A Technical Look Moving into Next Week - Walt Disney (NYSE:DIS)

While this certainly isn’t true easing of monetary policy, but rather prevention of tightening, the act seemed to be interpreted as not enough action on the FOMC’s part to bolster our ailing economy. Are economists ever happy?

Wednesday’s worse-than-expected trade balance number coupled with a slowdown in Chinese factory production sent the markets sharply lower, violating some key short-term technical levels, mainly in the S&P 500 Index. What I also found interesting was a Wall Street Journal/NBC news poll revealing that almost two-thirds of Americans still believe the economy is on a downward slope and has not bottomed out yet. These new results are much higher than the 53% of Americans who felt that way in January. The poll also showed an extremely high distain for our friends in Washington.

As a shorter-term trader, I tend to capture a quick snapshot of the macro economic climate/sentiment at present and find what, if any, catalysts might change those assumptions in the next couple weeks. At the same time, I examine the upcoming economic and corporate data announcements for the same reasons. Finally, I use technical analysis to research specific securities and then apply the appropriate options strategy based on my findings.

Right now, the market remains fearful, the global economy lacks any sort of real direction in the near term, and that sentiment is echoed by the reactions of the stock market. Manifestations of this fear can be seen in many ways, one of which is the lack of any follow-though on breakouts.

Another is the tough treatment of stocks like Disney DIS, which moved lower even after the company reported strong earnings. (Macy’s was an exception there, as its stock moved higher in the face of adversity on Wednesday.) The abysmal volume is typical for August, which tends to be the month that everyone – including the hot dog vendors on Wall Street – hit the Hamptons or another vacation destination.

The absence of volume and/or traders can lead to disaster. Fewer market participants means some market movements can be magnified, similar to a low-volume stock that is the center of a major news event.

Wednesday, the S&P violated first its 200-day and then its 20-day simple moving average (SMA). This breach was a short-term sell signal, although the fact that we closed right at the 50-day SMA at 1,088 was a minor relief. Since the index has spent most of its recent weeks below the 200-day SMA, it really has NOT been a support level, but rather resistance in this quasi-bearish period. The recent bullish channel that I believe was confirmed around July 20 was also violated yesterday – not a good sign for the bulls.

Traders will most likely be watching that 50-day SMA level at about 1,088 for support. If the index breaks below that, the next stop lower is probably 1,060.

As for catalysts, with Friday’s Consumer Price Index (CPI) report, Retail Sales, and Consumer Sentiment data, the market will probably not be without some movement. With the CBOE SPX Volatility Index (VIX) around 25%, the implied daily standard deviation of the S&P is about 1.6%.

Next week’s docket is light with the following major data due out (all times Eastern):