Stocks took one on the chin for a third week in a row, with most of the indices ending last week well under key technical support levels.  It was so bad, in fact, it was good in that we just might see a dead-cat bounce. Indeed, we started to see the market clawing its way back from intraday lows on Friday, suggesting traders think there’s too much value to simply ignore now. Don’t be surprised to see this week start out with more of the same buying.

Just don’t be too quick to jump to any sweeping bullish conclusions based on such an effort though. The bigger trend is still bearish even if the bulls can tack on some more gains here… for a couple of reasons.

We’ll look at those reasons in some detail below. First, however, let’s look at last week’s most important economic news and preview the economic announcements due this week.

Economic Data Analysis

It was a busy week, kicking off with a look at last month’s retail spending. Sales weren’t just up. They were markedly higher than expected, up 1.0% from June’s levels when not counting automobile sales. To the extent consumerism keeps the market moving forward (which is a lot), this is a significant tailwind many people may not have been expecting.

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Stock Market Index Analysis

Yes, the market managed to fight its way back to what was essentially a breakeven on Friday. Don’t get too excited just yet though. Stocks were careening the three prior days, and were deep in the red again on the fourth day — Friday — before snapping back. A pushback was likely no matter what. It’s not necessarily the beginning of a bullish reversal. The daily chart of the S&P 500 tells the tale.

Source: TradeNavigator

Backing out to a weekly chart of the composite puts things in perspective. Last week’s net loss is more or less in line with the prior three weeks’ worth of selling. The selling, however, is experiencing its first floor in the form of the 100-day moving average line (gray) at 13,155. You could expect a pause here. That doesn’t necessarily mean this is the end of the selling though.

NASDAQ Composite Weekly Chart, with VXN and Volume

Source: TradeNavigator

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The weekly chart also shows us how much the NASDAQ’s volatility index (VXN) is starting to work its way higher… which is bearish for the broad market. On the flipside, the VXN seems to be bumping into a bit of a ceiling around 23.3 (dashed, yellow). It will need to clear that resistance and the NASDAQ Composite itself will need to break below its 100-day line before we can expect any more downside. That may not happen immediately though. It could take a couple of days for the bears to regroup and restart the effort. Don’t confuse a lack of bearishness with bullishness to start this week.

Here’s the weekly chart of the S&P 500. The same basic idea applies here. That is, the index is testing its 100-day moving average line and the S&P 500’s volatility index (VIX) is starting to creep higher. But, the S&P 500 itself isn’t in the midst of an uncontrollable selloff… at least not yet.

S&P 500 Weekly Chart, with VIX and Volume

Source: TradeNavigator

Don’t be surprised to see the bulls push back a bit here. Again though, don’t read too much into it. The past three weeks have been decisively bearish, leaving stocks attractive to dip-buyers. There’s still a lot of froth left to burn off. The volatility indices are arguably the big “tell” as to if-and-when the market’s going to make another leg lower.

Price Headley

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