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Stock market preview for the week of August 25, 2014

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The S&P 500 increased in the first four sessions before Friday finished with a small loss and finished the week with a gain of 1.71%. The index pushed to a record high close on Thursday and in doing so it recovered from the earlier significant drop.

The S&P 500 broke above the 1970 midrange resistance level (MRL) on Monday and continued higher into the upper resistance of the lower half of the 100 L resistance from 1980 to 1995 into Thursday. Friday pullback back slightly after Thursday’s high nearly broke above the resistance at 1995.

Average daily volume levels fell 6.78% compared to the average daily volumes of the previous week. The week’s highest volume was seen on Tuesday and the lowest into Friday’s retreat. The difference between five day volume variances dropped 0.46% below the previous week to 15.40%.

Major Stock Market Indexes

The index charts of the Dow Jones Industrial Average, S&P 500, NASDAQ, New York Stock Exchange and Russell 2000 continued in bullish runs higher during the week.

The NASDAQ broke to a new 52 week high on Monday increasing it three times thereafter and finished the week at a 52 week high. The S&P 500 finished at a new all-time high on Thursday.

The Dow Jones neared all-time highs when it broke back above the 17,000 level on Thursday, and although it finished Friday lower, it closed the session above the 17,000 level. The NYSE also continued to move back towards all-time highs. Thursday finished the session just short of the 11,000 level before slipping lower on Friday.

The Russell 2000 is again lagging in the rebound, although it fell somewhat deeper than the other indexes into the recent setback. It doesn’t seem too unlikely the index could form a catch up rally later.

The S&P 500, Dow Jones and NYSE saw bullish crosses of their 13 EMA back above the 50 EMA. The Russell is very near this bullish cross.

All five indexes have established runs higher above their 13 EMA, with most widening the gap the price was running above this average during most of the week.

Several stalled at previous resistance in the run higher during the week, but it appears the indexes are working their way higher through these resistances.

All five indexes have reached fully overbought conditions, making it seem possible the indexes could see a short pullback. It seems likely they could begin to hold near overbought conditions and it seems possible the indexes could continue higher in the week ahead.

US Treasury Charts

The 20 year US Treasury Bond prices fell in the first three sessions during the week, finishing Monday and Tuesday near session lows and falling below the 13 EMA in Wednesday’s retreat before rebounding bullishly to finish the session above this level. Thursday and Friday pushed higher with each session finishing near the day’s highs. Friday’s close was well below the previous high. The 20 year is nearing overbought.

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

The interest rate on the 10 year US Treasury Note opened higher in the first three sessions, finishing Tuesday very near the session high and it bullishly broke above the 13 EMA Wednesday, settling lower to close just above it. Thursday opened quite a lot higher, but near session highs as the rate slipped to close lower and back below the 13 EMA. Friday opened lower and rebounded back above the 13 EMA before slipping to finish the session with a small loss and a little deeper below the 13 EMA, but higher than it began the session. Wednesday’s high fell short of the previous cycle high. Although this chart continues to show bearishness, the past week’s three day run was the first seen since a three day run was broken after the July 3 close. The ten year is still oversold.

Gold

Sunday night gold bounced lower after the Sydney open before starting a slow rebound at about 1298 in Hong Kong, pushing higher to finish the night just short of 1301.

Monday gold traded between 1300 and 1302 until breaking to about 1303 just after the London open, but then began to trend lower off this high reaching 1296 early in the New York session. Gold rebounded to near 1300 off that low and bounced between 1297 and 1300 for the remainder of the day finishing a little above 1299.

Tuesday gold traded mostly between 1298 and 1300 until breaking higher in London to about 1302 just before the New York open. Gold saw a bouncy retreat after the New York open falling to about 1294. Other than three short bursts higher and one lower, gold held between 1294 and 1296 for the remainder of the night to finish a little above 1294.

Wednesday saw gold trade flatly within 3 points of 1295 until it broke sharply to just below 1289 late in New York. It rebounded to about 1292 before the NY close, but trended slowly lower in Sydney and Hong Kong until it broke steeply from 1290, falling to 1285 late in the day. It rebounded to finish the day at 1287.

