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Stock market preview for the week of February 17, 2014

The Northern Michigan winter continues, but stocks began to heat back up in the past week.
Photo courtesy of Doug Dreyer

The Traverse City area saw a slight warm up as we had a few days of sunshine during the past week and temperatures broke above 20 degrees. It looks like stocks might have broken the ice in a move higher too.

The S&P 500 pushed higher in four sessions this past week and as a result posted a 2.31% gain. The index has finished higher in seven of the past nine sessions.

Volume continued to moderate during the week, with the lower volumes reaching levels common during the run late last year. This week’s average volume decreased 17.85% from the prior week. The five day volume variance also fell from the prior week to 18.77%.

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 to show bullish signs in the past week.

The NASDAQ chart continued to lead the way as it was the first index to recover from the drop, finishing Friday at a new 52 week high close. The NASDAQ has finished higher in seven straight sessions. Since breaking back above the 13 EMA in the previous Friday’s session, it has continued higher well above the 13 EMA.

The S&P 500 saw the 13 EMA rebound quickly and bullishly cross back above the 50 EMA Thursday. It too has continued higher well above the 13 EMA since breaking back above it. In the past seven sessions the S&P 500 finished only one session lower and that with only a 0.03% loss. The index finished Friday 0.53% below the January 15 record high close.

The New York Stock Exchange slipped back to the 13 EMA Monday, but rebounded higher off it and since has been moving higher well above the 13 EMA. The 13 EMA is nearing a bullish cross back above the 50 EMA. The NYSE slipped 0.0005% lower in its only setback in the past seven sessions.

The Dow Jones struggled at the 13 EMA Monday, falling back below it but finishing slightly above it. It also struggled at the 50 EMA. After breaking and finishing above the 50 Tuesday, it retreated and finished below it Wednesday before breaking back above it Thursday to finish above it. The 13 EMA is narrowing the gap the between it and the 50 EMA. The Dow has finished six of the past seven sessions with gains.

The Russell 2000 pushed above the 13 EMA Tuesday and it has finished every session fairly far above it since, although it dropped below it briefly Thursday. It broke above the 50 EMA Wednesday, but slipped to finish below it. IT finished well above the 50 Thursday and again on Friday. The 13 EMA is also nearing a bullish cross of the 50 EMA. Although the Russell continues to lag some of the indexes in the rebound to this point, it has finished the past seven sessions higher and is maintaining a trend that is taking it higher faster than it fell. It also surpassed the Dow’s rebound.

Rebounds on the indexes continued to show strength in the past week. All have reached or are near overbought, but it doesn’t seem unlikely they could continue higher in the week ahead and might start to hold in or near overbought conditions again.

US Treasury Charts

The 20 year US Treasury Note finished the week only slightly lower, but this chart continues to exhibit failures. After the previous Friday’s rebound above but finish below the 13 EMA, it rebounded and finished above it on Monday. Then fell directly back below it Tuesday and has finished every session since below it. Wednesday turned higher after nearing the 50 EMA, but both Thursday and Friday’s highs were turned back at or near the 13 EMA with neither penetrating the level. Although this chart is still not bearish looking it appears a deeper pullback is possible. The 20 year is near oversold, but it seems possible it could hold near this level for the time being.

Long term US Treasury charts continue to suggest prices could continue lower. This is somewhat bullish for stocks.

The 10 year US Treasury Note broke and closed above the 13 EMA Tuesday with every session since topping this barrier. Wednesday’s rebounded got stuffed at the 50 EMA, as it slipped off this level, but it looks like this level could be retested soon. The 10 year Treasury rate finished four sessions higher in the past week. And seven of the past nine for gains. This chart continues to show signs of returning to a more bullish stance. The chart is near overbought, but it seems possible the rate could continue higher.

Gold

Gold traded uneventfully Sunday night between 1266 and 1270 finishing the night at about 1269.

Monday morning gold trended gradually higher in Hong Kong to 1275 then traded flatly between 1272 and 1277 until the Hong Kong open Monday night. It pushed strongly higher from about 1274 to about 1284 in about a half hour breaking above resistance, and then leveled out briefly before continuing higher to about 1288. It slipped off that high to finish the night at about 1284.

Tuesday morning it traded flatly between 1283 and 1286 before bouncing to 1287 just before the New York open, it fell quickly to 1278 finding support near previous resistance and rebounded quickly to 1294. It slipped off this high and traded flatly between 1289 and 1292 until falling steeply shortly after the Sydney open to 1285, then rebounded to 1287 and trended slowly lower to finish the night at about 1286.

Wednesday morning saw gold trade flatly between 1285 and 1287 until it began to bounce higher in London just before the New York open. These bounces reached a high of 1296 before slipping back to 1290 before the New York close. Gold traded flatly between 1290 and 1293 in Sydney before trending slowly lower to finish the night at about 1289.

The slow downtrend continued Thursday reaching a low of about 1286 in Hong Kong just before the London open, but the trend reversed and gold trended steadily higher for most of the rest of the day, and although it slipped slightly after the Sydney open, it reached a high of about 1307 in Hong Kong before flattening out and finishing the night at about 1305. This was probably the most bullish daily trend gold has seen in many months, aside from the early setback in Sydney, all markets seemed to be buyers into the run.

Friday morning gold traded tightly to 1305 in Hong Kong before bouncing to 1310 and holding close to it in the late session. It continued to trade near 1310 early in London before trending higher for nearly two hours to about 1320 before the New York open. It then traded between 1315 and 1321 with the low gradually increasing to about 1318 into the New York Spot close of 1319.10, which was higher than the previous week’s close of 1267.10.

