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Stock market preview for the week of August 11, 2014

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The S&P 500 increased in three sessions and finished the week with a small gain of 0.34%. The week’s lowest close on Thursday finished the session 3.94% below the July 24 highest close. Friday’s 1.15% gain was the largest move higher in a session since a 1.53% increase on March 4.

See related story.

The strong rebound on Friday makes it seem possible the index may have begun to rebound from the significant drop it had taken from the likely resistance between 1980 and 1995 within the lower half of the 100 L. If this rebound continues it seems possible the resistance in the upper half of the 100 L, likely to be seen between 2010 and 2020, was softened considerably by this pullback.

Average daily volume levels fell 6.95% compared to the average daily volumes of the previous week. The week’s highest volume was during Wednesday’s $0.03 gain and the lowest volume was seen in Friday’s strong rebound. The difference between five day volume variances more than halved as the variance dropped 27.63% below the previous week to 21.94%.

Major Stock Market Indexes

The index charts of the Dow Jones Industrial Average, S&P 500, NASDAQ, New York Stock Exchange and Russell 2000 saw mixed results during the past week.

Four of the five indexes finished the past week with gains and pushed higher in three sessions. The exception was the New York Stock Exchange, which finished 0.01% lower for the week and moved higher in only two sessions.

All but the Russell 2000 saw the lowest close in current pullback on Thursday. The Russell had the most bullish week and saw every session in the past week finish higher than the previous Friday’s finish. Although the other indexes continued lower into Thursday, they remained near support levels found during the previous Friday’s fall.

All the indexes rebounded quite strongly on Friday, with all but the NASDAQ finishing that session with gains greater than 1%, led by the S&P 500’s gain of 1.15%. Although it fell short of the 1% gains seen on the other indexes, the NASDAQ pushed 0.83% higher on Friday.

The S&P 500 saw the 13 EMA dip slightly below the 50 EMA on Thursday, leaving the NASDAQ as the only index not to see this bearish cross. The NASDAQ was also the only index to finish the week above its 50 EMA and Friday’s finish fell just short of the 13 EMA. The Russell finished the week just below its 13 EMA.

All of the indexes are in or near fully oversold conditions as are many stocks. The recent pullback has brought many stocks to valuations that could be appealing, so it doesn’t seem too unlikely the indexes could begin to rebound from the recent retreat.

US Treasury Charts

The 20 year US Treasury Bond slipped and finished below the 13 EMA in Monday’s session but finished higher in the next three. It opened Tuesday with a gap lower, but after slipping further it reversed direction with the rebound carrying it to a finish above the 13 EMA. It opened with a gap higher in the next three sessions, but fell to cover these gaps before continuing higher with Wednesday and Thursday finishing with gains. Friday’s session pushed above the previous cycle’s high, but retreated into the late rally in stocks finishing at a loss and near session lows. Friday’s high reconfirmed its uptrend that it appeared to break in the previous week. This chart continues to show bullishness. The 20 year is nearing overbought conditions.

The long term Treasury charts appeared to reconfirm uptrends and continue to appear somewhat bearish for stocks.

The interest rate on the 10 year US Treasury Note slipped in every session finishing lower in six straight. Although it finished with small losses in each session, Wednesday gapped considerably lower at the open, and fell steeply before rebounding to regain nearly all the earlier losses by the close. Wednesday’s dip rebounded at the lower trend line, making a rebound seem fairly likely in the week ahead. The ten year rate remains deeply oversold. This chart continues to hold within a downtrend.

Gold

Gold trended slowly lower Sunday night, to finish the night a bit below 1292.

Monday gold trended back to about 1295 by the London open, but reversed and after popping briefly back up to 1294 shortly after the New York open, fell to about 1286 just after noon in the New York session. From there It traded flatly between 1286 and 1289, finishing the day a little lower than 1289.

Tuesday gold trended higher to about 1293 shortly after the London open but again reversed trend falling to about 1283 in early morning trading in New York. It trended higher off that low before spiking back to 1293 after the NYMEX close, but fell fairly steeply lower to 1288. It then traded very flatly until trending slightly higher in Hong Kong, finishing the night at about 1290.

Wednesday continued in a flattish pattern within a couple points of 1290 until it began a steep spike higher just before the New York open that carried gold to 1310 early in the NY session. That run turned into a flattish down trend bouncing between 1305 and 1309 with the highs gradually reducing until finishing the night just under 1306.

