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Stock market preview for the week of February 10, 2014

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The S&P 500 had the second volatile drop since the -2% L indicator became active on Monday as the index fell 2.28% lower during the session. Despite the large loss the index pushed higher in three sessions and finished the week with a 0.81% gain. The higher finish snapped a three week string of losses. The index has rebounded quite strongly since Monday’s drop finishing three of the past four sessions with gains and moving 3.16% higher. Monday’s close was the lowest seen in the current pullback and finished 5.76% lower than the record high close on Jan 15.

Monday’s drop rebounded from an intraday low of 1739.66 and finished the session at 1741.89. The rebound came within the likely alternate support of the first 1700 level MRL at 1735 to 1745 (or possibly 1750).

The average daily volume increased 6.96% over the previous week’s average. The highest volume of the week was seen in the fierce selloff Monday. The weakest volume was seen in the strong rebound Friday, as volume began to retreat to more normal levels during the week. The five day volume variance increased to 25.16%.

Volume was very strong into the recent downturn. Thursday’s 13 DMA was the highest since June 5, 2012, with that 13 DMA seen a couple days after a bearish pullback rebounded into a long very bullish run higher during the summer of 2012.

Major Stock Market Indexes

The index charts of the Dow Jones Industrial Average, S&P 500, NASDAQ, New York Stock Exchange and Russell 2000 all took deep drops Monday and all but the Russell finished Friday with weekly gains. The charts are beginning to show some bullishness again.

The NASDAQ chart maintained a mostly bullish appearance throughout the pullback. Monday’s drop rebounded strongly higher above but near the lower trend line. Although this drop took the index fairly deeply below the 13 EMA and 50 EMA, it rebounded quite quickly pushing back through them Friday to finish above both. The break and close above the 50 EMA Friday was the first in nine sessions, while it closed four sessions below the 13 EMA. The rebound also began to bend the 13 EMA higher above the 50 EMA before it crossed the 50.

The S&P 500 saw the 13 EMA slip below the 50 EMA in a bearish cross Monday, but has shown bullishness since. Friday’s rebound carried the index back above both the 13 and 50 EMA. It finished that session above the 13 EMA and resting on the 50 EMA. The finish at the 50 EMA was the first close at or above this level in 10 sessions and the close above the 13 EMA was the first in 11. The 13 EMA has turned higher back towards the 50 EMA.

The NYSE saw Friday’s rebound carry the index back above the 13 EMA and it finished above it for the first time in 11 sessions. The move higher also covered over two thirds of the remaining distance to the 50 EMA from Thursday’s close. The 13 EMA has turned higher back towards the 50 EMA.

Friday’s rebound also carried the Dow Jones back above the 13 EMA and the finish above it was the first in 12 sessions. The move higher covered about half of the distance remaining to the 50 EMA from Thursday’s close. It was hard not to notice the recent changes to the Dow components helped to prevent the index from reaching a higher high after Dec 31 and also helped to carry it lower in the recent downturn.

Although the Russell rebounded fairly strongly off lows, it has lagged in the current rebound. It not only failed to regain the losses seen Monday by the weeks end, it also failed to rebound back above either the 13 EMA or 50 EMA. This lag may continue for the time being, but the lagging index often tends to have a catch up rally later in the rebound.

Rebounds seen on the indexes have been very strong so far, yet all remain in fully oversold conditions. Current market concerns seem over blown; if leveler heads prevail it doesn’t seem unlikely the indexes could continue higher in the week ahead.

US Treasury Charts

The 20 year US Treasury Note closed Monday at the highest level since July 3, but has begun to retreat off these highs since. It finished the next three sessions with losses breaking slightly below the 13 EMA Wednesday, but rebounded to finish the session above it. It dropped back below the 13 EMA Thursday and finished below it. Friday rebounded above the 13 EMA briefly before giving up these gains and although it finished the session slightly higher, it also ended the session below the 13 EMA. This chart is not bearish looking yet, but appears to be beginning a pullback from recent highs that could move much lower. The 20 year has fallen out of overbought, but is far from oversold.

Long term US Treasury prices appear to be beginning moves lower. This is somewhat bullish for stocks.

The 10 year US Treasury Note fell into Monday’s stock selloff but the rebound in the next three sessions helped it to hold onto gains for the week. Friday pushed higher and back above the 13 EMA, but slipped into the close to fall back below the 13 EMA and lower for the session. Monday’s drop fell below likely support at the lower trend line, but the following two sessions’ lows rebounded at the trend line. This chart currently looks bearish; however it is showing signs of returning to a more bullish stance. The chart is still deeply oversold, so it does not seem too unlikely it could move higher.

Eventually reality has to settle in on Treasury holders. There is a lot of potential downside with little upside potential. Without the Fed buying billions of dollars of these bonds to inflate their price, there is little reason to hold them; the interest rate is far too low to offset the potential downside risk.

What is the downside risk? The Fed has promised to keep rates “historically low” after the current bond purchases cease, but the rate on the 10 year and 20 year notes could more than double and this promise would still be met. A double on these rates would send the price plummeting.

