Rising Bond Yields Put Pressure on Equities

Stocks moved sharply lower last week amid concerns that the strengthening economy could lead to higher inflation and a more hawkish Federal Reserve. Many analysts believe that the labor market has reached or surpassed full employment, and wages are starting to accelerate. The unemployment rate reached a 50-year low of 3.7%, but the 0.3% increase in average hourly earnings was the most highly watched part of the report.

Next week, traders will be watching several key economic indicators, including the consumer price index on Oct. 11 and the consumer sentiment report on Oct. 12. With the S&P 500 forming a possible double top, small-cap stocks in free fall and tech stocks under pressure, traders will also be keeping a close eye on technical factors influencing the market over the coming week following a sharp sell-off last week. (See also: Fed Chief Bullish Despite Big Investors' Gloomy Outlook.)

The SPDR S&P 500 ETF Trust (SPY) fell 1.49% last week. After nearly reaching R1 resistance at $294.15, the index formed a bearish double top chart pattern. Traders should watch for a breakdown from the 50-day moving average and S1 support at $286.35 toward S2 support at $281.98 or a rebound to retest pivot point resistance at $298.79. Looking at technical indicators, the relative strength index (RSI) appears neutral at 45.16, but the moving average convergence divergence (MACD) experienced a bearish crossover that could signal more downside.

The SPDR Dow Jones Industrial Average ETF (DIA) fell 0.68% last week, making it the best performing major index. After hitting R1 resistance at $268.91, the index broke down from trendline support and hit the pivot point at $263.10. Traders should watch for a breakdown from the pivot point to the 50-day moving average and S1 support at $258.59 or a rebound higher to re-enter its price channel above $265.00. Looking at technical indicators, the RSI appears neutral at 55.33, but the MACD could see a near-term bearish crossover if momentum wanes. (For more, see: Why Stock Market's 'Out of Whack' Leadership Signals Next Crash.)

The PowerShares QQQ Trust (QQQ) fell 3.59% last week on much heavier than average volume. After breaking down from trendline support, the index fell past S1 and 50-day moving average support to near S2 support at $177.76. Traders should watch for a breakdown from these levels toward the 200-day moving average at $170.54 or a rebound from S2 support to retest S1 support and the 50-day moving average at $182.04. Looking at technical indicators, the RSI appears slightly oversold at 39.06, but the MACD experienced a bearish crossover.

The iShares Russell 2000 Index (IWM) fell 4.16% last week, making it the worst performing major index. After a bearish engulfing at the beginning of the week, the index plummeted past its S1 and S2 support levels to reaction lows at around $162.00. Traders should watch for a breakdown from the 200-day moving average at $160.05 to trendline support at around $152.00 or a rebound from these levels to retest S1 and S2 support levels. Looking at technical indicators, the RSI appears oversold at 29.20, but the MACD remains in a strong bearish downtrend. (For additional reading, check out: Investing in Real Estate to Survive a Bear Market.)

Charts courtesy of StockCharts.com. The author holds no position in the stock(s) mentioned except through passively managed index funds.