Morning Thoughts Monday November 7

After early morning weakness on Friday U.S. stocks managed to find support and rallied for the rest of the day all the way into the close.  On the week U.S. stocks fell which led the market to its first weekly drop since September.  The situation in Europe remains unstable even as Greek politicians are nearing an agreement on a potential unity government.  All sectors in the S&P 500 fell last week, led by financials which dropped nearly 5.5 percent.  The S&P 500 itself slipped 2.5 percent on the week, which resulted in the first weekly decline since late September.

I have much discussed the resistance areas on major charts recently, especially on the S&P 500.  Another way to look at the S&P 500’s important crossroads is by noting the upward sloping line that served as support for much of 2011 and now looks to be acting as resistance.  The line currently comes in just around the 1300 mark and coincides with the 200 day simple moving average.  When the line acted as support earlier this year it also served as the neckline of the head and shoulders pattern that hit its target in early August.  Note the three circles on the chart below denoting the head with the shoulders left and right of it.  I remain of the opinion that it is unlikely for the S&P 500 as well as the other broader U.S. equity indices to rally much beyond the highs from October 27 before turning lower again.  It would however be possible for stocks to swing back and forth at current elevated levels for a while before ultimately resuming their downtrend again.  The market from a trading point of view remains best played in the shorer time-frames with longer-term investment buckets sitting in cash.     

The Russell 2000 still holds its technical patterns of resistance the best, i.e textbook, out of all the major U.S. equity indices.  I would therefore again point out the horizontal resistance near 770, which coindices with the 200 day moving average as well as an important Fibonacci retracement level.

One group of stocks I will keep a close eye on in coming weeks is the retail stocks.  The group as measured by the S&P Retail ETF (NAR:XRT) is up roughly 9% for the year so far and thus clearly in the winning column on a relative basis.  Should those stocks start to lose upside momentum and possibly fall below the 200 day moving average on the S&P Retail ETF (NAR:XRT) it could serve as a clue to the broader market turning lower as well.  

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