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Stock market preview for the week of January 13, 2014

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The S&P 500 carried higher in three sessions to post a 0.60% gain for the week. The index has finished lower in six of the past ten sessions.

The index pushed lower on Monday rebounding off support near the recently broken upper boundary of the 100 L at 1825 late in the session and continuing bullishly higher Tuesday. The retest of support near the upper boundary of the 100 L again acted bullishly; however the rally from this support appeared to lack a follow through. The retest also dropped much deeper into this support showing a substantial weakening of this support level.

The average daily volume increased 32.86% over the previous week’s average. Monday saw the weakest volume, although it was higher than any seen in the week before, and Wednesday had the strongest volume. During the past week the five day volume variance fell to 10.84%, showing the increased volume was very steady for the week. See additional data notes on this week’s volume in the comments section below.

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 mostly bullish tendencies during the past week, but also continued to hint that a deeper pullback is still possible.

All but the Dow Jones finished the week higher. The Russell was the only index that managed to reach a new high close in the past week as it finished Friday at a record high. The NASDAQ reached a higher intraday high Thursday, but slipped off this high to finish the session at a loss.

All but the Dow Jones finished the week with higher closes in three of five sessions. The Dow’s only increase was seen Tuesday and as a result has reached a somewhat bearish three consecutive day fall. The NASDAQ and S&P 500 reached the three day fall total on Monday, but finished higher in three of four sessions since.

All of the indexes maintained closes above, at or only slightly below the 13 EMA during the past week and those that closed below this level rebounded quickly back above it. This is generally a bullish indication.

Even so the charts continue to appear somewhat toppish, as they have traded mostly flat into recent resistances. Most of the indexes have begun pushing back towards overbought without much upward price movement, and this is a somewhat bearish indication. The Dow Jones loss in the past week makes its chart look like it is beginning a rounding pattern out of this top. As a result the Dow has the least bullish chart this week, in stark contrast to it having the most bullish chart in many of the recent weeks.

The charts are showing some strength, but at the same time they are showing some weakness. Indicators continue to suggest a deeper pullback is possible, and although the charts don’t appear bearish, they don’t appear particularly bullish either. It seems possible the indexes could slip deeper than they have so far, but more might reach new highs first.

US Treasury Charts

The 20 year US Treasury Note saw a four day winning streak end on Wednesday after Tuesday’s close above the 13 EMA. Wednesday’s lower close slipped slightly back below the 13 EMA. Thursday rebounded bullishly and closed back above the 13 EMA. Friday opened with a large gap higher above the 50 EMA then pushed still higher into the close, being the first close above the 50 EMA since Nov 4. Although the run up appears speculative and it seems fairly likely it could eventually fail, this bullish move might continue higher first.

The recent bullishness in US Treasury prices is a somewhat bearish indicator for stocks.

The 10 year US Treasury Note interest rate slipped in the first two trading days this past week. Tuesday’s finish below the 13 EMA was the first close below this level since Nov 26, 2013. Wednesday pushed bullishly back above the 13 EMA. Thursday saw rates slip but still closed above the 13 EMA, but by Friday’s close the rate has fallen deeply below the 13 EMA. The 10 year rate has held in or near overbought levels for over two months and the duration it has held within this level makes it seem possible this drop could take it into fully oversold. Even so, this chart continues to look very bullish and show bullish traits and it seems fairly likely it could rebound from any setback that might be seen.

Gold

Gold began to retreat Sunday night during Sydney trading falling back to about 1233 just before the Hong Kong open, after which it began to rebound reaching about 1246 but trended lower off that high to finish Sunday at about 1238. It rebounded again early Monday morning to about 1243 then trended lower through the remainder of the Hong Kong session and during London trading reaching a low of about 1236 just before the New York open. In New York it trended higher to about 1249, then dropped sharply to 1235 within about ten minutes, rebounded quickly to about 1243, then trended lower to about 1238. Sydney trading pushed about a point higher early and then trended lower to finish a point below the New York close. It again trended higher in early Hong Kong trading reaching about 1243, but slipped again to finish Monday at about 1240.

