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Tickers in this Article: DIA, GLD, IJH, IWM, QQQ, SLV, SPY, XLE, XLI, XLK
Tuesday’s drop gave investors an excellent entry point for what looks like a sustained rally. Of course, certain groups appear better than others at the moment, writes MoneyShow.com senior editor Tom Aspray.

It was another headline-driven week for the markets, as last Tuesday’s plunge in reaction to uncertainty in the Euro debt plan shook the confidence of even some bullish investors.

As I noted last week, the market was quite overbought, so a correction was likely. But it was sharper than I expected.

The market is now awaiting the confidence vote in Greece, which will be completed late Friday, and concerns have been growing over Italy since Prime Minister Silvio Berlusconi turned down funding from the IMF on Friday. The Italian bond and stock markets were not convinced, and once again came under pressure.

Though Tuesday’s losses were quite severe, if you look at the charts the pullback looked fairly normal. In many cases, Tuesday’s decline just filled the gaps from the previous week, which is pretty normal from a technical standpoint.

The MF Global debacle also shook the confidence of investors. After many years in the market, I am still surprised that this type of mismanagement within a financial organization can still go on undetected. The highly leveraged position in euro debt held by MF Global was shameful, and unfortunately it is the employees and customers of MF Global who bear the brunt of the pain.

Certainly, the battle between the bulls and the bears continued, and it is likely that many weak longs were taken out of them market last Tuesday. Stocks finished the week lower for the first time in five weeks.

However, last Thursday’s strong gains in reaction to the surprise rate cut by the ECB put the bulls back in charge. On Friday, stocks edged higher from the early weakness to close well off the lows, which was encouraging.

The good signs came in spite of the disappointing employment report. And while the number of new jobs missed expectations, the upward revisions in the prior months were positive. This suggests that we may see further upward revisions.

Most economists have now given up on the double-dip scenario, though many are staying out of the markets due to concerns over Greece (and now Italy), as well as the impending deadline for the supercommittee.

The markets took the lack of a definitive final communiqué from the G20 meeting pretty well. It does seem that the IMF will have emergency funding in place quickly if needed.

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The daily chart of the E-mini S&P futures shows that last Tuesday’s decline held above the key 38.2% Fibonacci retracement support at 1,204.75. A close back below this level would put the bears back in charge. This would project a drop down to the 50% support at 1,178.75.

The futures closed well off the lows, so the bears are likely a bit nervous. It appears that much of the action over the past two weeks has been in the futures; volume was especially high on October 27. This was likely portfolio managers belatedly jumping into the market…but one wonders how many were stopped out last Tuesday, as they quickly had sharp losses.

As I noted in today’s in-depth technical review of the stock market, sentiment did reach an extreme in early October, but now there are fewer bears. They need to get much more bullish before it is a concern, and typically it takes several months for the sentiment to shift from one extreme to the other.

There were some interesting numbers on money flow last week. It seems as though investors are now willing to accept more risk. It was reported that $25 billion moved out of money market funds, which was the highest since August. Another $3.5 billion went into emerging-market equities. The last time the flows were that high was in April.

Money also flowed out of the Treasury market. As I noted a last week, a shift from bonds to equities could provide fuel for even a stronger stock rally. If these trends continue over the next few weeks, they could have intermediate-term significance.

Other economic data was mixed. Retail sales were a bit lower, though some stores like Kohl’s (KSS) exceeded estimates.

Forecasts for consumer spending during the holidays are still low, but I continue to think that the actual figures will beat analysts’ expectations. I still like the retail sector, and think it can continue to move higher until we get closer to the holidays.

This week is fairly light for economic news. The most notable numbers come at the end of the week. Thursday, of course, we have weekly jobless claims, as well as the international trade and Import/Export prices. This is followed on Friday by the latest readings on consumer sentiment, which is probably the biggest report of the week.

NEXT: What to Watch

WHAT TO WATCH

As I noted earlier, the vote in Greece after the close will set the tone for the markets early in the week. It will be important as a breakout of the recent ranges should signal the next major move. The volume and A/D line analysis are both still in clear uptrends for the major averages, and do not show any signs yet of topping out.

A close above last Friday’s highs will signal a test of the late-October highs for all the major averages, and I would expect them to be exceeded.

Conversely, a close below Thursday’s low will set the stage for a test of last Tuesday’s lows, and may indicate another wave of selling. If this occurs it will take some of the strongest sectors back to good support where the risk on new long positions is favorable.

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S&P 500
The Spyder Trust (SPY) traded Friday in the middle of Thursday’s range, which is likely a sign of indecision. The flat 200-day moving average is at $127.50, and a close above this will give the market a psychological boost and suggest a test of the recent highs at $129.43.

The daily Starc+ band is at $131.41, with the weekly Starc+ band at $134.06.

The NYSE A/D line is still clearly in an uptrend after turning positive in October. The moving average of the A/D line is rising sharply, also suggesting the trend is still up. As of Thursday’s close, the A/D line is just slightly below its recent highs.