What is the upside potential? Stocks could slide, but this seems unlikely do to an improving economy and record earnings. The Fed could change course and continue purchasing Treasuries, but this seems unlikely because the economy is doing better.

Despite what many believe, the economy will likely do even better once these purchases cease, as the data shows the low rates have actually hindered the rebound. Increases seen in the GDP as the rates increased would tend to support this, along with other economic data. The increases in the economy will likely make stocks an even greater value than Treasuries, adding to the downside potential in Treasuries.

What about the low rate? If the rate were return to historical levels, the only way to break even on the price loss would be to hold the 10 year note to maturity. The timeframe is unacceptable, so the rate is too low to offset the risk.

Gold

Gold slipped at the open in Sydney Sunday to a low of about 1242, they traded flatly between there and 1245 for the rest of the night.

Monday morning gold pushed to about 1247 in Hong Kong before slipping to about 1241 just before the London open. It began a long trend higher reaching 1250 an hour before the London close during New York trading and then shot higher to 1263 in less than ten minutes. It slipped off this high to 1260 then rebounded to about 1266 at about the London close. It then began to trend lower finishing NY trading at about 1258. Gold traded between 1256 and 1260 for the remainder of the night closing the day at about 1256.

Tuesday morning it continued flatly between 1256 and 1260 in Hong Kong before beginning a trend lower just before the close that carried to a low of about 1248 less than an hour after the New York open. It then trended slowly higher to about 1256 an hour and a half before the New York close. It flattened out and traded between 1253 and 1256 for the rest of the night, closing the day at about 1254.

Wednesday morning gold began a shallow trend higher finishing Hong Kong trading at about 1256 and continuing to about 1259 in London before rocketing up to 1273 in the first half hour of New York trading, with the bulk of this move again happening in less than ten minutes. It dropped nearly as fast off this high reaching a low of 1255, rebounded quickly to 1263, then slipped back to 1256 giving the first couple hours of NY trading a single heart beat pattern before going into cardiac arrest as gold pretty much flat lined after a bouncy rebound to 1260 that trended slowly but fairly steadily lower In Sydney and Hong Kong to low of about 1255. Gold bounced to 1256 in the final 15 minutes to finish the day.

The late night rebound continued into Thursday reaching a high of about 1260 in Hong Kong and about 1264 in London before falling to 1256 and rebounding to 1266 during the first hour in New York, it slipped off this high falling to about 1253. It rebounded to about 1257 and traded within a point of that for almost eight hours before slipping back to about 1256 just before the Hong Kong open. It trended higher to about 1262 before dropping to finish the day at about 1261.

Gold traded between 1258 and 1263 Friday morning until a five minute rebound from 1258 to 1272 a half hour after the NY open that fell to 1259 within the next 20 minutes. It settled lower to 1258 then trended higher to about 1268, mostly on two hour long bursts separated by several hours before finishing the New York spot at 1267.10 and higher than the 1245.90 close of the previous week.

Gold is again beginning to whipsaw, and therefore looks risky at the current time.

S&P 500 Constituent Charts

The source normally used to view the charts for this portion of the article has ongoing issues and it does not seem likely they will be resolved anytime soon. A replacement was found that is slow and cumbersome in comparison and also has chart configuration issues that make viewing of many of the normal characteristics looked for in these charts more difficult. Unfortunately it was also unavailable when needed for this article.

A hundred or so of the constituent charts were viewed several times at a various times during the past week. Some of the things noticed in these charts are included below.

There were many of the constituents that have begun profound V rebounds from recent lows. Some of the charts viewed, although not necessarily constituents of the S&P 500 showed their stock prices recovering from the entire drop in a day.

Several of the charts that hit resistance during Monday’s pullback, did not pullback very deeply before rebounding higher and through this resistance later in the week.

Many of the constituents appear to be turning higher off support levels, many are still deeply oversold. Overall it looks like this rebound could have legs. It seems fairly likely the index could continue higher in the week ahead.

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 +/(-) 90 D, (-)/+ 90 D, MRL, -2% H, +2% H, 90 E and + 10 day indicators are currently active. The +10 day indicator that was near a high state on Friday became active at Monday’s close. See a more detailed description of most of the indicators developed through research and featured in these articles here.

The +/(-) 90 D indicator that became activate on Oct 7, 2013 will expire with this coming Friday’s close. It has performed as follows to this point in the format: highest close / lowest close / last close.

+10.28% / -1.23% / +7.21%

The (-)/+ 90 D indicator that became active on Nov 25, 2013 has performed as follows to this point in the format: highest close / lowest close / last close.

+2.55% / -3.36% / -0.30%

Recent chart formations and early indicators seem to suggest a rebound could be underway. It seems likely this rebound could retest the resistance of the MRL at 1850 to 1865. The resistance is not likely to give way immediately, but it seems likely the index will probably push above it. Once this resistance level is passed, it seems fairly likely the index will move to the next likely resistance level held within the 100 L at the 1900 level.