Thursday gold continued in the flattish downtrend, breaking below 1305 in small bounces just before the London open until reaching about 1303. It pushed back to about 1307 in London and started to trend lower until it reversed midmorning in New York, breaking to about 1313 by noon. It leveled off trading within a point higher and two lower from that top until it slipped lower after the Sydney open, falling to about 1308 early in the Hong Kong session before rebounding strongly to finish the day a little short of 1317.

Friday gold continued higher in Hong Kong to reach 1323, but slipped and began trading flatly between 1316 and 1318 until it began to trend lower in London before the New York open. The trend continued lower early in New York falling to about 1306 before rebounding to about 1313 and then flattening between 1312 and 1309. Gold finished the week with a New York Spot close of 1309.10, which was a fair amount higher than the previous week’s close of 1294.20.

Gold broke a three week string of losses with this week’s gain.

S&P 500 Constituent Charts

The charts and conditions make it seem possible the index has begun to rebound from the recent significant drop.

Many of the constituents began to rebound quite strongly in the past week. Several have turned higher in V patterns that regained ground faster than it was lost. Several of these rebounds began into the overall market downturn.

Others appear to have begun to move higher off likely support levels. Quite a few of the stocks in downtrends look to be rebounding off the lower trend line.

Many that haven’t yet rebounded appeared to have found support during the week.

Several indicator stocks rebounded strongly during the week.

Some of the constituents broke above upper resistance in topping patterns. Although few of the constituents have been able to move much higher after making this break, as has been seen in the past, if the index continues higher the overall move higher in stocks could help carry these breaks higher briefly.

Not all stocks look ready to move higher, some appear to have downside potential left, but it looks like the majority of the constituents have begun or could begin to move higher. The majority usually sets the direction of the index.

Most of the constituents are in or near oversold conditions with many of the constituents deeply oversold.

The aftermath of the recent pullback shows that there are a fairly large number of constituent stocks showing possible failures in topping patterns in their short and or long term charts. Although it seems likely many of these stocks are ready to rebound, these failures are reason for concern and could lead to a larger drop later.

Retests of many of the support levels that held in this drop look prone to further failures in a future retreat as it appears many of these support levels have been softened and could break in this retest. Several fractured the support that held before rebounding. Although these breaks rebounded back above support and the support level held, breaks below a support level tend to weaken it, making in more likely to fail in a future retest.

Several constituents fell through several potential support levels before appearing to find a support level that held in this retreat. If these stocks fail to make new highs in the following rebound, the numbers of potential supports they have already surpassed makes it appear likely they could fall deeper in a future retreat.

It is beginning to look fairly likely the S&P 500 could fall to either the lower trend line or lower support line in a retreat at some point. Although it seems unlikely, the drop could occur in this retreat within the 100 L. The next higher resistance found in the 2035 to 2055 MRL holds the highest probability for this fall, but there is no guaranty it will occur at that resistance.

Chart formations appear to suggest there is reason to remain cautious. An increase in failures in topping formations into the recent drop is of concern. Although it seems possible the index could be beginning a rebound from the significant drop and adding some risk seems reasonable, continued caution with investments also seems merited.

Indicators

Although the indicators featured in these articles are not always correct, they have been many times and being so they are worth reading about and taking note of.

The +2% L, -2% L, 100 L and +10 day indicators are currently active. See a more detailed description of most of the indicators developed through research and featured in these articles here.

The +2% L did not provide a correct indication in the past week.

The –2% L did not provide a correct indication in the past week.

A significant pullback was seen within the 100 L. The index fell from likely resistance between 1980 and 1995 in the lower half of this resistance level. If the index continues to rebound to recover from this drop, it seems likely the resistance in the upper half of the 100 L has been softened considerably by this drop. Although the index could slow as it reaches this resistance, it seems possible it could move past it without further incidence.

It continues to look fairly likely the index could rebound within the projected 3% to 5% range at the 100 L. Even if this rebound occurs, the potential for a larger drop looms due to an increase in possible topping pattern failures of the constituent charts. The current topping pattern failures could soften support in future retests of these support levels.

