If you were looking for a good entry for a new short position this past week, you missed the boat. Instead of a reflex bounce after last Friday's sell off (with the possible exception of the Dow), investors came back to the market on Monday ready to dump more shares. The selling pushed the indices even closer to their March lows. The NASDAQ Composite finally broke below its 50 day moving average (DMA), the last of our indices to do so, before popping back above it today.

The VIX flashed a heads up on the upcoming dead cat bounce when it failed to break above resistance at 24 as the indices were falling Monday through Wednesday.

One of the shortcomings of the weekly nature of this review is that sometimes the analysis may not be so timely. However, one of the goals of this blog is to show you methods we use on a daily basis--look for these sorts of divergences as signals of potential reversals. With a pruned watchlist and regular market analysis such as we show you here, you can be poised to grab gains even in choppy markets like this one.

The market bounced a bit Thursday on better than expected retail sales numbers. Volume tracked higher across the board, but all still closed in the lower half of their trading ranges. Friday tacked on some lower volume, unconvincing gains as reported CPI showed inflation in food and energy prices, 5% and 17% year over year (YoY) respectively, has yet to overly affect other areas (core inflation was reported as 2.3% YoY).

However, tame core inflation cannot continue indefinitely. (As we all keep muttering about high oil prices I'm sure, though the above oil chart begs to differ.) Increases in raw material costs are going to continue to put pressure on prices. May's PPI numbers, reported on Tuesday, could bear this out. In April, crude materials costs rose almost 8%. Recall that eight months ago many in the media insisted that the market sans financials was in pretty good shape and would be fine if "sub-prime contagion" was confined to that sector...

This week the index charts' horizontal lines have been moved to indicate the support area of Thursday's bounce. In some cases, such as the Dow, I don't find the case for support at these levels particularly compelling. However, two indices, the NASDAQ and the S&P, may be setting up for a short opportunity.

My preferred short play would be the S&P as it nears 1380 (buying SDS). A case can be made for 1360 where it closed on Friday, however I think this is weak. 1380 has provided support on numerous occasions the past two months and now happens to coincide with possible resistance at the 50DMA. The NASDAQ could also find significant resistance at 2450 where it has found support before, so shorting it is an option as well (buying QID). However,

1. The NASDAQ is the stronger index
2. The spread between 2450 and the Thursday's low is around 2% while the same play on the S&P off 1380 yields around 4%.
3. The S&P is trading well below its 50DMA while the NASDAQ is not. Waiting for a better spread on the NASDAQ would mean it would have regained its 50DMA and possible support there.

• Add new comment