Breakout Or Fake Out?

A roller coaster week ends flat and leaves more questions than answers

Last week’s roller coaster ride took investors on a dizzying ride as global markets struggled for direction and remained within the recent tight trading range.

On My Wall Street Radar

The fundamentals were mostly terrible but markets shook off bad economic news and central bank inaction to focus instead on promises for better days and a better than expected jobs report.

chart courtesy of StockCharts.com

In the point and figure chart above we see how the rally took prices back to recent resistance levels but the buy signal remains intact with an upside target of 1550. Heavy resistance is at 1400 while support is at 1360 and even stronger support at the bullish support line at 1350. A break below that would be a major trend change to the bearish side.

For the week, the Dow Jones Industrial Average (NYSEARCA:DIA) was up 0.2%, the S&P 500 (NYSEARCA:SPY) gained 0.4%, the Nasdaq 100 (NYSEARCA:QQQ) advanced 0.3% and the Russell 2000 (NYSEARCA:IWM) declined 1.0%.

U.S. Treasuries (NYSEARCA:IEF) declined on the week.

So we remain locked in the recent trading range but with a slight bias to the upside that would be further confirmed with a break above current levels. Expect more volatility and choppy conditions ahead.

View From the Summit

Last week’s headline makers were the Federal Reserve standing pat and Mario Draghi saying that his European Central Bank was going to come up with a plan to buy Spanish and Italian bonds. Markets at first didn’t like the news but rallied hard on Friday on speculation that European governments would rally around Spain and Italy to save the European Union. Further support came from Greece where new pledged of austerity bolstered confidence that the country would continue to be kept on European life support.

July payrolls were the good news on Friday as the number came in at a better than expected 163,000 compared to last month’s weak 64,000, however, overall unemployment edged up to 8.3%. ISM made a slight advance along with consumer confidence.

On the negative side of the ledger, global PMIs continue to drop, construction spending in the U.S. dropped, car sales and factory orders were down and ISM remains in contraction mode.

After a heavy data week, next week is light on economic reports with job openings on Tuesday, weekly jobless and wholesale inventories on Thursday and import prices Friday.

So the question remains, “is recent market action the start of a breakout or another fake out?” The answer depends upon what the central banks do and on words from Dr. Bernanke and Mario Draghi. Really nothing else matters in this momentum driven world where fundamentals remain weak, economies slow and profits decline. Looking ahead, we see the Federal Reserve Jackson Hole meeting August 25-27 and the FOMC meeting September 12-13 where many analysts expect Dr. Bernanke to launch the next round of quantitative easing to attack slow growth and stubbornly high unemployment.

Bottom line: Market players clearly expect central bank intervention to boost markets higher. If they get it, the rally will likely continue, if not, the most probable outcome would be a sharp break to the downside.

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