The S&P 500 finished at 1938.99 on Monday after rebounding from a low of 1921.20 and a higher low within upper resistance of the 100 L at 1900 than the proceeding Friday. Tuesday opened lower at the day’s high of 1936.34, falling to a low of 1913.77 before rebounding to finish at 1920.21. The index again opened lower on Wednesday falling to a low of 1911.45, but rebounded to reach a high of 1927.91, before settling lower for a small gain and a close at 1920.24. Thursday opened higher, but slipped to a low of 1904.78, the deepest fall within the upper resistance of the 100 L at 1900 of the week, but topped Wednesday’s high at 1928.89. It also posted the lowest close in the fall of 1909.57. Friday started out slightly higher, but retreated to 1909.01 before beginning to move higher with momentum building as the day went on. It finished with a 22.02 point gain at 1931.59, just slightly lower than the high of 1932.38.

Although the S&P 500 slipped lower midweek before rebounding Friday, it continued to find support at the previous resistance in upper level of the 100 L at 1900, being a bullish indication.

Although some constituents continue to have upward tensions, it appears the significant drop could also provide a brief regeneration of exhausted tensions. It seems possible this regeneration could provide enough fuel to push the index above the 100 L.

The +10 day indicator toggled cleanly off in Monday’s rebound, but back on in Tuesday’s retreat. It held in a high state until Friday’s rebound toggled it off again. The double toggle makes it seem possible it had given a false indication initially and toggled on too early.

The + 10 day indicator has performed as follows to this point in the format: highest close / lowest close / last close.

+0.72% / -0.81% / 0.33%

The index has been running above the upper trend line off crash lows for a duration that makes a drop to at least the lower trend line seem somewhat likely.

Current Cautions

Although the index finished higher for the week, a midweek slump brought the fall from the July 24 highest close to the Aug 7 lowest close to 3.94%. The significant drop began from an intraday high of 1991.39 from likely resistance between 1980 and 1995 found within the lower half of the 100 L at 2000. The index had also seen a bearish 2% drop during this retreat.

Index and constituent chart formations appear to be giving reason for added cautions. The index had broken above the upper trend line. The break above the upper trend line often produces larger retreats on the index at some point, although it is not uncommon for the index to see one or more significant drops before this larger retreat. Many of the constituent’s charts are in topping patterns and the recent retreat saw an increase in failures in these patterns. Some of those stocks that held support in these falls saw brief failures of these supports that could weaken them in a future retest.

As the index works its way into the 100 L at 2000 (from 1975 to 2025) it will begin to enter the level identified as a potential topping area during data evaluation beginning in 2008. These data evaluations make it appear resistances met between 2000 and about 2140 could have the potential to cause a large drop, possibly reaching crash proportions.

Although the 100 L at 2000 does not appear to hold crash potential, it has provided a significant drop. It seems possible this pullback could reach near 5% and probably remain within or near the 3% to 5% range. It also seems likely the significant pullback within the lower half of the 100 L could considerably soften resistance in the upper half of the 100 L likely to be seen from 2010 to 2020. It therefore seems possible the index could move past the upper half of this resistance level without further incidence.

The next higher resistance once the index moves past the 100 L is likely to be seen in the midrange resistance (MRL) from 2035 to 2055. This level appears to have the potential to cause a very large drop possibly reaching crash potential. The 2035 to 2055 MRL also holds the level of concern at 2040. Recent data evaluation pointed to resistance at 2040 as the most likely area that a crash would be seen between 2000 and 2140. The research also suggested if this crash were to occur, it probably finds bullish support somewhere near the two previous tops in 2000 and 2007. Although the crash potential is within the 25 to 35% range, this evaluation makes a fall from near 2040 seem more likely to produce a drop of less than 30%.

Current chart formations tend to make a fall in excess of 10% seem possible within the 2035 to 2055 MRL, depending partly on the outcome within the 100 L resistance level. If the significant drop within the 100 L stays within projected levels, it seems possible the MRL could produce a drop that reaches the lower trend line or lower support line and probably stays within the 10% to 18% range, but could possibly fall to crash potentials if the drop is steep or falls to a rebound point near the tops seen in 2000 and 2007. If a drop to crash potentials is seen, it does not seem likely it would exceed 22% by much. Although chart formations are making it seem somewhat more possible a drop that reaches crash proportions could be seen, it still seems somewhat remote at this time.

A possible signal that an area of resistance could hold potentially larger drop potentials would be the presence of several volatile daily moves (those of 2% or greater) within a relatively short time period, for instance three or four within a few weeks more or less. The larger the number of volatile moves, the more potentially dangerous a resistance becomes. These volatile moves won’t necessarily all be seen within the resistance level, but they could be.

