Image Source: Pexels

Stocks were rebounding late last week. But, it was a feeble effort, one that was too weak to actually drag the market back into the black for the holiday-shortened stretch. It was the first losing week in the past three, and while both of the indices only suffered nominal losses, where and how they stopped climbing is concerning.

The S&P 500 as well as the Nasdaq Composite tried to test resistance that had been support just a few days earlier, only to recoil when it did. Now stocks are trapped in the middle, so to speak -- and quite literally (at least in terms of trading). Things could go either way from here.

We’ll dissect the action in a moment. Let’s first work through last week’s economic announcements and then preview what’s coming this week. It’s a pretty big one, chock-full of reports that have the potential to move this undecided market.

Economic Data Analysis

There was only one item of interest posted last week. That’s the Institute of Supply Management’s services index for August, rounding out the prior week’s update of the manufacturing index.

Services activity was up, improving from July’s reading of 52.7 to 54.5. That move rekindles a rebound effort that first got going in June, and in light of the fact that the manufacturing index is staging a similar recovery, we can take the hints being dropped by both data sets to heart.

ISM Services and Manufacturing Index Charts

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Source: Institute of Supply Management, TradeStation

Everything else is on the grid.

Economic Calendar

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Source: Briefing.com

This week is going to be raucous. The party starts on Wednesday, with a look at last month’s consumer inflation figures. Price increases had been slowing down, but ticked a little higher in July. Economists think they’ll do so again, with producer price data showing the same rising pace of price growth with Thursday’s look at those numbers.

Inflation Rate Charts (Annualized)

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Source: Bureau of Labor Statistics, TradeStation

Some chatter has emerged that the Federal Reserve may be able to skip the once-intended rate hike on the radar for later this month. Another uptick in inflation rates, however, might make that impossible.

Also on Thursday, we’ll hear last month’s retail sales report. Retail spending growth is apt to slow down from July’s pace, but that’s a pretty strong comparison. Either way, the bigger-trend picture here is an encouraging one. Consumers are doing their part to get the economy -- and therefore the market -- moving forward.

Retail Sales Charts

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Source: Census Bureau, TradeStation

Finally, on Friday, we’ll get August’s capacity utilization and industrial production data from the Federal Reserve. Forecasters aren’t expecting much change from July’s figures. It remains to be seen if that’s a problem. Both edged a little higher in July, but both have been basically stuck in neutral since late last year.

Capacity Utilization and Industrial Productivity Charts

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Source: Bureau of Labor Statistics, TradeStation

This matters -- much more so than the ISM numbers do, anyway. Capacity utilization and industrial output correlate very closely with corporate earnings. If these numbers are moving sideways, earnings are likely stagnant.

Stock Market Index Analysis

We start this week’s analysis with a close-up view of the daily chart of the S&P 500. As you can see, although the index started Thursday’s session below the 20-day moving average line (blue), it crawled back above it before the close.

It started the next day -- Friday -- in the same bullish mood and mode. It even went as far as to test the 50-day moving average line (purple) as resistance. But, it ultimately failed that test. That is to say, it was peeling back from the 50-day moving average line late Friday, suggesting the bulls aren’t yet quite ready to take the risk they need to take to keep the rally going.

S&P 500 Daily Chart, with VIX and Volume

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Source: TradeNavigator

The daily chart of the Nasdaq Composite looks almost identical. It approached its 50-day moving average line (purple) on Friday, but recoiled before hurdling it.

Nasdaq Composite Daily Chart, with VXN

(Click on image to enlarge)

Source: TradeNavigator

Both the Nasdaq and the S&P 500, however, are back above their 20-day moving average lines (blue). That’s a start. Also notice that the Dow Jones Industrial Average is finding support at a floor connecting all the major lows going back to last October.

Dow Jones Industrial Average Daily Chart

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Source: TradeNavigator

Of course, you may also notice that the Dow remains below both its 20-day and 50-day moving average lines. As was noted, stocks are very much “stuck in the middle” here.

Backing out to a weekly chart doesn’t help a whole lot, other than to underscore the point that the market isn’t convicted to maintain a move in either direction. The weekly chart of the Nasdaq Composite does show us something important about what traders may be unconsciously thinking here.

Take a look at the Nasdaq’s volatility index (VXN), or the so-called “fear gauge,” at the bottom of the chart below. It’s drifting sideways, supported by a horizontal floor right around 18.0 (yellow, dashed). There may be no additional room for the Nasdaq to tack on more gains, or at least tack them on and then retain them.

Moreover, with the VXN finding a support line that it could sooner or later push up and off of, there’s more potential market-wide downside stored up here than many traders might believe.

Nasdaq Composite Weekly Chart, with VXN and Volume

(Click on image to enlarge)

Source: TradeNavigator

There’s a time to be bold. This isn’t it. The market doesn’t know what it wants to do next, which means it could do anything and do so without any warning. Then it could change its mind.

With all of that being said, we must reiterate something we said in last week’s outlook -- the calendar says we should expect lethargic weakness to and even through October here. If it looks like these odds are going to be defied this year, we’ll point that out in a future outlook.

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