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Stock market preview for the week of February 25, 2013

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Here is the preview of the coming week on the S&P 500 from Traverse City, Michigan.

The S&P 500 closed higher in two sessions and lower in two sessions during the holiday shortened trading week, snapping a seven week string of higher closes as it finished Friday 0.28% lower for the week. The index has closed higher in 23 of the past 37 sessions.

Major Stock Market Indexes

Although most of the five major stock market indexes, the DJIA, S&P 500, NASDAQ, NYSE and Russell 2000, took a fairly steep drop in the middle of the week, the late week rebound appeared very bullish along with other things seen prior to and in the pullback.

The NASDAQ broke higher Tuesday to finish at a new 52 week high, but fell fairly steeply mid-week with Wednesday’s drop finishing slightly lower than the 13 EMA. Thursday continued lower before rebounding higher at about the lower trend line in the major trend and also at about the 50 EMA to finish the session above both these levels. Friday’s rebound was fairly strong as it nearly recovered Thursday’s drop and finished the session a cent off the session high, although the rebound fell slightly short of the 13 EMA.

The NYSE pushed yet higher through the resistance that has kept it trading nearly sideways for over three weeks Tuesday, capturing another 52 week high, but slipped fairly steeply for the next two sessions fracturing the lower trend line in the major trend during the trading day Thursday before rebounding to finish the session at about the trend line. Wednesday had finished the session slightly below the 13 EMA. Friday moved fairly strongly higher retaking all of Thursday’s losses and then some while finishing the session at about the 13 EMA. The New York Stock Exchange had a fairly small drop to reach the lower trend line due to a long sideways trend, so the drop somewhat lower than this trend is not surprising.

The Russell 2000 pushed higher Tuesday to finish at a new all-time high, then fell steeply Wednesday to finish the session resting on the 13 EMA. It dropped still deeper Thursday and fractured the lower trend line in the major trend, rebounding into the close but that rebound fell short of trend line. Friday’s rebound brought the Russell back above trend line and the 13 EMA.

The S&P 500 also finished Tuesday at a new 52 week high, then dropped fairly steeply on Wednesday to finish the session slightly below the 13 EMA, and dropped further still Thursday, before rebounding fairly strongly Friday. The rebound began well above the lower trend line in the major trend and well above the 50 EMA and it finished the week back above the 13 EMA.

The DJIA finished Tuesday above the 14000 level and at a new 52 week high. It then pulled back for two days with the fall Wednesday finishing just below the 13 EMA. Although Thursday’s drop was deeper than any seen this year the rebound was well above the lower trend line and 50 EMA and finished the session above the previous deepest intraday pullback on Feb 7. Friday’s rebound carried the Dow Jones well above the Thursday’s drop and the index finished the session above the 14000 level making it the first week in this rebound with two closes above the 14000 level and only the third week ever to finish above this level. Even though the DJIA had been trading quite flat against resistance over the past few weeks, the rebound was quite far above the lower trend line. This is mainly due to the catch up rally the Dow mounted after breaking to new 52 week highs.

The DJIA and NYSE broke the wedge formations they were in lower in the past week, but the quick rebound seen on these indexes makes this look like a false break. The quick pullback may have also allowed stocks a deep enough fall to rebound up and through these resistances.

All of the indexes ran to a higher high Tuesday prior to the two day pullback. All of the indexes rested near bullish initial support levels Wednesday, and although they fell deeper Thursday all rebounded near or above levels that these rebounds might be expected at, with those that slipped lower rebounding into the close. Friday’s rebound was also quite bullish carrying most of the indexes higher than they dropped from Thursday, giving a steeper initial rebound than seen in the fall. It also brought the indexes to or near bullish levels.

All of the indexes fell to a bearish lower low in this pullback, but all began from a bullish higher high. The rebound to this point makes another higher high seem possible while a failure to reach this high could send some to the sidelines. Some might take a wait and see stance if a higher high isn’t seen though.

Overall earnings have been very good this quarter, with most stocks doing much better than expected. Most stocks are trading at relatively low trailing and forward P/E’s leaving them far from overpriced. Many companies continue to be cautious with forward earnings statements, but most have done much better with earnings than they believed earlier for several quarters. Although these warnings shouldn’t be totally ignored, many indicators suggest earnings will probably continue to increase beyond current expectations.

The indexes saw a somewhat bearish pullback, but most of the indexes responded with a bullish push higher off these lows. The pullback was to levels that could be expected at about this point in the run. Most of the indexes are the nearest to oversold they have been this year, making a continued rebound seem fairly likely.

