Will Trading Volatility Elevate in Week Ahead?

The news flow this week certainly reminded me of the old colloquialism, “raining cats and dogs,” as startling headlines bombarded us from all quadrants of the world.

At Wall Street Sector Selector, we remain in a defensive posture, expecting lower prices ahead.

On My Radar

Chart courtesy of stockcharts.com

The Point and Figure Chart above displays the technical damage done this week as a “sell” signal was generated and now the bearish price objective is 1160. Support is found at 1250 and again at 1220 while the long term uptrend remains intact.  Overhead resistance is now at the 1300-1320 level.

So it appears that we are clearly in a short term “correction” within a still ongoing uptrend.

Depending upon your outlook, this could be a good opportunity to “buy the dip” or there is further downside potential to at least 1220 or beyond to the 1160-1180 level.

My view is that there is currently more risk than reward in the market.

The View From 35,000 Feet

It was another week of almost unbelievable news as events unfolded in Japan (NYSE:EWJ), Libya and Yemen which all created intense volatility in global equity and currency markets.

Japan was at the top of the news, of course, and while the situation surrounding the nuclear accident seems to be stabilizing over the weekend, there appears to be a long way to go before victory can be claimed in what is being called the worst nuclear accident since Chernoybl.

The death toll exceeds 7,000 with more than 10,000 still missing, and the economic toll is likely to be huge, as well, as we are bound to see supply chain disruptions and delays and the very likely possibility of a return to recession in the world’s 3rd largest economy.

The extent of the nuclear accident remains unknown and it’s likely that the winds will be carrying radiation to Tokyo by the end of the weekend which could generate a whole new series of economic and human misery and danger.

In Libya, Gaddafi declared a cease fire after the U.N. threatened imminent military action, but then apparently continued his invasion of the rebel stronghold in Benghazi.  Clearly this is a fluid and rapidly changing situation, but what is certain is that Libyan oil production is dropping as foreign companies have pulled out their employees and major oil facilities have sustained major damage.

Bloomberg reported that production has declined to 400,000 bbl/day and “could reach a halt.”

A protest in Yemen on Friday resulted in more than 40 deaths and reportedly hundreds of injuries and a state of emergency is now in effect in the country where 20% of the population lives on $2/day.

China (NYSE:FXI) raised their bank reserve requirements for the 3rd time this year while at home, the Federal Reserve said that growth is on “firmer footing,” and that employment is “improving gradually.”

Economic reports were largely mixed this week with positive news coming from March Empire Manufacturing Index, the NAHB Housing Index, initial and continuing unemployment claims, and the Philly Fed.  On the negative side of the ledger, Housing Starts, Building Permits and Industrial Production all disappointed in February.

What It All Means

The times, of course, remain dangerous and fluid and we can expect more volatility ahead depending upon how future weeks’ news flow unfolds and if the “cats and dogs” deluge continues.

Technically, major damage was inflicted on markets this week and so a resumption of the recent rally will be a challenge for the bulls in what can only be described as a hostile environment.  Finally, the rapidly approaching conclusion of “QE2” in June also casts more uncertainty on an already uncertain environment.

The Week Ahead

It’s a relatively quiet week of economic reports which probably a good thing given the drama unfolding around the world.

Monday: February Existing Home Sales

Wednesday: February New Home Sales

Thursday: Initial Unemployment Claims, Continuing Unemployment Claims, February Durable Goods

Friday: Q4 GDP 3rd Estimate, March Michigan Sentiment

Sector Spotlight

Winners: (NASDAQ:ICLN) Global Clean Energy (NYSE:TLT) 20 Year Bond

Losers: (NASDAQ:FEFN) Far East Index (NASDAQ:NUCL) Nuclear Eenrgy Index

Disclosure: No positions in ETFs or stocks discussed in this article.

John Nyaradi is the author of Super Sectors: How To Outsmart the Markets Using Sector Rotation and ETFs.