Tuesday morning gold rallied to about 1246 but began to taper off from this high before the Hong Kong close dropping to about 1238 in early London trading. It traded between 1238 and 1240 until dropping slightly deeper to about 1236 prior to the New York open, pushed back to about 1239 and then slipped steeply for about an hour to 1228 when the fall tapered to reach about 1226 during the next couple hours, it held between these two lows for a few hours then began a long gradual uptrend to about 1233 that reversed direction shortly after the Sydney open and continued to trend lower in early Hong Kong trading to finish the day at about 1228.

Wednesday gold traded between about 1224 and about 1228 until it broke higher in London to reach about 1232 just after the New York open. The rally ended abruptly with a fairly steep slide during the first hour of NY trading to 1222, it then rebounded slightly and leveled out before dipping lower to about 1220. It traded between 1220 and 1225 before beginning a long gradual trend higher near 1220 that reached 1227. That rally leveled out a little lower and then fell very quickly and steeply to 1219 but rebounded quickly to 1228. It slipped off that high to about 1225 and traded between there and 1228 during Sydney and Hong Kong trading, finishing the day about where it began.

Thursday traded rather flatly between 1225 and 1231 until after the Hong Kong open where it pushed to about 1235 then slipped to finish the day at about 1233. It then pushed higher to about 1237 early Friday before slipping and trading flatly between 1233 and 1236 until the New York open. Shortly after the NY market began trading gold dropped abruptly to from 1236 to 1229 then shot higher to 1246, with the high to low and back to high occurring in less than 15 minutes. It dropped back to 1240 then trended higher into the New York Spot close of 1248.60 and higher than last week’s close of 1238.00.

Over the past two weeks Gold has seen the increased presence of whipsaw movements. Whipsaw movements are very fast relatively large price movements from highs to lows then back to highs, or vice versa. Whipsaw movements are considered volatile and an increase in volatility is generally a bearish indication. Although not always the case, whipsaw movements are often seen prior to and during price breakdowns. These fast price changes present the opportunity for quick profits, but at the same time the increase in their presence is an indicator of increasing potential risks. If these fast price changes continue, it is very likely that eventually one of these fast breaks lower won’t rebound, but instead continue to break steeply lower.

S&P 500 Constituent Charts

Many of the constituent charts continued in bullish runs during the past week and some of the bearish indications seen in the past week have faded.

Some of the constituents that pulled back from resistance broke resistance in sudden moves higher.

For the most part the indicator stocks that failed to rebound from recent lows rebounded at least somewhat higher in the past week. Although some others that had rebounded returned to or near previous lows fairly quickly in the past week.

The numbers of constituents in or near fully overbought has diminished.

Yet some indications that a further drop could be forthcoming remain.

The numbers of constituents that were in bullish runs and failed to reach a higher high in recent rebounds and have since fallen to a lower low afterwards is increasing. Some have broken below support levels in falls. Some appear to be establishing downtrends.

Many of the constituents are in or near overbought conditions, but the numbers have diminished during the past week, and many that have dropped are nearing oversold. There are still reasons to be cautious, but it seems possible stocks could rebound in the week ahead.

Indicators

The +/(-) 90 D, (-)/+ 90 D and MRL indicators are currently active. See a more detailed description of the indicators developed through research here.

Most indicators suggest that volatility could remain calm for the time being and low volatility is most often bullish. The activation of a 90 E is nearing and this indicator is often active during volatile conditions. The presence of this indicator will also activate other indicators which show an increasing chance of volatility.

The +/(-) 90 D indicator that became activate on Oct 7, 2013 will expire in 24 trading days and a 90 E will become active in 11 trading days. The +/(-) 90 D has performed as follows to this point in the format: highest close / lowest close / last close.

