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TECHNICAL ANALYSIS:

PRICE/VOLUME COMBINATION:

The major indices cleared important price hurdles last week – namely Dow Jones 11613, S&P 500 1219 and NASDAQ 2623. One big problem, however, was the lack of conviction by buyers with light volume across the board. We always talk about the power of the price/volume combination, but we lacked it last week and it’s hurting the bulls this morning.
We’ve seen golden crosses (20 day EMAs rising above 50 day SMAs) within the past week, so an important first test of support in any uptrend will be those rising 20 day EMAs. Loss of the 20 day EMAs across all of our major indices would suggest the worst is not yet over. Bouncing off of them, however, and breaking to new highs would be solid technical action and favor the bulls.

MACD DIVERGENCES:

The daily MACDs have turned quite bullish. Normally this type of MACD encourages buyers on pullbacks to the 20 day EMAs I mentioned above. Clearly, that will be the next serious test of support if the close extends beneath the price support levels identified above.
60 minute MACDs are very bearish as the Friday highs were accompanied by lower MACDs on the intraday charts. These negative divergences on the 60 minute charts generally lead to a 50 hour SMA test, minimally, in order to reset the MACD back to the centerline. On the S&P 500, the 50 hour SMA currently resides at 1192.40. The rising 20 day EMA is currently at 1180 on the S&P 500. So those two numbers will be key to watch in the coming days.

MOMENTUM OSCILLATORS:

The stochastics and RSI are as follows on our major indices:

Dow Jones: 92-56
S&P 500: 93-57
NASDAQ: 97-59
Russell 2000: 93-54

Generally speaking, an RSI is considered overbought when it reaches 70. However, during bear markets or downtrends, it’s unusual to see the RSI move above 60. Therefore, RSIs are generally considered overbought during a downtrend in the 50-60 zone. Currently, those RSIs are deemed overbought with stochastics very overbought in the 90s. The bears are hanging their hats on the fact that this combination will hold back prices at the current level.

SENTIMENT:

The VIX broke down on Friday beneath key closing support at 29.50 to accompany the price breakout. But given the shallow volume on the move lower Friday, the bulls needed to take a stand today and send the VIX even lower. It hasn’t happened. At last check, the VIX had risen nearly 12.50% higher and back above that critical 29.50-30.00 area. The bears are winning this battle thus far.
The equity only put call ratio (EOPCR) is at .62 as of 11:00am EST. Relative COMPLACENCY is at 8.94%. These readings tell us that there’s still relative bullishness in the air, but the real problem occurs as this percentage approaches 20%. We still have a ways to go to get there, so I’d view this sentiment reading as neutral to slightly bearish for the market short-term.

MAX PAIN:

This past weekend there was a max pain video done to highlight the possibilities. I indicated that the market appeared susceptible to downside action this week, especially on the NASDAQ and S&P 500. Thus far, the market is cooperating and is heading lower.

HISTORY:

The Bowley Trend is our historical indicator that alerts us to specific periods throughout the year when three of our key indices (S&P 500, NASDAQ and Russell 2000) tend to trend in one direction or the other.
The major indices will be NEUTRAL all week, but will turn VERY BEARISH at Friday’s close as next week is the worst performing week of the year historically. More on that later this week.

SECTORS:

Materials, industrials and financials are suffering the most today. Plenty of earnings reports are having an impact, but the biggest gain in the dollar in October is sending the bulls running for the hills in the materials space.
The bank index and broker/dealer index are both reeling today, with the bank index approaching a pivotal test back at its 20 day EMA and 50 day SMA. Failure to hold these moving averages could lead to another 8-10% selloff, so be aware if you’re trading these two industry groups.
The 10 year treasury yield has dipped back beneath 2.20%, but is ok technically so long as 2.11% holds as support. Failure to hold there would indicate that money is flowing back into treasuries, which would be very bearish near-term for equities.
Finally, transports are once again nose-diving after another attempt to crack 4700 resistance on the Dow Jones Transportation Average. CSX is set to report earnings on Tuesday, that may well be the critical report for the group to try and take out that 4700 level.

ECONOMIC AND EARNINGS REPORTS:

The October Empire Manufacturing report came out at 8:30am EST and the bulls weren’t happy. We were supposed to see this number improve from a -8.82 reading last month to a -4.0 reading this month. Instead, it was flat, improving fractionally to -8.48. That wasn’t good enough and traders weren’t happy.
September industrial production and capacity utilization both essentially matched expectations and did little to sway traders when those reports hit the Street.
Earnings will begin flowing in by the droves this week. Citigroup (C) and Wells Fargo (WFC) kicked things off this morning and we should’ve known that two banks could only do so much in the current environment. C actually reported better than expected earnings and is a relative leader in the sector. C is down 2-3% from its earlier high, however. WFC, on the other hand, missed its earnings estimate and suffering for it. WFC is down 6% this morning. Those who thought bad earnings for banks were priced in may have to rethink that strategy.

INDIVIDUAL STOCK TRADES:

Max pain always presents opportunities for a trade here or there. Why? Well, for starters, we know it would be in the best interests of market makers to move a stock or index a certain way to maximize their profits. Does it always work? No. There’s no such thing as a guarantee in the stock market. But we have had a lot of success in the past following max pain and potential trade candidates. This month, we provided two more – one long and one short as follows:
FSLR – was a candidate last month and did fairly well, especially early in options expiration week. Well, FSLR is back again, this time with a long-term positive divergence, oversold conditions and a max pain level now 50% higher than the current price. Don’t misunderstand me here. I do NOT believe we’ll see FSLR 50% higher come Friday, but CLEARLY it would behoove market makers to edge this one higher during the week if at all possible. Watch 53.00 to the downside on a closing basis, especially if volume is heavy. Otherwise, we’re looking for a recovery here….
RHT – this one is a short candidate with spectacular looking technicals. Therefore, it’s a short-term short only. 48.00- 48.25 seems to be serious price resistance and RHT has an RSI and stochastics in overbought territory. A simple pullback to test its 20 day EMA would be fine technically and would allow some of the net in-the-money put premium to evaporate….

SUMMARY:

I continue to be cautious. The lack of follow through this morning only adds to that sense. Our major indices made bullish breakouts on Friday, but did so with volume very light. The weekly volume last week was ATROCIOUS. And given the sizeable gains, that simply isn’t good technically.
The bulls have much more to prove this rally is for real. Currently, it’s nothing more than a counter trend rally. The next couple days to couple weeks will provide a TON of earnings news, so how the market reacts technically will likely paint us a picture of the balance of 2011.

Happy trading!