suggest looking at the iPath S&P 500 VIX (VXX, $35.36, down $1.12) because it has volume and liquidity in the option pits.
Last week’s “pullback” and test to new lows can be viewed as “healthy” because the market needed a break following its big run since October. Although we all know nothing goes straight up forever, in the bigger picture of things, we are still in a bull market. We also said last week that that “at some point things could get ugly before they get better” and we mentioned the possibility of the indexes testing their 200-day moving averages at some point. They are: Dow 11,000; S&P 1,175; and Nasdaq 2,450.
This may or may not happen but we are preparing for it while at the same time looking for a breakout. In other words, the 4-week “trading range” the market has been in since mid-February is getting stretched and we could still go either way depending on the headlines.
We have a lot of charts we want to go over this morning inside our Members Area as we look for our next batch of trades. Some of the stocks we profile show a tight range and you can clearly see a breakout (or breakdown) coming.
As we head to press, Dow futures are higher by 122 points to 11,921 while the S&P 500 futures are up 17 points to 1,291. Nasdaq futures are showing a 29 point pop and are at 2,250.
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