Welcome to another week of stock trading my friends! Last week I noted the possibility of a breakdown in the Dow Jones Industrial Average (please see it here). Well, guess what. The broader S&P 500 appears to confirm where the Dow and the US economy are heading. As you can see from the $SPX’s weekly chart, the index has been forming a head and shoulders pattern. Remember that a couple of month’s ago it already attempted to breakdown but failed. Of course, it was a good thing that that did not happen. The question is, will it be able to avoid a breakdown this time around? Well, the S&P 500 rebounded very well last Friday with a gain 1.66% to close at 1064.59. It, however, would need to print a lot more than that to be completely out of the woods. You see, a a break below the formation’s neckline around the 1,000.00 region could send the broader index just below 850.00. Notice also that both the RSI, which is already below 50, and the MACD, which is in the negative region, are now indicating that the index’s downside move is starting to pick up speed. Let’s just just hope that the index is able to rebound and move past the peeks of the two shoulders and the head to resume its uptrend.
Existing home sales sunk by 27.2% to a 3.83 million seasonally adjusted annual rate which was below the market forecast of 4.72 million in July. This marks the accounts lowest tally since 1999! New home sales also weakened significantly to 276,000 from 315,000. Last year, sales were supported by the government’s tax credits. Sales, however, became subdued when this program expired. As I’ve mentioned in my previous post, perhaps the government could support the industry by re-introducing the same program to encourage home buyers.
Last Friday, Fed Chairman Bernanke’s said that he foresees a rebound in the US economy in 2011. He added that the Fed is prepared to use another set of “unconventional measures” if the economy does not pick up as desired in the near term. Do I hear quantitative easing? Well, the Fed’s benchmark interest rate is already at 0.00-0.25% so the next thing that the Fed can do is to do another set of QE and/or reduce the financial institution’s reserve ratio to provide more liquidity in the market.
In my opinion, both the Congress and the central bank should work hand in hand in order to prevent the economy from collapsing again. Because if it does collapse, the average Joes would find themselves in worse shoes. Unemployment would almost certainly pick up with a deterioration in market confidence. This would not only affect the US but would also send shockwaves across the globe. There is no such thing as a perfect decoupling because of globalization and trade. Hence, if the US sinks, other economies, even the emerging ones would find themselves in a very difficult situation.
Anyway, the week will kick off for the US with the release of the Conference Board sentiment index on tomorrow (August 31). The CB consumer sentiment is forecasted to rise slightly to 50.9 from 50.4. Though the market’s confidence as of late has been obviously dampened due to the disappointing home sales figures. ADP employment change results and the ISM manufacturing index are also due on Wednesday (September 1). The ISM index is seen to have softened a bit to 53.3 from 55.5. Remember, however, that the latest tally of the Philadelphia Fed Manufacturing index showed a drastic drop to -7.7 from 5.1. Such could also reflect in the ISM’s number. On Thursday, pending home sales, which are anticipated to have dipped again by -1.5% after already losing by 2.6%, will be reported. still, a worse-than-projected count could happen given the previous results of the new and existing home sales. The spotlight, of this week though will be the NFP report of Friday. Firms are seen to have slashed another 101,000 jobs which could push the economy’s unemployment rate to 9.6% from 9.5%.
Given the recent data and the present market forecast, worse-than-expected results are very much likely in at least one of the accounts. Such could send the market back to risk aversion mode which then could send the major indices into critical levels. Still, anything is possible. Let’s just hope for the best and prepare for the worse. But given the uncertainties, I suggest that you at least lighten your positions in equities.