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The bulls would call Friday’s action a bounce, but the bears would point out that while the market was up, the volume was down. While the Nasdaq managed to claw its way back above its 50 day MA, there there is still plenty of overhead resistance.

It was a tough week for bonds thanks to higher inflation expectations, thanks in part to a 0.6% rise in the CPI index. Since most of that was due to higher food and energy prices the bulls think that means we do not really need to be concerned with inflation. If the consumer only has money to buy food and gas, that can not be good for the economy. Last I knew if the economy was having a tough time, that can not be good for the stock market. Friday’s move might just give you a better opportunity for some bearish options trades.

JD

The Nasdaq joined the S&P 500 and the DJIA in their tail spin by crashing though its 50 day MA. It was only a matter of time. Oil failed to break Friday’s high, but that did not provide any relief. The DJIA is on its way to 12,000 and the S&P 500 will certainly find 1325. If higher oil prices were not bad enough, flooding in the Midwest gave grains a big kick start today. The March lows are within easy reach, especially for the DJIA. The probability of that level being tested looks like it will happen before we ever get a shot at passing the May highs. Say by the end of this week maybe?

Hold on for the ride. Its not likely to be smooth.

JD

Unfortunately, the DJIA won its battle with the NASDAQ, leading the markets down this week. It blew through prior lows like they were not even there on Friday. The only thing seemingly holding up the DOW was the low end of its Bollinger Bands, but on recent charts that has done nothing more than slow it down. While we might get a slight bounce on Monday because of this, I certainly would not count on this.

While the NDX chart doesn’t look as bad as the DJX or SPX, it certainly does not look like a safe haven. Keep your eyes on it though. Its recent strength point to the fact that Technology stocks are likely to lead the markets back, just do not hold your breath waiting for that to happen.

There were two major news items that led to the carnage on Friday, a 5.5% unemployment rate and $139 oil. People losing jobs, and higher inflation are certainly going to take their toll on consumer confidence.

As Bob would say, no reason to be a hero now. Use any bounces to lighten up on your long positions.

JD

The market got hit again today after rumors started flying in the afternoon. First, it was a rumor of a bank in California having problems. Then, Lehman had to come out and deny that they had tapped the Fed for cash. The bottom line is that risk aversion is in full swing. The yield curve rocketed steeper for a second day in a row as people ran for the 10 year again. I don’t know whats going on, but things are smoking so there must be a fire somewhere. Bernacke briefly helped things in the morning when he made some comments to support the dollar. Hopefully, everyone took advantage of the rally we had a few weeks ago and either did some selling or bought some protection.

BA

Are technology stocks and the NASDAQ going to succeed in pulling this market up again, or will the DJIA lead this market back down?

The NASDAQ chart looks strong with its second close above its 200 day MA in the last month.

The DJIA, on the other hand, is still being held back by its 50 day MA, never mind its 200 day MA.

The SP 500 is stuck in between the two after weakly bouncing off its 50 day MA earlier in the week.

The one thing that does seem to be apparent is that bonds are taking a hit since the FED pretty much confirmed that interest rates will not be getting any lower.

The bear call spread ideas I suggested 10 days ago still look good.

JD

Any way you slice it, this was not a good week for the stock markets. While record high prices in oil started the equity market tail spin, it was the news from the minutes of the last FOMC meeting that really knocked this market down. The FED now seems to be more concerned with inflation than with the stability of the financial markets.

After touching its highest level since the first week of the year at its 200 day MA on Monday, the DJIA blew right through the support of its 50 day MA. The next stop for support will be the April low at 12, 250, but it certainly would not surprise me if the market pays a visit to the March lows of 11, 750.

The SP 500 is not doing quite as bad, since it is still being held up by its 50 day MA. The NASDAQ still has a way to go to reach the support of its 50 day MA. The question stock market traders have to ask themselves: Is the DJIA leading the market down, or will the broader market and technology stocks help the it to reverse course.

The markets were led south by Financials, Real Estate, Consumer Discretionary and Retail. While the former two have been wreaking havoc with the markets for quite some time now, the rough week by the later two seem to be a confirmation that the consumer is feeling the pinch of inflation a lot more than the government has been leading us to believe.

No reason to close out the bear call spreads we suggested earlier this week, unless you have picked up 75% of the potential profit already. In that case, you might want to take your profits and move on to your next trade.

JD

Two more strikes against the stock market yesterday. Oil opened higher, and kept on going, rising over 3% to close over $133 per barrel. If that was not enough, the FED released the FOMC minutes from its April 30 meeting. They pretty much confirmed that Uncle Ben is done cutting rates and now is more concerned with inflation. Glad to see he finally stopped at the gas station on the way to the grocery store.

Not surprising that the stock market reacted poorly to this news. It doesn’t look too good from a technical perspective either. We already mentioned that it had been stopped by overhead resistance at the 200 day MA earlier in the week.

Yesterday’s drop blew right through the bullish trend line established after the March lows. And thanks to Tony and Eric for pointing out several indicators showing that pricing momentum is definitely running out of gas.

With two big down days in a row, you should probably wait for a pull back to before taking more aggressive bearish positions or adding some protection on your long positions.

JD

While the PPI actually came in lower than expected at 0.2%, the core PPI was up more at 0.4%. This was a solid indication that increasing food and energy prices are starting to impact the rest of the economy.

It did not help that oil made another record high at $129 thanks to the falling US dollar. Can anything stop this commodity’s attempt to reach the stratosphere? I realize that oil is extremely over bought, but I’m certainly not going to bet against it.

To make matters worst, indications from the FED are that it is ready to take a break from interest rate cuts, which seems to confirm what many have thought.

Our cautious attitude towards the markets is not going anywhere. You might even consider a bear call spread on your index of choice while the market heads down to test support.

JD

No, I’m not talking about the Presidential Election, that’s a topic for a different conversation, just the US stock markets. We are still sitting at the 200 day MA for the DJIA and the S&P 500. A move above this level that holds for more than a day might just be enough to remove the air of caution around here. With options expiration out of the way for this month, the market is free to move in its preferred direction. We will soon see what that turns out to be.

JD