Image source: Pixabay

Stocks just weren't able to follow through on the previous week's breakout thrust last week. They started anemically on Monday, and once trading resumed (after the Fourth of July) on Wednesday, the sellers were even more aggressive. Despite a couple of flashes of bullish brilliance, the S&P 500 ended the holiday-shortened week down to the tune of 1.1%. The Nasdaq didn't do any better.

It's not the end of the world. We all know stocks are still pretty well overbought thanks to their big rally since early May. It's going to be tough to tack on gains from here, particularly in the summertime. Besides, last week was hardly horrifying.

Where the indices bumped into their technical ceilings, however, is a little bit suspicious. We'll show where and why in a moment. Let's first look at last week's economic news, and then preview what's coming this week.

Economic Data Analysis

Last week started out with a mostly-unsurprising mixed message from the Institute of Supply Management. The services side of the U.S. economy is perking up from a string of weakness, but the manufacturing piece of the U.S. economy continues to weaken.

The ISM Manufacturing Index, in fact, slipped to nearly a three-year low. Last month's score of 46.0 is the lowest it's been since May of 2020, when it was on the way up when we first started bouncing back from the pandemic's arrival in the United States.

ISM Index Charts

Source: Institute of Supply Management, TradeStation

Yes, it's a reason to be concerned. Although services represent a bigger piece of the economy, manufacturing is still an important aspect of our economic ecosphere.

In a similar vein, while the country did add jobs last month, it didn't add as many as expected. Economists were calling for 220,000 new payrolls, but we only got 209,000. Meanwhile, May's growth of 339,000 new jobs was dialed back to only 306,000. That was still enough to push the unemployment rate down from 3.7% to the expected 3.6%. All the same, the first job-growth shortfall in ten months (and the bar wasn't set that high to begin with) is a red flag.

Unemployment Rate, Payroll Growth Charts

Source: Bureau of Labor Statistics, TradeStation

Everything else is on the grid.

Economic Calendar

Source: Briefing.com

There are several economic reports in the cards this week as we get the month rolling in earnest. But, there's only one wave of related figures we're interested in. That's June's inflation data. Consumer inflation figures will be posted on Wednesday, with last month's producer inflation numbers being released on Thursday. Analysts are expecting more or less the same as we saw in May, but perhaps another slight cooling is in the cards.

Inflation Rate (Annualized) Charts

Source: Bureau of Labor Statistics, TradeStation

While trending lower, inflation rates remain relatively high. That's the tricky part for the Federal Reserve, which still says a couple more rate hikes are likely before the end of the year. Wages are still rising at a pretty healthy clip, which buoys prices even as it helps keep families afloat - financially speaking, that is. 

Stock Market Index Analysis

We kick things off with a look at a daily chart of the Nasdaq Composite, since it best makes the most important point to be made right now. That is, the rally effort is not broken. The index found support right where it needed to, and found it at the first best possible place. That's the 20-day moving average line.

Thursday's kiss of the 20-day moving average, in fact, is the second time in the past couple of weeks the 20-day line has held up as a technical floor, as highlighted in yellow on the chart.

Nasdaq Composite Daily Chart, with VXN

Source: TradeNavigator

The daily chart of the S&P 500 shows us the same thing, although this index has yet to actually touch its 20-day moving average line as a floor. Even so, the rally that's been underway since October's pivot is clearly still intact.

S&P 500 Daily Chart, with VIX

Source: TradeNavigator

The daily chart hints, however, at a red flag that's even more pronounced on the weekly chart of the S&P 500. That's the volatility index, or VIX. It's starting to edge its way higher again after sliding back to a more absolute support area around 11.5 -- where it bottomed in 2019.

S&P 500 Weekly Chart, with VIX

Source: TradeNavigator

The same weekly chart also tells us there's something of a technical ceiling around 4464 for the S&P 500 itself. That wasn't so apparent on the daily chart. To see near-perfect horizontal resistance at the same time the VIX is pushing up and off of a floor? It's no guarantee of more downside from here. But, it's certainly something to watch.

We're seeing the same hints from the weekly chart of the Nasdaq Composite with its volatility index, the VXN. The VXN looks like its starting to push off of a major technical support level near 18.4, while the composite's bumping into a ceiling at 13,902. And the recent highs near that level aren't nearly as coincidental as you might think.

That's where the 61.8% Fibonacci retracement line (of the entire bear market) also lies. If the bears were going to make a stand anywhere, this would be one of the most ideal places to do so.

Nasdaq Composite Weekly Chart, with VXN

Source: TradeNavigator

Bottom line? We've known the rally's been too hot for its own good. Now we're seeing the impact of that condition. This is what you might expect to see at the beginning of a pullback -- particularly from the volatility indices that have just made new major lows.

Except, nothing about any of these charts actually says any of them are now in a downtrend. All of them show continued support, in fact, with lots of other floors just below that could (and likely would) serve as floor if-and-when tested.

For now, all we can do is wait and see how this pans out. It might be wise to just sit tight here and stick to individual high-conviction stock trades with a clear upside or downside that exists independently of the market's condition. It shouldn't be too long of a wait.

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