By Paul Cherney From Cherney Market Analysis
On Thursday morning, I thought the news that China was abandoning the dollar-yuan peg was going to be a short-term plus for the markets. But now, as I have had the opportunity to see the market's reaction, including the higher yield on the 10-year Treasury note, I have become concerned that the summertime lift is on wobbly legs.
The revaluation was not big, but it is a new piece of information for the markets to digest and there seems to be a focus on the realization that we will now (small, but it is there) be importing higher prices from China due to the huge amount of goods we buy that are produced in China. I think the news from China is going to pressure retailers. I have just looked at the RTH (Retailers ETF) and it is overbought and subject to profit-taking of more than just a couple of days.
The move higher in 10-year yields has contributed to the weakness in homebuilders because fears have risen that mortgage rates could continue to move higher affecting mortgage rates.
On a purely technical basis, the markets produced near capitulation volume (buyers capitulation) on Wednesday. On Thursday another day of big volume (relatively speaking ) accompanied lower closes. This can be a first sign that a shift in market sentiment could be at hand, a shift that carries negative implications for prices. For me, the odds are increasing that the upside is limited and the seeds for profit-taking have been planted.
There is a still a possibility that the markets will find a positive spin for the yuan revaluation, but closes below Nasdaq 2144.78 or S&P 500 1212.21 would act as confirmation of my concerns that upside is limited.
Before today's events I had thought that a lack of volume after this week or next week might cause sideways price action. But now the scales appear to be tilting a little more toward the potential for price weakness.
Immediate Intraday Supports:
Nasdaq support: 2183-2175, 2167-2144.78, with a thin shelf at 2135-2122.
S&P 500 has immediate intraday support at 1231.79-1223.03, with a focus at 1226.07-1224.70; there is a thin shelf at 1219-1215, then 1206-1183.
S&P 500: 1232-1236.62, with a focus of resistance at 1249.23-1267. A test of this focus is now possible.
Nasdaq: 2170.99-2193.19, then thick resistance at 2263.75-2328.05.