Some concerns as the index moves above the 2000 level include:

The aftermath of the recent pullback shows that there are a fairly large number of constituent stocks showing possible failures in topping patterns in their short and or long term charts. Although it seems likely many of these stocks are ready to rebound, these failures are reason for concern and could lead to a larger drop later.

Retests of many of the support levels that held in this drop look prone to further failures in a future retreat as it appears many of these support levels have been softened and could break in this retest. Several fractured the support that held before rebounding. Although these breaks rebounded back above support and the support level held, breaks below a support level tend to weaken it, making in more likely to fail in a future retest.

Several constituents fell through several potential support levels before appearing to find a support level that held in this retreat. If these stocks fail to make new highs in the following rebound, the numbers of potential supports they have already surpassed makes it appear likely they could fall deeper in a future retreat.

Until recently the index was running above the upper trend line in the trend off crash lows. Runs above the upper trend line have extended for several months in the past and often contained one or more significant pullbacks before finally breaking lower.

The numbers of the constituents showing possible long term topping patterns continues to grow. The numbers in downtrends off these tops is also growing, as are the numbers that have failed support in these patterns and broken lower. Although breaks from highs are often very steep, tops very seldom happen with all stocks failing at once, the numbers tend to grow until the weight of those that failed overwhelms those in bullish runs, dragging all lower in the larger retreat.

Few have broken higher and maintained these trends afterwards. Most that have broken higher in these patterns recently only went a short distance higher, then flattened again or fell off these highs. Although a rebound from a significant drop could make it appear some stocks are again moving higher above these resistances, it is not unlikely these runs could fizzle shortly after the index returns to new highs.

Recent increases in these failures are reason for concern, but are probably not yet at levels that would cause a large drop. Current chart formations make additional failures in these patterns seem somewhat more likely. It seems possible deeper falls could be seen on many of the constituents in retests of support levels in a subsequent drop.

Although the numbers of constituents in this category is not large, chances seem remote that some of the constituents that have continued in runs or held high prices could produce earnings to justify their current stock prices in timeframes investors are normally willing to wait. These runs higher could continue, but any sign that longer term earnings projections are too high, failures or continued failures to meet expectations, or an overall change in market direction could cause stocks trading well forward of current earnings to see large fold backs. Some of these stocks have broken considerably lower after recent earnings reports and further into the overall market downturn.

Some constituents appeared to over extend moves higher caused by earlier upward tensions. This could increase downward pressure on these stocks when they finally turn lower. These numbers are also small at this time.

Several of the indicator stocks taken across sectors fell significantly lower in the large pullback in the 100 L. Many of these stocks fell through short term support and all the way to long term support. Many of these stocks rebounded strongly in the past week, making a larger drop at the current resistance seem somewhat unlikely.

It also appears upward tensions in the constituents are beginning to wane, although most have seen pullbacks, some of these upward tensions appear to have remained intact into the significant pullback. Some of these tensions appear to have recharged and could help to push the index higher, but this recharge is not likely to remain intact as long as earlier tensions developed at the 1883 resistance.

At the current time there does not appear to be an outside catalyst for a crash. Many crashes occur due to stocks becoming overpriced to earnings. Without a substantial reduction in earnings, it would be difficult to consider stocks overpriced based on the actual unadjusted average P/E’s during the time the S&P 500 was an index. Although some are overpriced, most are not and the average P/E is still fairly historically low.

Chart analysis makes it seem possible this catalyst might not be from an outside influence as earlier thought, but instead from a pullback caused by a large number of failures in current topping patterns. Chances still seem somewhat remote that a fall would reach crash proportions in this drawback, although several have dropped in excess of 20% in earlier pullbacks from highs.

Earnings reports for the second quarter have been mostly better than expected; although not all beating projections are seeing their stock prices increase. It seems possible that overall earnings could come in 2% to 4% above the early projections.

The absence of an apparent outside catalyst for this crash does not mean one would not materialize as the index reaches this level. There is also the possibility investors could overreact to news events that probably should not take the market to these depths. Pullbacks seen during the summer of 2010 and 2011 were much deeper than rational evaluation of the data indicated they probably should have been. These falls also came during a time when huge increases in earnings were being seen, with near or over 70% of the constituents beating their earnings projections. This makes it seem somewhat possible this fall could come even if earnings are reported higher than expected.

The overall number of active indicators was decreasing generally indicating a decreasing chance of volatility and a possible bullish period. This decrease has occasionally acted contrarian to the norm in the past. Due to the volatile drop and a drop to significant levels on the index, it appears to have acted contrarian in this instance.

