What to Watch in the Week Ahead

03/18/2011 9:58 pm EST

Focus: MARKETS

Thomas Aspray

, Professional Trader & Analyst

By Tom Aspray, MoneyShow.com

A clear resolution of the nuclear crisis in Japan or civil unrest in Libya could take some pressure off the global equity markets in the week ahead, but there are still a lot of nervous investors out there.

Expect more volatility, tighter price ranges and a continuation of choppy market action.

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Clearly, stock investors have had a rough few weeks. As of Wednesday’s lows, the S&P 500 had retreated 7% from the highs made on February 18.

Most of the major market averages have broken their near-term up trends, suggesting that we’ll continue to see sideways to lower trading over the next few weeks.

A violation of this week’s lows risks a decline to the 200-day moving average, but the longer-term outlook is still good. Recent new highs in the NYSE Advance/Decline line, which rises as the percentage of winning stocks grows, is a strong signal that the major trend for stocks is still positive.

WHAT TO WATCH

  • S&P 500: Since stocks gave up much of their early gains by the close Friday, the rebound from Wednesday’s oversold levels may already be running out of steam. If so, stocks could turn lower early next week. The first indication would be a drop below $126.90 in the SPDR Trust (SPY). This would increase the chances of a test of Wednesday's lows at $125.28.
  • Dow Industrials: The Diamonds Trust (DIA), which follows the Dow Jones Industrials, has very short-term support now at $116.90, and then key support at $115.51.
  • Financials: The Financial Select SPDR (XLF) bounced nicely Friday, but needs to close back above $16.60 and its 50-day moving average to turn positive. A drop in XLF below $15.75 would be negative. The sharp declines since February in the sectors that had been leading—like technology, industrials and materials—suggests we may be seeing a shift in leadership.

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  • Oil: The UN’s decision Friday to approve a no-fly zone over Libya could ease upward pressure on crude oil prices, although Friday’s closing price on the New York Mercantile Exchange for May crude was down slightly, to $101.62. Earlier in the week, oil rallied sharply after testing support in the $96 area on Tuesday. Watch for a close above $105 and then above $106.50, which would signal a move to $111, or possibly to the $115 area. On the down side, look for a drop back below $97.50. Oil and oil-related stocks still look to be a strong sector.
  • Gold: Low volume on the recent rally in gold and in the SPDR Gold Trust (GLD) suggests it will have trouble getting above recent highs in the near term, despite the bullish long-term analysis. Two consecutive closes above $140.65 for GLD would be an upside breakout, while it would take a close below the 50-day moving average at $134.50 to weaken the short-term upward trend.
  • Interest rates: The yield on ten-year Treasuries has fallen sharply, from a high of 3.73% on February 8 to a low last week of 3.14%. Even though this was quite a decline—and there was some panic selling of high-yield or junk-bond ETFs—the longer-term trend towards higher yields is still intact. It would take a drop in yields below 3.02% and the 200-day moving average to alter the trend.

Overall, I would expect more choppy action in the global equity markets, with a downward bias. Cash or cash equivalents are still likely to be a favored asset class, so interest rates could move lower.

The gold market does not look ready yet to start a new leg to the upside, but two daily closes at new highs would change the picture.

The US stock market will have to have several more consecutive positive days early next week to suggest the worst of the selling in equities is really over.

Tom Aspray, professional trader and analyst, serves as senior editor for MoneyShow.com. The views expressed here are his own.

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