How much more pain can the bears in the stock market take?


Early last week, there was no doubt that traders and investors alike were concerned about the stock market ahead of the FOMC meetings and big tech earnings. The Wall Street Journal noted that a “mixed series of earnings reports followed an unstable path forward for the markets ahead of a critical Federal Reserve meeting this week.”

Tech stocks fell sharply on July 22nd in response to Snap’s dismal earnings, as some of the largest tech companies expected to report this week were also dumped.

For example, (AMZN) fell 8% as of July 22nd until July 26 to close at $114.81. Those who sold probably had some regrets towards the end of the week when AMZN closed at $134.95 up 10% for the week. Other beat up tech giants like Microsoft
(MSFT) also had a good week, up 7.8%, closing at $280.74. MSFT had a low of $249.57 on Tuesday.

It was the post-profit action in MSFT, along with the action in S&P futures (see Tweet), that indicated Tuesday’s market pullback was over. Wednesday’s strong open also supported the bullish case.

Of course, those who fell short of the big tech names had an even worse week. Last week’s tech studies indicated that the shorts would be squeezed and they certainly did.

Last week’s strong gains and impressive monthly performance in June were not enough to convince many that stocks can go even higher.

The drop in interest rates pushed the Dow Jones Utility Average ($UTIL) up to a gain of 6.6% for the week, while the Dow Jones Transportation Average was not far behind as it rose 5.8%. $UTIL is the only one of the averages in the table above that is higher in the year to date (YTD).

There were also solid gains in the Nasdaq 100 and S&P 500, which were up 4.5% and 4.3% respectively. Both are still showing double-digit YTD losses, while the 3% gain for the Dow Jones Industrials brought it down to a 9.6% loss for the year. The SPDR Gold Shares (GLD
) had a nice gain of 2.1% for the week.

What about the market forces? There was a dramatic improvement in the outlook for the Spyder Trust (SPY .) last week

) as it closed well above the 38.2% Fibonacci resistance at $407.17 and the 20-week EMA at $406.89. The 50% level is at $421.08 and a close of the S&P 500 above 4200 is likely to grab the attention of the market. The 61.8% resistance is at $434.98 with the weekly downtrend, line a, slightly higher.

The weekly S&P 500 Advance/Decline line was very strong last week as it closed above the resistance (line c), indicating that a important low point is in place. The WMA tries to spin higher and must hold all the pullbacks. The weekly NYSE Stocks Only A/D and NYSE All A/D lines (not shown) also closed the week above their moving averages and resistance.

Not all stocks fared well over the past week, as (AMZN) surged higher Friday in response to earnings, Intel
(INTC) fell lower to close 8.56% for the day. The action in Apple
(AAPL) confirmed positive on-balance-volume (OBV) signals in June, as the long side favored and rose another 3.28% on Friday.

All these stocks are part of the Invesco QQQ
Trust (QQQ) which fell back to its 20-day EMA on Tuesday before rising sharply. The 38.2% Fibonacci retracement resistance is at $322.54 with the downward trendline a, at $328.90. The 50% resistance is at $339 and a close above $340 should convince many that stocks can move even higher.

The Nasdag 100 Advance/Decline line is still in an upward trend from the June lows, line c. It reached the highest level since April and has strong resistance on line b. A drop below the WMA and the daily uptrend would be a sign that the rally has lost momentum. The OBV is in a shallow uptrend as the volume on the rally is not yet impressive. Volume in the S$P 500 was better.

So what’s next? Since June’s “Don’t Count On A Rally Failure” evidence has emerged that a medium-term bottom was forming. Last week’s action added to the “weight of the evidence”.

How much more pain can the bears in the stock market take? In my experience, it takes both time and higher prices to convince those who are bearish to change their mind.

Some did not expect the S&P 500 to cross 4000 and it may take a few more weeks and a move above the 4000 level to change their mind. It will be important to monitor the technical action of the leading growth ETFs for warning signs to see if the rally falters – stay objective.

Last week I was looking for a pullback early in the week and then a strong close to further support the bullish case. This week I would expect there to be some profit taking as well as those who are short try to slow the rally.

Many of the ETFs I have preferred such as QQQ, XLK
and SMH
are now closer to the June highs and their starc+ bands. This increases the likelihood of a short-term pullback, but for now there are no signs of a top.

The rallies in some of the individual stocks were even more impressive, so a pullback should create equal opportunities for stock selection. I’ll be sharing my market view on Twitter during the week and I expect stocks to move even higher in August as the A/D lines start moving higher.