Weekend notes on the market -- May 10, 2008

If “the worst is behind us”, what lies ahead?

The surging oil price and the lack of uplifting economic/earning news snapped bulls’ 3-week winning streak, along the way, the major indices fell below some key levels.
On the weekly charts: both SP500 and DOW posted bearish engulfing candles with positive momentum stalled, NASDAQ was less bearish in comparison; stochastic in overbought; weekly volumes remain relatively light.
On the daily charts: for all major indices, the momentum, which displayed bearish divergence in recent weeks, finally flipped to the negative side; MACD has either crossed down (SP500 and DOW) or is poised to do so (NASDAQ); MA10s turning down; stochastic and RSI(2) point to further near-term decline; overall candle formation turned bearish in recent days;
On VIX: while technically it still looks like a broken case, its momentum crossed to the positive side for the first time since late March, and with MACD now crossed up, the chances are that it would continue to rebound in the near-term.

Thoughts and observations about the current market conditions and near-term outlook:

1. Technically speaking, the market is at a crucial point. On the one hand, both weekly and daily charts show many signs suggesting the multi-week rebound might be coming to the end, on the other hand, the pullbacks came in on light volumes. As the major indices now at some key support levels, the lack of big boys participation on the sell side may limit the extent of the decline.
2. As the fuel that has been driving the bullish movement in last 6-7 weeks, such as FOMC rate cut and Q1 ER, is running out, bulls are in urgent need to find new fuel in order to sustain the march. I must say that it hurts my head try to find any such fuel in the coming weeks for bulls.
3. Speaking of fuel, the pain caused by the ferocious advancing of the oil price has finally become too much to be overlooked. The impact is quickly spreading from the daily life of individual people to the bottom line of many companies (just look at FedEx earning warning on the Friday after the close). While I feel that oil is entering a parabolic moving stage that might be followed by a mini-crash, the chart suggests that the break-out run is no where near the end of the course.
4. Any one who holds bullish view on the market for the coming months should be really concerned about this week’s huge jump of the consumer debt. Bulls better hope that both economy and housing market will turn the corner in a hurry, or what are described in this article ("Barely surviving on credit cards") could become the harbinger of what to come down the road.
5. Next week’s inflation report will likely shape the path for the market in coming months. Any hot than expected inflation readings could pretty much extinguish any hope that a new bull market is emerging, to say the least.