Although personally not a buyer of gold, the break and rebound at resistance along with the first overall world market support of higher prices seen in quite some time looks rather bullish.

S&P 500 Constituent Charts

The constituent charts show that most are in bullish rebounds off recent lows. Many continued in uptrends throughout the recent index downturn. Many are already pushing to or near 52 week highs.

Not all stocks are doing well, some have pulled back due to disappointing earnings or guidance, but several that took these pullbacks earlier are beginning to rebound from them. It doesn’t seem unlikely that many could recover from these drops in the weeks ahead.

Nearly all the indicator stocks are currently in very bullish postures.

Resistance breaks are becoming more common again.

Most of the constituents appear to be in very bullish runs higher. Many are also nearing overbought conditions. Although some stocks will likely pullback briefly, it seems possible many could turn higher before falling to fully oversold or maintain in or near overbought conditions. Although the rebound might slow as some stocks refuel in brief downturns, 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, MRL, -2% H, +2% H, 90 E and +10 day indicators are currently active. The +/(-) 90 D expired on Friday. The +10 day indicator will expire at Monday’s close, upon this expiration a +10 E indicator will become active. 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 expired with Friday’s close. It finished as follows in the format: highest close / lowest close / last close.

+10.28% / -1.23% / +9.70%

The interpretation of this indicators’ 90 trading day period was given in the Oct 14 preview, the first article after it became active and was as follows:

“The current indications would suggest that this indicator could begin very bullishly provided news events do not thwart its progress. These indicators also suggest that this 90 day trading period could end with a pullback; although it is not likely it will erase the gains * the S&P 500 has already seen during the 90 D indicator’s tenure. It is also possible this pullback might not occur until after this indicator has expired. Therefore the 90 D has been given a +/(-) prefix, indicating that it is likely to begin higher first, but see a pullback late during its active period.”

*A typo was corrected from the original passage; “seen” was deleted.

The 90 D indicator provided a gain of over 10%, and within the range expected for a 90 D with a plus rating. There was a significant pullback late in the indication period that reached 5.76% before rebounding, and within the range expected at the time it was given a minus in parenthesis rating. Therefore the ratings given this indicator appear correct in this instance and the interpretation given also appears mostly correct.

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% / 2.01%

It seems possible the index could begin to retest the resistance of the Midrange Resistance Level (MRL) at 1850 to 1865 in the week ahead. The resistance in the MRL is not likely to give way immediately. It seems most likely the index’s climb could stall relatively briefly as these resistances are reached and broken down. This slowdown will probably allow some stocks to fall back towards oversold conditions, providing fuel to push the index above these resistances. These resistances could cause the index price to slip, but these pullbacks are not likely to be large and probably recovered quickly.

Once this resistance level is passed, it seems fairly likely the index could move on to the next likely resistance level held within the 100 L at the 1900 level. This resistance level has the potential to produce a significant pullback.

However, preliminary data would suggest that it is unlikely a significant pullback will be seen at the 1900 100L, but if one were to be seen, it probably would not exceed 3% by much. Timing is somewhat critical in this projection. It is felt that it is not possible to give an accurate timeline that the index might reach this resistance level at this point. If the timing used in this projection is off, this projection could change substantially later.

The -2% H did not provide a correct indication in the past week. There were multiple instances of volatile conditions. Periods with multiple volatile instances are more apt to see additional volatile conditions. Even so, most indicators continue to suggest volatility is calming and could remain calm.

The +2% H indicator did not provide a correct indication during the past week.

The 90 E will expire in 13 trading days. This indicator is often active during volatile conditions.

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 has begun.

The +10 Day indicator will expire with Monday’s close. At that time a 10 E indicator will become active. The 10 E indicator suggests there is a high likelihood the index could finish higher during the next ten trading day period, but it does not project the gains expected. The +10 Day indicator has performed as follows to this point in the format: highest close / lowest close / last close.

+5.55% / 0.00% / +5.55%

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

Current Cautions

It seems likely the index could reach the resistance within the 1850 to 1865 MRL resistance level soon. It is an established significant resistance and being so some caution should be exercised.

The pullback and rebound continue to fit normal patterns seen during rounds of profit taking. It seems most likely the MRL resistance could be broken in this retest; however it does not seem likely the index will push directly through this resistance. It will probably slow the current ascent while it is digested.

Volume continued to decrease during the week, falling to more normal levels. This is often an indication volatility is calming.

Indicators are beginning to expire, and it seems likely many more will expire or fall to lower likelihoods in the coming weeks. A reduction in active indicators is generally a bullish indication.

The 90 E is active and is often active during volatile conditions. 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.

If the index continues within the trend established off the crash lows, it seems possible it could reach the 2000 to 2100 level in nine to 18 months if it reaches this level near the upper trend line and within 36 to 42 months if it reaches this level near the lower trend line. The data suggests the MRL at 2040 could be the resistance level of concern in this range. If this is actually the level it appears to be, the index will probably reach it while it is near the upper trend line making this appearance probable within the next 13 months. If this is the actual level of concern, the pullback off this level is likely to be in the 25 to 35% range, but would probably not exceed 30%. If this pullback comes earlier than expected, it seems likely it could be much shallower, probably not reaching crash levels. If seen later than expected, it could be somewhat deeper.

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 87% invested long in stocks in his trading accounts. The decrease in his investment level over the past week was due to the purchase of three issues with the cost of these purchases more than offset by the sale of four issues and dividend payments. Ron feels he is slightly oversold 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 nine issues in the coming week and eight in the following week. If no further investment changes are made during this time frame these dividend payments will not change 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.