Thursday saw gold trend lower in a steepening curve in Hong Kong, breaking below 1280 before leveling out before the London open. It pushed slowly back to about 1282 before again trending lower in a steepening curve hitting a low of about 1275 in New York. It retested 1275 several times before rebounding back to about 1280 and reversing again in a more linearly trend lower to about 1273. It rebounded to about 1278 and traded rather flatly for the remainder of the night finishing a bit above 1278.

Friday gold traded very slowly higher to reach about 1283 by midsession in London, but reversed trend falling more steeply to about 1275 by midsession in New York. It rebounded strongly off that low to about 1281 and then slipped back to 1279 before rebounding and trading mostly between 1280 and 1281 into the New York Spot close of 1280.80 that was lower than the previous spot close 1304.50.

Gold saw a second straight week of losses, falling in five of the past six weeks.

S&P 500 Constituent Charts

The majority of the constituent charts make it seem fairly likely the index could continue to rebound from the recent significant drop, although there continues to be reason to be cautious.

Several constituents have rebounded to previous highs or resistances and have again begun to trade flatly at these highs or resistances. Several that pushed above previous highs appear to have broken off these highs late in the week after only moving slightly higher. It seems possible they too could begin to trend flatly near these new highs as most have in past moves higher.

Some of these rebounds appear to be flattening near resistance found lower than the most recent highest high, showing a potentially lower high in this rebound. It does not seem too unlikely this could be seen more frequently in this rebound than in previous rebounds.

Several constituents that appeared to be rebounding to potentially break from downtrends turned lower from a lower high and appear to be continuing in these downtrends.

Several constituents pushed strongly higher on good news or earnings reports during the week. Several moved to new highs and others saw these rebounds take them into a resistance level. If earlier patterns hold true, many of these stocks will likely have trouble pushing past the highs seen in this move higher, and some already appear to be showing these tendencies.

Several constituents gapped higher or lower recently. Occasional gaps are not necessarily a concern, but some of the constituent charts are showing a lot of gaps higher and lower over the past several months. These charts are also showing very choppy stock price patterns, indicating an increasing potential for volatility in these stocks. Many have also left unfilled gaps at prices much lower than the current price. These stocks seem somewhat potentially dangerous investments at his time.

At the same time, it looks like the index could continue higher for the time being.

Stocks that are trending flatly at resistance do not create downward tension on the index. It seems fairly likely these patterns could continue for the time being, allowing the index to move higher as others that have not reached resistance levels continue higher.

Several constituents with these strong moves higher are still far short of resistance or previous highs, so it seems possible many of these moves have continued upside potential.

Overall, a fairly large number of constituents moving higher are still short of likely resistances.

There are several constituents that have continued in bullish runs higher, and it seems possible many of these stocks have upside potential left.

Chart formations appear to suggest there is reason to remain cautious, but they also seem to show the index could continue higher for the time being.

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 E 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.

The S&P 500 recovered from the significant pullback from a July 24 retreat that began from the lower resistance level of the 100 L on Thursday. It seems likely the resistance in the upper half of the 100 L was 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.

If this rebound continues and the S&P 500 moves past the 100 L resistance as it seems fairly likely it could, the potential for a larger drop still looms due to an increase in possible topping pattern failures of the constituent charts along with the index’s move back above the upper trend line. The current topping pattern failures could soften support in future retests of these support levels. Index moves above the upper trend line eventually break lower to either the lower trend line or lower support line. This continues to make the resistance at the 2035 to 2055 MRL appear potentially formidable.

The S&P 500 moved higher in the first four sessions before slipping slightly on Friday. Monday began the move higher with an open higher than the previous Friday’s close at the session low of 1958.36 and finished the session just off the session high of 1971.99 at 1971.74. The index again opened higher on Tuesday at the session low of 1972.73, again finishing near the session high of 1982.57 at 1981.60. Wednesday opened lower at 1980.46, and slipped to a low of 1977.68 before rebounding to finish at 1986.51. The slightly higher open Thursday at 1986.82 was again at the session low continuing to a high of 1994.76 before slipping to close at 1992.37. Friday began the session slightly higher at 1992.60 and continued higher to 1993.54 before slipping to finish off the session low of 1984.76 at 1988.40.