S&P 500 Constituent Charts

Some of the S&P 500 constituents’ charts took on a slightly bearish appearance in the past week as the pullback extended downtrends below previous support levels or gave some charts the characteristics of topping patterns. Even so most of the constituents continued to look bullish.

Many of the constituents took fairly large pullbacks along with the index, but several recovered the entire fall they had taken in the two or more days prior to Friday in that rebound. Many that took pullbacks maintained within the established short term trend and many rebounded higher than the starting point in Thursday’s pullback Friday, so most are showing a steeper rebound than fall.

Not all stocks fell in the mid-week pullback, quite a few of the constituents continued higher into the overall market dip and several pushed to new 52 week highs several days during the past week. Some also broke resistance levels and pushed considerably higher. Several stocks also broke downtrends, rising as the overall market fell with Friday’s marker rebound carrying several through the upper trend line. Many of these stocks also began these rebounds with a higher low, so it seems likely many of these stocks could establish uptrends.

Many of the stocks that have fallen during the past couple to few weeks have reached deeply oversold conditions, and many are at likely support levels, so it seems possible many of these stocks could begin to rebound soon. Some of these stocks have already broken above the 13 EMA and look ready to begin riding it higher. Even though these stocks were cycling lower, they maintained within long term uptrends.

Overall the constituent charts continue to look bullish and it continues to seem likely stocks will move higher in the weeks ahead. The pullback appears to have presented some opportunities to add.

Indicators

The -2% H (precautionary) is currently active. See a more detailed description of the indicators I have developed through my research here.

The relative absence of indicators is generally bullish as it shows a declining chance of volatility.

The -2% H indicator did not provide a correct indication in the past week. The index is within the influence of the untested drop resistance at 1549.38 and being so the chances are greater for a move of this proportion. However, it continues to look unlikely that we will see a downward move of 2% or greater in a session.

The 1549.38 drop resistance is responsible for the pullback seen on Wednesday and Thursday. The two day fall from Tuesday’s close to Thursday’s close measured 1.86%. The pullback started a little earlier than expected as Tuesday closed at 1530.94, but the drop was in the upper half of this resistance.

The rebound Friday appeared very bullish; most stocks are rebounding faster than they fell, so it doesn’t seem unlikely this rebound could continue.

A drop resistance continues to have influence 1% above the resistance level in the absence of a significant drop, so if this rebound continues the S&P500 will remain within the influence of the 1549.38 drop resistance until it closes above 1564.87.

Tuesday’s close was not 1% above the 1520.33 resistance, which is considered closed as explained in last week’s Preview. To this point the drop did not reach a significant level and it seems fairly likely the index could continue to move higher. If this drop was to reach a significant level, the closed resistance would be noted as a possible influence in my records, but there is little evidence that this resistance level actually had any influence over this drop.

Current Cautions

There are many reasons to be bullish at the current time, and it seems fairly likely the trend will continue to be bullish for the foreseeable future, but the index is within the influence of the final drop resistance of 1549.38 so there is reason to show some caution.

There is a chance this drop resistance could cause a significant pullback (one of 3 % or greater), however historically pullbacks at drop resistances this near new all-time highs tend to remain fairly shallow. If a significant pullback is seen at this level, it will probably remain less than 5%. It is also possible any pullback seen would not reach a significant level.

Correction:

In the comments section of last week’s Preview I noted there was not one 10% drop in 2003. I should have added the notation “after the March 11 low” to this sentence. There was a 10% or greater correction from the Jan 14 highest close of 931.66 to the March 11 lowest close of 800.73 of 14.05%.

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

Have a great day trading,
ronz

Disclosure: I am currently about 86% invested long in stocks in my trading accounts. The reduction in my investment level was due to the sale of three issues and dividend payments. I had several buy orders come close to filling during the week, but none did. I consider myself oversold, but I am not forcing buys and I will continue to sell stocks that reach long or short term price targets. All buy orders I opened in the past few weeks will expire on or before Feb 28. I may reopen the orders that do not fill after that time, or I may look for other opportunities. I will receive dividend payments from 17 issues in the coming week and 9 in the following week, if I make no further investment changes during this timeframe, these dividend payments will reduce my investment level due to rounding.

Disclaimer: What I provide in the Stock Market Preview is my perception of the current conditions and what I think is the most probable outcome based on the current conditions, the data I have collected and the extensive research I have done into this data along with other variables. It is intended to provoke thought of the possible market direction in my readers, not foretell the future. I do not claim to know what the stock market will do. If the stock market performs as I expect, it only means I am applying the stock market history to the current conditions correctly. My 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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