Market testing resistance

Market Commentary:

Intel’s cautious outlook put a bit of pressure on the tech stocks today but in the last hour, programmed trading kicked in to lift stocks on the final day when taxes are due.

In most years, this marks the end of the seasonal cycle that runs from October to mid-April.

On a side note, the Fidelity Select Family Stochastic Oscillator that measures this cycle is now at a peak level with %K at 91 and %D at 89, warning the next several months are likely to put pressure on the equity markets as is typically seen in the months May to October.

The stock market will now have to decide how worthy the Fed’s spin is about the merits of a second half recovery verses the risks of a more prolonged recession.

Before we get into these merits, step back and understand we can’t trust the Fed’s spin. If anything they can’t be honest with you.

This is a game of psychology. They knew we were heading for a whopper of a recession, perhaps a depression and yet they feared if the truth was known, a crash would occur, so we keep getting an optimistic spin out of the boys at the top.

When this recession started, the spin was this would be a typical recession, lasting about 8 months or so and to expect a V-shaped bottom. How many times have we heard this is the bottom, only to see this was just another suckers’ rally that ultimately led to lower lows?

We are now in the sixteenth month of this recession/depression and to be honest with you while there are a few signs hinting of improvements we are far from being out of the woods. Take today’s numbers.

Consumer prices fell unexpectedly in March -0.1% and recorded their first annual drop (-0.4%) since 1955. Can you image how severe things must be to record the first deflationary number in 54 years? It is the trend that is disturbing and it is getting worse, despite trillions of dollars of stimulus. No signs of improvement here!

With unemployment heading higher and consumer purchasing power and business labor costs under pressure, deflation will remain the bigger price-stability worry over the next few quarters.

Industrial production is down 13.3% since the recession began in December 2007, the largest percentage decline since the end of World War II, when production of military equipment ground to a halt and production fell 35%. What does this tell us about consumer demand?

Factory production dropped 1.7% in March. Factory output has fallen 15.7% during the recession, also the largest decline since 1945-1946. Underscoring the trend in manufacturing, factory output has dropped 15% in the past 12 months and has fallen for five consecutive quarters.

The Fed said capacity utilization fell by a full percentage point, to 69.3%, the lowest since the data series began in 1967.

There were some positives in the numbers today. The NY Empire State Manufacturing Survey came in at -14.7, climbing 24 points. With the Fed promising a turnaround in the second half, some are gearing up for a economic recovery – but is this a result of hype or real demand?

Although there is reason for cautious optimism, a number of conditions must be met for the economy to recover: Improvement in financial markets must be sustained, job losses must moderate, and house prices must halt their free fall.

What are we to make of the Fed’s decision to delay the results of the stress tests for the larger financial institutions? Why delay this news if it is good news?

There are no signs that job losses are about to moderate, quite to the contrary.

While the bulls are excited about new home sales, home prices continue to fall at a very rapid pace. There is just not enough economic confirmation that an economic trough is developing.

Whenever you see a bear market, there will be a number of resistance levels that must be overcome in order to sustain a durable uptrend at the conclusion of the bearish run. For example, the bulls have to overcome short-term resistance levels, such as the 50-day moving averages, which they have been successful at doing so far.

They have overcome intermediate-term resistance levels and of course for a new bull market to begin we have to reach a level of upside momentum strong enough to break out of a left translation pattern and start producing a pattern of higher highs and higher lows and get the price of the major indexes trending above the 200-day moving averages again.

We are now testing intermediate-term resistance levels.

In this chart of the S&P 500 index, we have “back tested” to the old support line, which is now intermediate-term resistance.

As you can see we are now testing the old wedge support line. Notice that trading is now highly compressed and narrowing. This is a developing bearish continuation pattern. I would like you to also note that volume was highest in week two of this rally and has been declining over the last several weeks (and will likely continue to decline the closer we get to May). Clearly, the probability of a correction/break down and a new intermediate-term down leg looms large.

This is why it is dangerous to chase this bear market rally. It still remains within a left translation, or lower lows and lower highs for the broad market indexes from one intermediate-term cycle to the next (refer to the chart’s upper black resistance line).

Let me repeat myself – I want to see what the market looks like at the next intermediate-term bottom. Will we see a higher intermediate low and then climb back to set a higher intermediate high?

We won’t know the first part of this question for another six weeks or so. But I can assure you if we do go back and test the March lows, you are not going to like it if you are thinking of going long in the market right now.