The drop Monday rebounded from an intraday low of 1739.66 and within the likely alternate support of the first 1700 level MRL at 1735 to 1745 (or possibly 1750). The ensuing rebound has been very strong, moving 3.16% higher in the four trading days since. Although the intraday high was lower at 1798.07, the index closed Friday at 1797.02 and the highest into resistance found in the100 L near the midline resistance of 1800 since breaking below it. The midline resistance caused the Jan 30 turn back at an intraday high of 1798.77. The index moved through the midline resistance relatively easily in the initial rebound after rebounding from the first setback at 1802.33 Nov 18. It therefore doesn’t seem likely the midline resistance will continue to be an issue.

The strongest resistance in the initial push through the 100L was seen near 1813. A break above this level probably sends the index clear of the upper boundary of the 100 L at 1825 and onwards towards the MRL at 1850 to 1865.

The -2% L provided a second correct indication during the past week as Monday slipped 2.28% lower during the session. There have been two occurrences of 2% drops, within a short time span. When multiple instances of volatile conditions are seen there is a higher likelihood that additional volatile conditions could be forthcoming therefore the -2% indicator moved into a high state (-2% H). Even so, most indicators continue to suggest volatility could remain calm.

The +2% H indicator did not provide a correct indication during the past week. The second instance of a 2% pullback substantially increases the chances that an offsetting move will be seen, it also renews the ten day period that a move of this proportion is most likely to be seen in. If a move of this proportion is seen, it would be a bullish indication. At the same time it would also be yet another volatile move, increasing the chances that more volatile moves might be seen. However, it is not uncommon for volatile conditions to end with one or two moves of 2% or greater higher.

The 90 E became active and this indicator is often active during volatile conditions. The second instance of volatility was seen Monday, with the other seen a couple days before this indicator became active.

The 90 E indicator is also known for a high occurrence of market price direction changes while it is active. It continues to seem fairly likely a direction change higher could occur during this indicator’s presence.

The +10 Day indicator that was in a near high state on Friday toggled on into Monday’s furious selloff and became active at the close. This indicator suggests there is a high likelihood the index could rebound in the 3% to 5% range during the ten days it is active. It has performed as follows to this point in the format: highest close / lowest close / last close.

+3.16% / 0.00% / +3.16%

The lowest close only considers closes lower than the starting date, it there are none lower it is reported as zero percent.

Current Cautions

The recent drop on the index has reached significant levels and the index has had two volatile trading sessions. These are bearish indications, so there is reason to have some continued caution.

However, the pullback continues to fit normal patterns seen during rounds of profit taking. Monday’s close was 5.76% lower than the highest close on Jan 15 and fairly close to the levels that seemed likely that this pullback might provide.

The current rebound began within the alternate support seen within the first 1700 level MRL at 1735 to 1745 (or possibly 1750).

Concerns over the emerging markets appear to be overblown.

Volume increased for the week, but volume levels began falling to more normal levels as the week progressed and stocks began to rebound. This is often an early indication volatility is calming, and a move higher has begun.

The 90 E became active Tuesday and this indicator is often active during volatile conditions like those seen on Monday. It also has a strong history of pointing to market price direction changes and it seems fairly likely it could point to a move higher in this occurrence.

The -2% H and +2% H indicators are currently active and these indicators are often active during volatile conditions. The S&P 500 has seen two volatile daily moves while these indicators were active. It seems fairly likely that volatile conditions could last for a relatively short duration, probably exiting before or with the expiration of the 90 E.

The beginning of the year is generally a bullish timeframe; however rounds of profit taking that result in significant drops are more common during this timeframe.

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 allows exact, and these resistances could react sooner or later than expected, it is also possible the resistance will not be seen at all.

There continues to be many reasons to be bullish at the current time. Any pullbacks in stock prices seen along the way are probably a good opportunity to add.

Comments:

The emerging markets are slipping over concerns of two countries, Turkey and South Africa. As a result the world’s stock markets were following these countries’ market leads lower.

The two countries have a combined GDP of only 1.6% of the world’s total GDP. They account for less than 5% of the revenue of the companies in the S&P500 and less than 2% of total US revenues. Neither produces commodities or product for the US that cannot be supplied elsewhere. The product or commodities they do supply are not of amounts that would cause much of a disruption if these supplies were cut off.

Although a few companies might need to scramble to cover these disruptions IF they were to occur, any supply disruptions that might occur would likely only be an opportunity for another to profit from their misfortune.

Much bigger obstacles have been overcome in the US markets during the run off crash lows; it does not seem unlikely this minor bump will be any different. Concerns over the emerging markets seen in the US markets seem overblown and the pullbacks made off these concerns likely provided a buying opportunity.

Many of these sources of information were used in this article.

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Have a great day trading,
ronz

Access to all of Ron’s past articles.

Disclosure: Ron is currently about 89% invested long in stocks in his trading accounts. The increase in his investment level over the past week was due to the purchase of three issues and monthly dividend reinvestments into three issues with the cost of these purchases partially offset by the sale of two issues and dividend payments. Ron feels he is near proper allocation at the current time and hopes to maintain within a few percent of his current investment level by offsetting purchases and sales. 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. Either of these activities may take him outside this preferred range. Ron will receive dividend payments from eight issues in the coming week and nine in the following week. If no further investment changes are made during this timeframe these dividend payments will reduce his investment level.

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

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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