Ultimately the direction that the stock market takes from here could be influenced by news events.

Average daily volume levels decreased 6.95% week over week and the difference in the five day volume variance decreased 27.63% to 21.94%. Volume levels remained somewhat higher than bullish levels until the push higher on Friday, which saw the week’s lowest volume. Variance levels dropped off substantially consistent with the absence of volatile conditions.

There continues to be many reasons to be bullish at the current time; however the index is nearing an area of potential concern and some caution should be exercised. Any pullbacks in stock prices seen along the way are probably a good opportunity to add although some flexibility in these investments could become necessary later. If a large pullback is seen on the index, it could be prudent to increase equities holdings into this drop. It could also provide the best remaining opportunity to take profits in gold holdings.

If the index continues within the trend established off the crash lows, it seems possible it could reach the 2000 to 2100 level in five to 14 months if it reaches this level near the upper trend line and within 32 to 38 months if it reaches this level near the lower trend line. The data suggests the Midrange Resistance Level (MRL) at 2035 to 2055 could hold the resistance level of concern within this range at 2040. More details of this potential resistance can be seen in past articles.

It appears the index was running somewhat ahead of the projection to reach 2000, indicating it was running above the upper trend line. The recent significant drop pushed the index slightly below this trend line, although it is currently running at about this trend, it seems fairly likely it could again rebound above this trend line.

These data evaluations do not mean a crash is certain within the 2000 to 2140 range. The data evaluations only identified this level as one with a high potential to cause a large drop, possible reaching the 25% to 35% range; although a fall seen low in this range might not reach these levels. This range also holds most of the specifications identified in the first crashes of a market entering into a secular bull.

Please note there is no established resistance in the MRL levels before the index has reached these levels. Several instances have proven to hold resistance once reached; however MRL levels that the index has not yet reached are only the most likely levels that resistance will be seen based on research. Back tests of the data used to project these resistance levels work well, but they are not always exact, and these resistances could react sooner or later than expected, it is also possible the resistance will not be seen at all.

If the market should fall to crash levels, the blue chips, stocks with very low or no debt, and stocks with histories of stable dividends tend to fair best in pullbacks on a percentage basis. Caution should be used in stocks that have seen dividend increases well beyond those normal seen. Moderately priced stocks tend to lose less on a dollar per share basis. From a psychological standpoint this could be an important consideration, it is easier for an investor to hold a stock that falls from $50 to $25 without selling than it is to hold a stock that falls from $100 to $50. Even though the percentage lost was the same, the larger dollar value erosion of share price gives many the perception of a greater loss and a much larger distance for the stock to rebound to regain these losses, and this perception could lead to further sales of higher priced stocks in a downturn.

A crash in stock prices could be the last hurray for gold investors for many years to come.

Data provided for the S&P 500 was derived from the historical daily data tables, similar data can be found at Google Finance.

Stock and Treasury charts used for analysis and commentary were provided by ScottradeELITE.

Gold charts used for analysis and commentary were provided by Kitco.

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Have a great day trading,
ronz

Disclosure: Ron is currently about 76% invested long in stocks in his trading accounts, reflecting an increase in his investment level from the past week. This increase was due to the purchase of one issue partially offset by dividend payments. Ron feels comfortable with his investment level at the current time. However he has and will continue to sell stocks that reach long or short term targets and also continue to add stocks he feels are at a great value through a variety of buy orders. Ron will receive dividend payments from ten issues in the coming week and five in the following week. If no further investment changes are made during this timeframe, his investment level would not change due to these dividend payments. Ron postponed dividend reinvestments scheduled for the first of the month.

Some of the trades made during the past week may have been due to repositioning investments as discussed in previous articles.

Disclaimer: The information provided in the Stock Market Preview is Ron’s perception of the current conditions and what he thinks is the most probable outcome based on the current conditions, the data collected and extensive research he has done into this data along with other variables. It is intended to provoke thought of the possible market direction in his readers, not foretell the future. Ron does not claim to know what the stock market will do. If the stock market performs as expected, it only means he is applying the stock market history to the current conditions correctly. His perception of the data is not always correct.

This article is intended to provoke thought about investment possibilities. Acting on the information provided is at your own risk. You are urged to do your own research, and where appropriate, seek professional investment advice before acting on any information contained in these articles.

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