thursday update … negatives building

SHORT TERM: market opens flat, rallies, then drops, DOW -62

Overnight the Asian markets were mostly lower. Europe opened lower but closed mixed. US index futures were relatively flat overnight, and at 8:30 weekly Jobless claims dipped below 400K: 398K vs 418K. The market opened slightly lower at SPX 1304, after closing at 1305 yesterday. After bouncing around in the first few minutes the market started to rally. At 10:00 Pending home sales were reported lower but still positive: +2.4% vs +8.2%. The rally continued until about noon when the SPX hit 1316, then it started to pullback. Around 1:00 the FED released the following: http://www.federalreserve.gov/newsevents/press/bcreg/20110728a.htm. The pullback continued right into the close when the SPX hit 1299 and ended the day at 1301.

For the day the SPX/DOW were -0.40%, and the NDX/NAZ were +0.10%. Bonds gained 8 ticks, Crude lost 30 cents, Gold was flat, and the USD was higher. Support for the SPX drops to 1291 and then 1261, with resistance now at 1303 and then 1313. Short term momentum did bounce from extremely oversold to neutral during the rally, and now displays a positive divergence. Tomorrow, the first look at Q2 GDP, then before 10:00 the Chicago PMI and Consumer sentiment.

This market is on the verge of potentially breaking down. The SPX opened flat, held the 1303 pivot, then rallied into the 1313 pivot range clearing the extreme oversold condition from yesterday. Considering yesterday’s decline this was not much of a rally. The market reacted in kind by taking out yesterday’s 1303 low near the close. Should the market continue to decline it will confirm a downtrend soon. If this does occur it will be the first time, since the March 2009 bear market low, the SPX/DOW bull market had not made a new high during an uptrend. As we all know this always occurs at the beginning of new bear markets, and only sometimes in bull markets.

With the continuing weakness in foreign markets, and six of our eight long term technical indicators displaying negative divergences this is not a good sign. When we add the fact that two of our potential counts fit with a bull market high in the SPX/DOW in May, and a bull market high in the NDX/NAZ in July, there is real reason for concern. A defensive investment posture is still warranted.

Short term support is at the 1291 and 1261 pivot ranges. Overhead resistance is at the 1303 and 1313 pivot ranges, then 1330. Should this market take out the mid-July SPX 1296 low there is some support in the mid-1280’s and then the 1261 pivot. Short term momentum may be setting up a positive divergence for another rally attempt. Short term OEW charts remain negatively biased and will require a rally over SPX 1321 to turn positive again. Best to your trading!

MEDIUM TERM: uptrend under pressure

LONG TERM: bull market at inflection point

CHARTS: http://stockcharts.com/def/servlet/Favorites.CServlet?obj=ID1606987