Can Durable Goods Orders Fuel A Market Bounce?

For two days now, the market has failed to create a bounce that would relieve more of the pressure being placed on the bruised bulls. The final 30 minutes leading into the close was very weak as traders rushed to the exits. Small-cap stocks are taking the most pain as large-caps are still holding up slightly better. We are due for an oversold bounce, but when will we actually see this take place?

Most of the day, the bulls seemed reluctant to do much. Some early day trades worked, but overall volume was light and the pockets of strength varied with no true leadership. If we could get a few sectors to take leadership, we would stand a better chance of fighting off the sellers. Instead, we are continuing to bleed daily, with the small-caps bleeding the most for now. Even with the weaker dollar, the markets could not put together a strong bounce, which is a concerning change in the market trend.

I use the iShares Russell 2000 Index Fund (IWM) to track small-caps and the S&P 500 (SPX) to track large-cap action everyday. As stated above, the action in small-caps is deteriorating quicker than large-caps. IWM has breached support at the key support level of the 100-day SMA while the SPX has continued to trend barely above that support (see charts below). The damage to the markets does not look terribly bad if you only view the SPX, but if you view the IWM, you’ll see the market action is more dangerous than it may first appear. The good news is we are still due for an oversold bounce. We have fallen into oversold territory in the RSI indicator and we are trending at the bottom of the trading range, but I would anticipate that a bounce would see some short-term resistance levels as bulls will look to exit painful positions creating additional pressure. We would need some type of news or story that the bulls can rally behind to change the sentiment and really get something started towards a rally. A better-than-expected economic release may just be the trick.

This week is an economic data filled week. On Wednesday morning, at 7:30am CST, durable goods orders will be released. Durable goods tends to be one monthly economic release that can sway the markets in either direction. Briefing.com gives durable goods an economic importance grade of “B” meaning that it has above average chance of directing the market action Wednesday until something else takes control. Estimates have been revised to -2%, which is a very low estimate as just last month, we had a +2.5% release. The higher we can beat that low estimate, the better chance we have at staging a strong bounce to start the day. If we meet or somehow drop below that low estimate, all bets are off though. If we come in lower than estimates, we can expect many more fears over our economic situation and our GDP estimates.

IWM Uptrend Chart

IWM YTD Chart

As always, do your own homework to see if you agree. Keep your eyes open for some early morning action to profit into. I’ll look to be a net seller with mostly day trade time-frames rather than trying to build long-term positions during just one bounce. Crude inventories will be released after the market opens, that will provide further clarity on the rest of the Wednesday. Good luck out there,