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What Are Keys for Market to Halt Skid?


US stock futures are slightly lower Wednesday morning as earnings season kicks off. Alcoa (AA) marks the beginning of the season, and last night the aluminum giant beat Street expectations despite swinging to a loss, and is set for a lower open. Yum! Brands (YUM) eclipsed expectations and is 5% higher in the pre-market.

The heavy action the last three days suggests investors are jittery heading into this earnings season, which is expected to potentially be one of the worst in the last several years. Chevron (CVX), which had been building a nice upper level base, is opening nearly 2% lower this morning as well after revising down 3rd quarter guidance. As active traders, we do not typically take stock into earnings, instead waiting for better risk-reward set-ups to develop after reports.

On the economic front, there are also a few data points to watch. Wholesale inventories are set for release at 10am ET and the Fed's Beige Book on economic conditions will be released at 2pm ET.

The question now is whether the weakness of the last three days will be contained by upper level support in the S&P, or whether the market needs to probe deeper retracement levels. Tech has been leading the market lower, with the Nasdaq ETF (QQQ) giving up its 50-day MA yesterday without a fight at all. The ETF is in a little bit of no-man's land right now after breaking that level, with minor support at $66.40. A mini head and shoulders top pattern in the QQQ looks like it could take the ETF down to the ~$65.60-66.00 level, which coincides with the 100-day MA.

The S&P 500 ETF (SPY) only broke its 21-day MA yesterday, and has important support around $143. The 50-day MA, which is rising into that $143 level as well, could come into play if market weakness persists.

It's no coincidence that recent market weakness comes during a rough patch for Apple (AAPL). The world's most valuable company started to feel a bit exhausted after charging above the $700 level surrounding the iPhone 5 release, but supply worries and somewhat disappointing sales numbers have triggered some angst among investors. The AAPL sell-off over the last three days has been fast and furious, although yesterday the stock reversed in the afternoon to give bulls a glimmer of hope. AAPL is set for a slightly higher open this morning after nearly kissing its 100-day in the morning yesterday. Watch to see how AAPL reacts to that reversal, as it will be a key to market direction. The past gives us clues on how to trade Apple (AAPL).

Traders should also have an eye on Google (GOOG) after the stock finally succumbed yesterday. GOOG had been holding up remarkably well over the past two days despite a push-through failure on Friday, but yesterday could not shrug off market weakness. The stock broke down through the upper floor of $750 that had been building over the past two weeks, and now we need to see if it holds the 21-day MA around $739.

The banks will also be in focus over the next week as most of the big names report earnings. JP Morgan (JPM) and Wells Fargo (WFC) kick things off Friday morning. WFC dropped around 2% yesterday after news that the US government was suing the bank over possible fraudulent, reckless loan activity. The financial sector has played an instrumental role in the market rally over the last few months, and it will be important for the group to remain strong to give the indices fuel to climb back to highs. Goldman Sachs (GS), which reports earnings next week, has been the recent leader.

*DISCLOSURES: Scott Redler is long AAPL, short SPY.