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Tickers in this Article: AA, AAPL, DIA, GLD, IWM, IYT, JPM, QQQ, SLV, SPY, WFC, XLF, XLK, XLP, XLV, XLY
Technical action in most markets seems to show this week's downswing was only a temporary pullback, which means buying season can continue for investors who control their risks.

The month of July is getting off to a rough start. Worldwide rate cuts last Thursday did not impress investors or traders. This set the stage for June’s uninspiring jobs report, which led to stocks closing the week on a negative note.

The rate cuts got a mixed reaction from investment professionals. While some applauded them, others saw them as a sign that the economic recovery is in worse shape than central bankers are admitting.

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The yield on the ten-year T-Note turned lower on Friday, after having risen from a low of 1.44% on June 1 to a recent high of 1.67%. The chart points towards still lower yields as the completion of the flag formation (lines a and b) still has downside targets in the 1.35% area. In short, from a technical standpoint, there are no signs yet that rates have bottomed.

The economic news was mixed last week, though things started on a sour note. The ISM Manufacturing Index last Monday contracted for the first time since July 2009. Export orders were a serious negative, and the PMI Manufacturing Index on Monday also reflected the weakest rate of growth in 18 months.

Factory Orders the next day were better than expected, and the ISM Non-Manufacturing Index last Thursday still reflected a decent rate of growth, though it was lower than May’s reading.

The health of the economic recovery is difficult to predict at this point, as there are no clear signs like there were in 2007 and 2008. That time around, the technical outlook turned negative well ahead of the fundamentals, and it remained negative until March 2009.

The current technical readings, as I discuss in more detail later, are suggesting that stocks have completed a significant bottom. It is always important to keep an eye on what it would take to change that view. There are key levels in the Advance/Decline (A/D) lines that must hold in order to maintain the positive outlook.

The economic calendar is light this week, but earnings season begins again with Alcoa (AA) reporting after the close on Monday. The markets are likely to focus on earnings for the majority of the week.

On Wednesday, we get International Trade numbers and the FOMC minutes, followed on Thursday by jobless claims as well as Import and Export Prices. Then on Friday, we get the Producer Price Index and the University of Michigan’s consumer sentiment survey, which is expected to decline slightly.

WHAT TO WATCH
Friday’s stock-market decline pushed most of the major averages into negative territory for the week, though all the major averages closed well above the lows.

The S&P 500 had a low of 1,348 but closed above 1,354. The technical readings suggest that this is just a pullback within the market’s overall uptrend, and it could be over by the middle of the week.

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The daily chart of the NYSE Composite and the cumulative NYSE Advance/Decline line reveals that important resistance in the A/D line (line c) was broken last week. The corresponding price resistance was not broken, indicating that market internals are acting stronger than prices.

This kind of pullback is generally what occurs in the early stages of a new intermediate market uptrend, and is similar to what occurred last October 13. Another few days of selling would be enough to take the A/D line back to its uptrend (line d) and its rising WMA. The bullish case will be confirmed by a move in the A/D line above last week’s highs.

Conversely, a drop in the A/D line below its rising WMA and more importantly the June 25 lows (line 1) would suggest that we could see a test of the June lows.

Both the individual investor and the financial newsletter writers became more bullish last week, but the worse than expected jobs numbers could alter their enthusiasm. If my bullish view is correct, the current correction should be a good buying opportunity.

NEXT: Key Levels for Stocks and Tom's Outlook

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S&P 500
The Spyder Trust (SPY) exceeded the major 61.8% Fibonacci retracement resistance level at $136.58 last Monday, hitting a high of $137.80 on Thursday. The SPY gapped lower Friday, with next good support at $134.28 and the 20-day EMA.

There is further support at $132.70 to $133.40 (line b), with key support sitting at $130.85.

The S&P 500 A/D line reached its major downtrend (line c) last week, but failed to move through it. It will be important on the next rally that this resistance is overcome. There is initial support for the A/D line at its rising 21-period WMA, with further levels at the late June lows.

Initial resistance now stands at $136.30 with more to follow in the $138 to $138.50 area (line a).

Dow Industrials
The SPDR Diamonds Trust (DIA) tested its 20-day EMA on Friday, reaching a low of $126.87. The next support sits in the $125.50 to $124.25 area. A daily close below the $123.85 level (line f) would weaken the outlook.