There is short-term support for SPY at $123.60, with further levels at $122.80 and the $122 area.

A close below the 38.2% Fibonacci retracement support at $121.02 would signal a drop to the $118.43 area, which is the 50% support.

Dow Industrials
The Spyder Diamonds Trust (DIA) is still showing better relative performance than the SPY. It closed the week well above the 200-day moving average at $119.56.

Once above Thursday’s high at $120.41, the next resistance is in the $122.20 to $122.48 area. The longer-term downtrend is at $123.56.

The Dow Industrials A/D line was the only A/D line to make new highs last Thursday, suggesting that the safety and dividends of the blue-chip Dow stocks are favored by investors.

There is now minor support for DIA at $117.17, with the 38.2% support following at $115.48. A close below this level would project a drop down to the 50% support at $113.26.

Nasdaq-100
The PowerShares QQQ Trust (QQQ), as I noted last week, had started to underperform the S&P 500. The RS analysis has not topped out yet, so another push to the upside is still possible, as technology-sector earnings have been stronger.

A close above last Thursday’s high at $58.17 will signal a rally to the prior highs at $59.21. There is trend line and daily Starc+ band resistance in the $60.50 to $61.10 area.

Despite Friday’s lower close, there are no signs yet that the Nasdaq 100 A/D line has topped out.

NEXT: Small Caps, Sector Focus, and Tom’s Outlook

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Russell 2000
The iShares Russell 2000 Index Fund (IWM) tested the 61.8% retracement resistance level in late October before turning lower. It held in a narrow range on Friday.

A daily close above $75.20 and last Thursday’s high would be positive, and is likely to signal a breakout above the 61.8% resistance level.

The RS analysis broke its downtrend in early October (line b). A move through resistance (line c) would create a pattern of higher highs and higher lows, suggesting that the small-cap stocks have started to outperform the S&P 500.

The on-balance volume (OBV) formed a bullish divergence at the October lows (line d), and has turned up sharply. It is acting stronger than prices, and is already close to the July highs, even though IWM is still much lower.

A close below $71.83 would weaken the short-term outlook and suggest a test of the 38.2% support at $70.53. A decisive close below this level would project a drop to the 50% support at $68.54.

The Russell 2000 A/D line is still in an uptrend, but needs to hold above last week’s lows.

S&P Mid-Cap 400
The iShares Trust S&P Mid-Cap 400 (IJH) also held a narrow range on Friday. It had rallied from an October low of $72.99 to a high on October 27 of $91.94.

The decline last week held above the 38.2% support at $84.88, and if it is broken the 50% support sits at $82.23.

The RS line has broken its downtrend (line e), but it still needs to move through the resistance formed in August (line f) to complete its bottom formation.

The OBV on IYT also formed a bullish divergence at the October lows (line g), and is still positive, though the selling last Thursday was quite heavy. The weekly OBV (not shown) needs a higher close this week to turn positive.

Sector Focus
Of the ten major sectors,the Select Sector SPDR Energy (XLE), Select Sector SPDR Industrials (XLI), and the Select Sector SPDR Technology (XLK) are closest to their recent highs. If they can move above last Thursday’s highs, it would be a short-term positive. I recommended several railroad stocks last week, which are part of the Industrial sector.

The Dow Transportation Average, after moving above the resistance at 5,000, has had a normal pullback. It still looks positive.

NEXT: Oil, Precious Metals, and Tom’s Outlook

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Oil
Crude oil has been leading the market higher. That was the case again on Friday; after December crude oil edged into positive territory in the afternoon, stocks firmed.

Crude oil held the breakout level (line a) on last Tuesday’s drop. The weekly and daily technical studies on crude oil are positive, and suggest a move to the $98 to $100 area. The weekly double-bottom formation has targets above $105.

Precious Metals
The SPDR Gold Trust (GLD) was able to overcome the 50% Fibonacci retracement level at $170 last week, which suggests a move to the 61.8% resistance at $173.76.

The daily OBV is positive, while the weekly is closer now to also turning positive. Still, the sluggish nature of the rally does not warrant new long positions, as the trading has been quite choppy.

There is first support now at $168, and a drop below $163.61 would be a short-term negative.

The iShares Silver Trust (SLV) has backed off from the highs at $34.44, but the chart pattern still looks like a continuation pattern. This would imply that we will see another decline. A break of key support at $29.80 would be negative.

The Week Ahead
I would not be surprised to see new governments in both Greece and Italy by the end of the week. Greece may also go into default, but I think if they do, the reaction may not be what most are expecting.

That is one good thing about technical analysis. While it is subjective, at least you are dealing with hard numbers from the markets. I have found, after more than 30 years in the markets, this approach has a better chance of correctly forecasting future prices.

I hope if you were looking to buy, you did on last Tuesday’s drop, as I recommended last week.

As always, I recommend you develop your investment plan while the markets are closed. Also, be sure to use stops, and adjust them once you have nice profits.


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