Tough Week For The Bulls As Stocks Pull Back

Stock markets declined last week as investors locked in profits following a quick move to new highs.

Enthusiasm spurred by news of Bin Laden's death quickly faded, and equities sold off for most of the week.

A small bounce on Friday helped to pare some of the losses, but for the most part the general indices were down between 1.5 and 2%.

In the prior Market Digest, our outlook was extremely optimistic. The NASDAQ Composite had confirmed a decade long high, and a number of other indices had cleared some major resistance levels.

Sometimes we can get ahead of ourselves though, and it looks like over the short-term, we did just that. A perfectly normal pullback ensued, and our unwarranted enthusiasm was curtailed.

Last week, we experienced a sharp 4-day decline that ultimately drove prices to some key short-term support levels. (Image: MikeBaird on Flickr)

Based on the prior week's trading, Thursday's low near 1330 is a key support level to watch. Also, we may see some sellers come out if the bulls can drive prices into the 1350 area.

 

 

Although the bears controlled a majority of last week's price action, the daily chart still looks healthy.

The S&P 500 closed the week above the 20-day EMA, a key short-term support level. Also, the benchmark index appears to be catching a bid near trendline support as well.

We recently confirmed a head and shoulders bottom breakout, and I believe that this pattern is still in play. It is fairly common to see a pullback to the neckline after an upwards breakout, and as long as this former resistance area is defended, the pattern is intact.

So, this neckline support zone near 1340-1350 is a key area to watch over the intermediate-term.

 

 

Last week, both of the key indices that we track closed lower on above average volume.

However, no major damage was done to our intermediate-term outlook. Why? Because equity markets continue to trade at or near long-term highs, and as a trend following investor, it would be prudent to give the underlying uptrend the benefit of the doubt.

The NASDAQ Composite and S&P 500 both found support near their 10-week moving average lines. This is a positive sign for the bulls, and it shows that institutional investors are stepping in to buy the dips.

As long as we continue to trade above this key moving average support level, the intermediate-term outlook is bullish. Also, the primary (long-term) trend is higher as well.

Key intermediate-term levels to watch on the NASDAQ include support near 2500, and the 10-week moving average line near 2890.

On the S&P 500, keep an eye on resistance near 1400, and the 10-week moving average support line near 1327.

 

 

Both of the key indices we track have recently confirmed a new bull market high. Our Dow Theory outlook has been updated with new potential intermediate-term support levels. These areas have been circled in blue.

The Dow Jones Industrial Average and the Dow Transports simultaneously confirmed new bull market highs recently, and key intermediate-term support levels have been updated accordingly. There are no other changes to our Dow Theory outlook, and we remain on a long-term buy signal.

 

 

The Dollar Index moved sharply higher last week, rising about 2.6%. The benchmark index closed slightly below key resistance ($75).

While this is clearly positive for Dollar bulls, the index continues to trade below a declining 10-week moving average line. So, over the intermediate-term, it looks like the trend is still to the downside.

Although the short-term trend may be higher, the intermediate term trend is bearish. Also, the long-term trend is still negative, as we remain on a 10/40 week MA sell signal.

The next major support/resistance levels have been highlighted.

 

 

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