The Dow Industrials A/D line has turned lower, and failed to reach its key negative divergence resistance (line g). It has been one of the weakest A/D lines, but is still above its WMA.

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Nasdaq-100
The PowerShares QQQ Trust (QQQ) broke through its downtrend from the April highs on Thursday (line a).

The tech sector was encouraged by the ability of Apple (AAPL) to overcome resistance at $590. Apple eventually was able to close above the $600 level, and surpassed the 61.8% Fibonacci retracement resistance.

QQQ had a high last Thursday of $65.26, which was just below the 61.8% Fibonacci retracement resistance from the April high at $65.32. This is now a key level of resistance once the market again turns higher.

The Nasdaq-100 A/D line did break through its negative divergence resistance (line c) at the end of June. This is a positive sign, consistent with the end of the correction.

The next support is at $63.40 and the 20-day EMA. The short-term uptrend on the daily chart (line b) is next in the $62 area, followed by key support (on a daily closing basis) at $61.58.

Russell 2000
The iShares Russell 2000 Index Fund (IWM) rallied 8.5% from the June 26 lows, eventually reaching a high of $81.84 last week. The downtrend (line e) was broken at the start of July. There is major resistance between $82 and $84.

The Russell 2000 A/D line tested its major negative divergence resistance (line f) before turning lower. The A/D line is still in an uptrend and above its WMA. A break through this divergence resistance may signal that small-cap stocks are starting to outperform.

There is first support at $79.50 and the former downtrend, with stronger levels at $79 to $78.40 and the rising 20-day EMA. Major support sits in the $75.40 area.

NEXT: Sector Focus, Commodities, and Tom's Outlook

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Sector Focus
The iShares Dow Jones Transportation Average Index Fund (IYT) turned lower last week, and was not able to surpass the June high at $94.57 (line a). There is initial support for IYT in the $90-$91 area.

The relative performance, or RS analysis for IYT is still in a shallow uptrend, but needs to move above the prior two peaks to signal that the Transports are leading the S&P 500. The on-balance volume (OBV) is still weak, as it is below its downtrend (line c).

The Select Sector SPDR Technology (XLK) was able to test its downtrend (line d) before Friday’s drop. The short-term uptrend is now in the $27.80 area. The relative performance is still locked in its trading range (lines e and f). The OBV did break its downtrend (line g) in June, and is above its rising WMA.

Of the ten major sectors, only the Select Sector SPDR Consumer Discretionary (XLY) has failed to surpass the June highs.

The Select Sector SPDR Health Care (XLV) and the Select Sector SPDR Consumer Staples (XLP) both made convincing new rally highs last week, and continue to act the best.

The Select Sector SPDR Financials (XLF) is a sector to watch next week, as JPMorgan Chase (JPM) and Wells Fargo (WFC) both report earnings on Friday, July 13, and that will have the market’s attention.

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Crude Oil
The August crude-oil contract rallied sharply from its lows at $77.28 last week, hitting a high of $88.98 on Thursday. This was still below the major 38.2% retracement resistance from the March high, which stands at $90.34.

It will be interesting to see if we get a soft test of the June lows, with first support now in the $80 to $82 area.

Precious Metals
The SPDR Gold Trust (GLD) was hit hard Friday after slightly breaking its short-term downtrend (line b). As I discussed last week, the technical action has improved over the past week, and there is a strong seasonal pattern for gold to bottom in July.

This makes the current decline quite important. If we get a decisive break below the late June low at $150.15, it will suggest one more drop before the lows are in place. The sentiment on gold is already quite negative, and has reached levels consistent with a bottom

The Week Ahead
From the analysis above, it is clear that the Advance/Decline analysis is giving somewhat of a mixed picture.

The NYSE A/D line has the longest track record, and I have found it to be the most important. It does suggest that an important low is in place. The S&P 500, Dow Industrials and Russell 2000 A/D lines are acting weaker, while the Nasdaq-100 A/D line is positive.

It will be important to watch the trading early in the week. If the market can hold above further support and then turn higher by the end of the week, it will support the bullish case.

Therefore, the current correction should be a buying opportunity...but as I said last week, I would be patient and buy at good support levels where the risk on any one position can be kept at reasonably low levels.

Just in case we do get a break below the late June lows that is confirmed by similar weakness in the Advance/Decline lines, I will be adjusting stops early next week for the stocks in my “Charts in Play” portfolio.


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