For Stocks, Line of Least Resistance Is Down

JULY 03, 2010
Michael A. Doran
This week the Standard & Poor's-500stock index made a technical break of the neckline off a larger head and shoulders distributional top. This pattern began forming in early November 2009.  

These types of patterns are widely watched and can often times fail to complete. Last summer, a similar and head and shoulders pattern fooled most technicians by refusing to follow through on the downward trajectory for stock prices. An extremely bullish advance began in July and lasted through the entire year.

A better fundamental case could be made for the market in mid-2009 based on improving economic numbers, along with an extremely low bar for company earnings and revenue expectations.

Contrast that to the current situation. The economic expansion and recovery is much more in question. One example of that can be gleamed from Friday's payroll report: The drop in hours worked suggests that consumer demand is not as strong as was expected and manufacturers do not need to produce beyond the current demand requirements. As a result, inventories may be stockpiling too quickly.

Weekly earnings data also declined, which may be a precursor to further declines in retail sales over the coming weeks.

There is no way to accurately predict the direction of the market. It is always best to let the actual price and volume in the present and most recent days provide the clues. For now, the line of least resistance appears lower from here. However I am expecting a brief attempt to stabilize and rally, which may provide other reset or entry points for increasing some short-term exposure.

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