The S&P 500 broke above and finished above the 1970 MRL Monday and Tuesday continued higher into the lower level of resistance in the 100 L from 1980 to 1995. Wednesday slipped below this resistance briefly before rebounding to finish with a gain and higher into this resistance. Thursday tested the upper level of this resistance, falling just short of breaking above it. Friday retreated, but rebounded above the lower resistance of this level and finished well above the session lows.

Although resistance at 1995 held in Thursday’s push higher, the index moved higher into this resistance level. Friday slipped off this resistance level, but found support above the lower level of this resistance, rebounding to finish well off the lows and above the July 24 close the significant drop began at. It appears the index is working its way through this resistance.

The 10 E indicator will expire with Friday’s close, although it seems likely it would not actually expire until Tuesday due to evidence of a false initial toggle of the + 10 day indicator. This indicator suggests a high likelihood that the S&P 500 could continue the move higher that was seen during the +10 day indicator’s presence.

Note: It continues to appear the most recent +10 day indicator toggled falsely initially. The second toggle finished the ten day period with its highest gains and within the range normally expected for this indicator, with a 3.20% gain. It seemed possible this indicator was out of step with market conditions in the first toggle, since a potentially false indication was identified with this method, it could lead to future changes to this indicator.

Average daily volume levels decreased 6.78% week over week and the difference in the five day volume variance decreased 0.46% to 15.40%. Volume levels are consistent with bullish moves and the low variance levels are consistent with the absence of volatile conditions. It seems fairly likely these bullish volume conditions could continue for the time being.

Current Cautions

The index has rebounded back above the upper trend line. The index recovered from the significant drop seen within the 100 L and continued somewhat higher. Although it continues to seem unlikely a large drop within the 100 L resistance occurs, the index is now in a position that is more likely to see this type of drop. Due to an extended period seen since first breaking above the upper trend line, a drop to at least the lower trend line seems fairly likely in a future pullback. The resistance within the 2035 to 2055 MRL continues to seem the most likely resistance this drop occurs at.

The index recovered from a significant drop that began from an intraday high of 1991.39 and within likely resistance between 1980 and 1995 found within the lower half of the 100 L at 2000. The drop measured 3.94% from the July 24 highest close to the Aug 7 lowest close. The index also saw a bearish 2% drop during this retreat.

Index and constituent chart formations appear to be giving reason for added cautions.

The index has again broken above the upper trend line. Breaks above the upper trend line often produce larger retreats on the index at some point, although it is not uncommon for the index to see one or more significant drops before seeing this larger retreat. The index has rebounded from two significant retreats since initially breaking above the upper trend line.

Several constituents are again flattening against resistance levels. Some constituents are flattening at resistances that are below the previous high. If these stocks fail to move above these levels, it seems fairly likely a significant retreat on the index could send many of them lower than the previous fall.

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. Several constituents failed to rebound from retreats with the overall market. Some have continued to fall, while others have flattened near support. Some that appeared to be rebounding fell short of previous highs before turning lower again maintaining downtrends.

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 seemed 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. 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 rebound from the significant drop within the 100 L carries the index into the 2035 to 2055 MRL, 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. Chart formations make it seem possible a drop that reaches crash proportions could be seen, although it seems somewhat remote at this time. If a drop to crash potentials is seen, it does not seem likely it would exceed 22% by much.

A possible signal that an area of resistance could hold potentially larger drop potentials is 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. Some of the constituents failed to rebound with the overall market and several continued lower, while others have flattened near support.

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. Some have already turned lower and broken lower below this support. Others have rebounded back above support, but 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. Some of these stocks trended more or less sideways along these support lines in the early rebound, this makes it seem more likely they could fall short of highs if they do rebound.

The index rebounded back 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. Runs above the upper trend line eventually break more deeply lower, often finding support at or near the lower trend or lower support line established in the crash rebound. Constituent chart formations make it seem possible the index is nearing an area that this larger drop could occur at.

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. Some of those that are currently in these runs are heading towards resistances that have proven to be staunch in the past.

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. They could rebound with the overall market from this significant drop, but remain at risk for larger losses if a larger drop on the index is seen later.

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.

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 it does not seem likely this recharge could 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.

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

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 75% invested long in stocks in his trading accounts, reflecting a reduction in his investment level over that of the past week. This reduction was the result of the sale of two issues and 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 11 issues in the coming week and 17 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.

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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