Are Stock Market BULLS Running Out of Steam?

After a six week rally, global stock markets face important tests ahead

Major  U.S. stock indexes and ETFs closed Friday just below yearly and recovery highs and now stand at serious resistance levels as the dog days of summer slowly draw to a close.

On My Wall Street Radar

In the point and figure chart of the S&P 500 (NYSEARCA:SPY) above we can see how prices have now arrived at significant resistance near yearly highs.  Resistance levels At 1420 mark the last significant near term ceiling and 1400, which was resistance, has now become support, along with even stronger support at 1340-1360, just 4-7% below current levels.

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A bull market uptrend remains in place with an upside price objective of 1550.

For the week, U.S. stock indexes advanced for the sixth week in a row to close just below 2012 highs.

On Friday, August 17th, the S&P 500 (NYSEARCA:SPY) closed within 1 point of its 2012 closing high and the Dow Jones Industrial Average (NYSEARCA:DIA) finished 4.12 points below its May 1, 2012 closing high.  The Nasdaq 100 (NASDAQ:QQQ) gained 0.44% and the Russell 2000 Index (NYSEARCA:IWM) added 0.83%.

View From the Summit

In quiet summer, low volume, low volatility trading, global markets continued their grind higher last week.  Support came from mixed economic reports and German Chancellor Angela Merkel who came out in support of European Central Bank bond buying to aid Spain.  For its part, Spain appears to be moving closer to a request for a full bailout which the ECB says is necessary to garner its support and Greece is campaigning for an extension to four years from two to reach its austerity goals.  Madrid’s mayor said that a Spanish bailout seems “inevitable” and resolve seems to be growing among northern tier states to do what it takes to save the Euro.

Stock markets in Europe showed strong gains for the week with iShares MSCI Germany Index (NYSEARCA:EWG) and iShares MSCI Italy ETF (NYSEARCA:EWI) both posting solid advances.  Spain’s major stock index, the IBEX, also climbed to multi-month highs.

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At home, economic reports were mixed, as usual, with July retail sales posting a gain after the previous month’s decline, industrial production and home builders index climbing, and leading indicators and consumer sentiment showing improvement.  On the negative side, unemployment claims rose, the Empire State Index fell and the Philadelphia Federal Reserve index fell for the fourth month in a row.  July housing starts declined and European region GDP declined for the 2nd quarter as recession spreads across Europe.

Next week promises to be light on volume again as economic reports are thin and many market participants are on vacation.  No reports are scheduled for Monday or Tuesday, Wednesday brings the FOMC minutes and existing home sales, Thursday features weekly employment, new home sales and Markit PMI, and Friday wraps up a slow week with the durable goods orders reports.

In Europe, closely watched events will be meetings in Europe between Greek Prime Minister Antonis Samaras and European finance ministers leader, Jean-Claude Junker who said last week that Greece would not leave the European Union.  Samaras is also scheduled to meet with French President Francoise Hollande and German Chancellor Angela Merkel and we can expect market moving headlines to come from these meetings as policy makers struggle to save the Eurodollar and European Union.

Volatility remains low, some observers say, too low, as complacency settles across markets.  VIX and VIX ETNs plumb new lows and market players have opposite readings on this phenomenon with some saying that low volatility is a warning flag and others saying that low volatility points to the potential for higher equity prices ahead.

However, as the summer doldrums continue, the most important event of the month will be Federal Reserve Chairman Dr. Ben Bernanke’s widely anticipated speech in Jackson Hole, Wyoming on August 31st.  Many analysts expect a “pre-announcement” of a new round of monetary easing in hopes of a replay of the summer of 2010 when Dr. Bernanke’s speech kicked off a period of quantitative easing and a powerful stock market rally.

Best Buy (NYSE:BBY) and Dell (NASDAQ:DELL) are slated to report earnings on Tuesday, August 21st, while Dow component Hewlett-Packard (NYSE:HPQ) reports earnings on Wednesday, August 22nd.

Bottom line:  European leaders seem to be consolidating around the need to keep the Eurodollar intact as the costs of break up far outweigh the costs of keeping the Union together.  At home, volume remains light as market participants stand on the sidelines in hopes that the Fed will do more to support markets and big money players go on vacation.  Markets are at a fork in the road and need to punch through current levels to continue this move higher.  With indexes at overbought levels, seasonal weakness and strong resistance just ahead, we could expect a short pause here while money movers wait for Dr. Bernanke’s annual pilgrimage to the tony Tetons.

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John Nyaradi is the author of The ETF Investing Premium Newsletter.