This past week stocks fell mainly due to poor economic reports and worries that Citigroup could file for bankruptcy. The one bit of positive news during the week was better than expected GDP growth for the third quarter. This created a very strong rally on Thursday but quickly gave way to Fridays Consumer Sentiment and Personal Income reports. These both reminded investors of how weak the sector truly is and that it would very likely hinder growth over the next quarter. Since investors tend to be looking forward to what may come the Consumer Sentiment numbers weighed more heavily on the market than the past quarters GDP results sending us into an end of the week sell-off.
In last week's newsletter we forecasted a downward trend for the coming week. Even though our expectations were surpassed as to how far it would drop, the Precision Charts trade signals kept us in check and generated some great trades after a small whipsaw earlier in the week.
SPY (S&P 500 SPDR) 5 Day Chart
1 Week Change -4.0%
Looking back at a study I shared in the October 18th newsletter about nearing the top of an ascending wedge pattern, I have updated the chart while keeping the resistance and support levels exactly the same to discuss again our longer term outlook. As you can clearly see, we have broken out of the wedge well below the support level indicating a strong possibility of a new developing downtrend, or at least a very strong consolidation period.
Looking forward from here there are a couple of technical analysis points to consider. The first is that once the wedge is broken, you will often see a retest of the support level. If this holds true we could see one more rally up to 108.50 before the downtrend really becomes developed. Second, a lower resistance level of 101.50 is not very far below our current price which could limit the continued downturn in the coming week.
Let's adjust our Resistance level to be 108.50 with a support level at 101.50 for the coming week. While I think that the bulk of next week's action will remain between 101.50 and 106, there is a possibility of that 108.50 retest to keep us on our feet.
Upcoming Economic Events
Monday - ISM Manufacturing Index - 10:00 AM
Tuesday - Motor Vehicle Sales
Consumer Confidence- 10:00 AM
Wednesday - ADP Employment Report - 8:30 AM
FOMC Announcement - 2:15 PM
Thursday - Productivity and Costs - 8:30 AM
Jobless Claims - 8:30 AM
Friday - Employment Situation - 8:30 AM
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