- Down end to a down week, but still in position to continue the rally. Just has to do it.
- Gold jumps off its 50 day EMA as the dollar bounces off its test.
- Retail starting to crack.
- More startling economic numbers.
- Trend remains in place, but after another week it is up to the buyers to prove they can maintain and extend it.

MARKET SUMMARY

Volatile expiration pushes indices to the ‘show me’ point.

It was not necessarily a great day for the stock market, but it was a rather typical expiration Friday. Stocks sold off, rebounded to flat, and then sold off in the last hour and a half to close to the downside. There were some steep losses. NASDAQ, -0.7%; SP500, -0.8%; Dow, -0.75%; SP600, -0.8%; SOX, -0.3%. NASDAQ 100, -0.8%. Overall a very spread-out, even decline as all market sectors took part in the general beating about the head and shoulders. It was by no means a bloodletting. It was something of a stubbed toe, but it was typical of an expiration Friday.

I want to note a couple of interesting features of the day. The initial selloff at the open was somewhat forecast by the futures. They were down but were trying to trend higher, and stocks did try to move up momentarily before they fell off down to the mid-morning low. There is the tumble, and then an inverted head and shoulders and a nice break to the upside. As a bookend to that, there was a head and shoulders form over lunch and into the early afternoon. It brought the indices right back down near the session lows by the close. Just a little intraday chart interpretation, and it very much reflects what you would see on a daily or weekly chart. In expiration, you have volatility and it sets up clearly-defined bullish and bearish patterns intraday that help the transfers from downside to upside and then back down again.

There was very little to get the market excited on the day. There were a few earnings out, mostly retail sales. GPS and ARO both had trouble. GPS had a problem with its outlook, and it seems that sellers love to sell GPS. It gapped down sharply from near 23 to 19. Very steep decline for this stock. ARO did not fare much better. It had already gapped lower, and there was a continuation gap and something of a breakaway as well. Huge gap to the downside. It was struggling because it had the same problem with its outlook. ANN actually surprised to the upside and posted some strong guidance. Nonetheless, it was down as well.

I noted on Friday, and as the week progressed, that some retailers are starting to struggle. More than that, some are actually cracking and starting to break. That somewhat makes sense when looking at the economic data over past several months. It has been steadily declining, and we saw that this past week as well. Housing starts and building permits were disappointing. Industrial production and capacity utilization both came in less than expected, showing declines after peaking. It looks like they are starting to turn back over.

Initial claims improved, but they are still over 400K for a sixth week. Again, this is no reversal. I will talk about some of the statistics shortly. These are not good numbers. Existing home sales were down when they were expected to rise. The Philly Fed was pathetic at 3.9 versus 18 expected and 18.5 in April. The leading economic indicators put in a downside month after eight months to the upside. That does not mean the trend has turned anymore than a 409K weekly jobless claims means that the six-week rise is over. It just shows that there is some mitigation in the numbers, and a weaker leading economic indicators number actually dovetails with the other weakening data we have seen through the economy.

As retail earnings start to fall, it corresponds to the issues with respect to the economy. Again, I will go into some of the numbers in more detail later. They are quite frightening with respect to how many people are unemployed and where we are with other recessions and depressions in the past. The RTH, the retail ETF, is having problems of its own. Nice, strong rally up through May, but now it is stumbling. We could have an ABCD pattern, so I am not jumping off the cliff with respect to retail. It is showing some cracks, though it is after a good run.

We will have to see how that shakes out, but I do see some big moves down. There are some almost unwarranted gaps to the downside. Again, I am referencing GPS and ARO. Those moves are not warranted for the numbers, and that is often a sign that a sector is running out of gas. People are getting out while the getting is good. We need to watch this for the other retail leaders to see if it becomes more of an epidemic or if it is just an isolated outbreak.

MONDAY

There is quite a bit of economic data next week. The important New Home Sales are on Tuesday, followed by Durable Orders on Wednesday. On Thursday we have the Initial Claims again and the second reading of the Q1 GDP. It is expected to rise to 2%, and maybe it will. There was some beneficial export data, but export data does not tell us much as far as I am concerned. It is not a real indication of economic strength or economic growth, unlike imports.

On Friday there is Personal Income and Spending, Michigan Sentiment, and Pending Home Sales. All important. It will be a week of important data, but it is also a week of technical action. With all of the undercurrents, that is what is driving the market. We have the dollar, gold, and foreign relations. We have what bonds are doing and, of course, stocks and economic data.

The action has been somewhat erratic, but that is what happens with an ABCD pattern. That gets people upset. They seeing that action   the lower highs, lower lows   and they say it will sell off. It could. It is no guarantee that it will make a break higher, but the possibilities are typically that it does rally back up into that prior resistance level. That is our initial target. When there is a good base after a solid rally, a new breakout, and then an ABCD consolidation, that would suggest that it will continue to the upside. That is why we have been focusing on the upside plays. Although we did make some money on the downside this past week with SSYS and the QID to name a couple.

There is also leadership. There is some good leadership, and there is some that is breaking down. We are seeing that in retail and in some technology stocks like AAPL. But AAPL has been struggling for quite some time now in its trading range. It has been bouncing back and forth, and this is just more of an up-and-down inside of its trading range. Some leaders are struggle, and that is normal. The key is whether the majority of leaders start to break down and the indices simply cannot hold the ABCD patterns and start to break lower as well. That is a different story altogether.

The action is erratic and there is a lot of pessimism with that put/call ratio bouncing higher. Still, that does not mean that the market is going to tank and roll over. There are a lot of factors that naturally get people on edge after a rally. The question is when the market will break. Eventually it will have to because the economy is not that strong. We are printing way too much money and we are ignoring inflation. In history, that has ultimately meant that we have serious problems in the stock market.

Again, the question is when it will happen. Nobody knows. This Saturday is supposed to be the end of the world. There are people making predictions with absolute certainty that the rapture will happen on Saturday, and we will have the end of the world with a massive earthquake. I do not know. The Bible I read just says that nobody knows when the master will come, and you should not spend your time worrying about it. It is best just to be prepared in the event he does come. How do you prepare? Do what the good book says and go about living your life as you should. Part of that is taking care of your family and making money for them. You also take care of other people with the other money that you make as well. That said, I will get off the soap box.

I will be looking at more upside plays because the trend is still in place. We will also look to the downside just in case. You always have to have a “just in case.” Like “Shoeless” Joe Jackson said in Field of Dreams, “You have to watch for in your ear” even when you are looking at the most probable event. I will be looking at some downside plays just in case. The market is still trending higher. If it continues higher, we will make money to the upside. If it decides to give it up, we will button up our positions and make money to the downside. As long as it is moving, we will be making money.