Image source: Pixabay

The stock market may have notched yet-another weekly win last week. But, it was tainted. It’s downright alarming, in fact, hinting that the rally as near or at the point of exhaustion right where you’d expect it to hit a wall.

Still, it’s not as if the market is fighting a battle it’s clearly losing. There’s room for a little weakness before a major correction gets underway.

We’ll look at all of this in some detail in a moment. Let’s first look at last week’s major economic reports and then preview what’s coming this week. Spoiler alert: This week’s got some news coming that could readily move the market -- and by more than a little.

Economic Data Analysis

The only item of any real interest dropped this week was June’s inflation data. It’s not so much of a mixed bag as it is a mixed message. We’re still waist-deep in price increases, although for the first time since early-2020 we saw a month-to-month decline in overall consumer prices.

Core consumer inflation rates (not counting food or fuel) remain at or above 3.0%, however, so it’s difficult to say we’re making meaningful progress. It’s even more difficult to say it given the overall producer inflation was even stronger than expected, and also remains above target.

Inflation Rate Charts

(Click on image to enlarge)

Source: Bureau of Labor Statistics, TradeStation

Traders weren’t quite sure what to do with Thursday’s and then Friday’s news. On the one hand, it points to economic strength. On the other hand, it makes it even more difficult for the Federal Reserve to cut interest rates -- sooner and/or later. It’s now difficult to tell which side of this fence we’re actually on.

Everything else is on the grid.

Economic Calendar

(Click on image to enlarge)

Source: Briefing.com

This week’s pretty well loaded. The party starts on Tuesday with last month’s retail sales figures. You’ll likely remember that consumer spending has been pretty anemic since late last year. Economists don’t believe that changed much in June.

Retail Sales Charts

(Click on image to enlarge)

Source: Census Bureau, TradeStation

On Wednesday, look for June’s housing starts and building permits data. Both have been in a shallow freefall since March, reaching new multi-month lows in May after high interest rates and high building costs finally caught up with the market. Current forecasts say not much has changed since then.

Housing Starts, Building Permits Charts

(Click on image to enlarge)

Source: Census Bureau, TradeStation

Last but not least, also on Wednesday, we’ll get June’s capacity utilization and industrial production figures from the Federal Reserve. We’ve seen a couple glimmers of hope on this front in recent months, but nothing glimmering enough to convincingly say the economy’s turning robust again. Don’t look for the bullish argument to be bolstered this time around either. Economists are calling for slight dips for both sets of data.

Capacity Utilization, Industrial Production Charts

(Click on image to enlarge)

Source: Federal Reserve, TradeStation

Stock Market Index Analysis

There’s some backstory required to fully appreciate this week’s analysis.

Off and on for the past few months, we’ve been discussing a so-called cup-and-handle pattern. It’s called that just because, well, that’s what it looks like. That is, a big bowl-shaped move (the cup) followed by a small “handle” sticking out the side of it. The pattern in and of itself doesn’t mean much until the brim line of the cup is broken by the index or stock in question.

More often than not, the subsequent breakout move is big enough to be trade-worthy. On the weekly chart of the S&P 500 below, although the cup-and-handle-pattern is marked, it’s pretty obvious either way. Just as scripted, once the brim line at 4,598 was breached, the rally took off.

S&P 500 Weekly Chart, with VIX and MACD

(Click on image to enlarge)

Source: TradeNavigator

That’s not the noteworthy detail here, however. Just as interesting (and more interesting now) is how far this breakout thrust is apt to travel. Broadly speaking, the distance between the brim line and the bottom of the “cup” is the same distance the break above the brim line is likely to move.

Care to guess where that upside target lies this time around? Right around 5,655, or about 1,050 points above the brim line. Care to guess where the S&P 500 peaked last week? Right at 5,655. The daily chart of the S&P 500 below shows this suspicious action in some detail.

S&P 500 Daily Chart, with VIX and Volume

(Click on image to enlarge)

Source: TradeNavigator

Coincidence? Maybe. In fact, it’s rare to see any predicted move from the market work out with this much precision. On the other hand, it’s also unlikely to see an “outside day” reversal bar like the one we saw on Thursday exactly this close to an established technical ceiling, just as it’s unusual to see stocks retreat so much from an intraday high as the S&P 500 did after hitting 5,655 on Friday.

The Nasdaq Composite is also benefiting from its own cup-and-handle breakout, but it’s not yet to its most likely upside target of 19,100 (green, dashed). Don’t become too much of a stickler for details, however. It’s the spirit or idea of a pattern that really matters. It doesn’t have to be perfect to work.

Nasdaq Composite Weekly Chart, with MACD and Volume

(Click on image to enlarge)

Source: TradeNavigator

Here’s the daily chart of the Nasdaq Composite, mostly to show you the depth and scope of Thursday’s intraday reversal. Although the index was able to do a little bit of damage control on Friday, the sellers still tipped their hand the day before, showing how easily they could be prompted into selling at the first whiff of unwanted economic news (inflation). Given how overbought the composite is just since April’s low, there’s no denying the vulnerability to profit-taking here.

Nasdaq Composite Daily Chart, with VXN and Volume

(Click on image to enlarge)

Source: TradeNavigator

The only problem with the bearish argument is, we’re only seeing reasons for it to happen, and seeing vulnerabilities that it might happen. We’re not actually seeing it happen.

Indeed, both of the indices have a fair amount of room to fall without actually snapping the bigger-picture uptrend. Any of the nearest three moving average lines could step up as support should any selling take hold, bringing a quick end to any pullback effort. For now let’s not assume something might happen and ignore what technically is happening. The bigger trend is still bullish here, even if there are some brewing concerns.

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