+10.28% / -1.23% / +9.92%

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% / -1.51% / +2.21%

The S&P 500 retested the support of the upper boundary of the 100 L found at 1825 again on Monday. The drop breached 1825 as the low reached 1823.73. Although near the lower levels of influence, the turn higher was within the influence range of upper boundary and the rebound closed above it at 1826.77. This indicated continued bullish support at this level and Tuesday rebounded strongly off this support, but the rally seemed to lack follow through as Wednesday finished slightly lower, Thursday finished only slightly higher and although Friday ended with a fair gain it spent the day see-sawing between gains and losses.

The bulls and bears appear to be in a tug of war and it appears the bulls are currently winning as they have maintained mostly bullish trends in the charts. Since the bulls appear to be winning this round, it seems possible the index could rebound and push higher into the MRL resistance. If this resistance holds and turns the index lower again, the fall could fracture the weakened support at the upper boundary of the 100 L. A drop through that support probably gives the bears the upper hand.

Current Cautions

The index appeared to find initial resistance near the 1850 lower boundary of the likely resistance of the MRL from 1850 to 1865. Since the initial turn back from the Dec 31 intraday high of 1849.44, the index has twice found bullish support within the upper boundary of the recently broken 100 L. It appears this support sustained substantial weakening in this week’s retest, nearly breaking below the influence level of this support. It therefore seems possible this support could fail in a future retest.

It continues to seem fairly likely the MRL could cause a significant pullback. If this pullback is seen, it seems fairly likely it could be a round of profit taking, with the drop likely to remain within the 3% to 5% range. The index has entered a timeframe that is more susceptible to a letdown, so it seems possible that if a significant drop develops, it could carry the price down near the lower portion of this projection.

Please note there is no established resistance at the MRL levels; the index has not reached these levels before. They are 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.

The index charts continue to show mostly bullish tendencies, but some subtle signs that the pullback could continue deeper are noticeable including signs of topping in the index charts and several of the constituent charts. The indexes are still near overbought as are many stocks.

Volume increased strongly again this week, but the price move higher seemed small in comparison.

Most indicators continue to suggest volatility could remain calm for the time being. The activation of a 90 E is nearing and this indicator is often active during volatile conditions. The presence of this indicator will also activate other indicators which show an increasing chance of volatility. Although this volatility is not a certainty, indicators seem to suggest that a more volatile timeframe could be nearing. If this volatility is seen, it seems fairly likely that it could last for relatively a 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.

The +/(-) 90 D indicator that became activate on Oct 7, 2013 has reached a level that seemed likely before seeing a pullback when this indicator first became active.

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

As noted in last week’s article; the source normally used for volume data, Yahoo Finance, did not include the volume levels for the S&P 500 for Monday Dec 30, 2013 and has not updated the omitted values. Data from alternate sources were used to calculate an estimated volume of approximately 2.295 billion at that time and this estimate was used in the comparison data of last week. Although this estimate seems to fit normal patterns, due to differences in the data used for estimation, this estimate could be significantly different than the actual volume seen on Dec. 30.

One of the new and untested indicators unveiled after the index reached a new all-time high, the Midrange Resistance Level (MRL) indicator, has shown some potential. The first few instances the MRL indicator has been used appear to have been fairly accurate in showing the potential price range of unestablished resistance levels in the S&P 500. The charts clearly show resistances were met very near or within price ranges established by the MRL’s used to this point. Although a few correct instances are not enough to give this indicator a passing grade, and the MRL has not yet been credited with a significant pullback, the MRL is showing some merit.

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

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Have a great day trading,
ronz

See all of Ron’s past articles.

Disclosure: Ron is currently about 87% invested long in stocks in his trading accounts. The increase in his investment level over the past week was due to the purchase of one issue and monthly dividend reinvestments made into one issue with the cost of these purchases partially offset by 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. He will also continue to add stocks he feels are at a great value through a variety of buy orders. He will receive dividend payments from 13 issues in the coming week and six in the following week. If no further investment changes are made during this timeframe 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. Ron’s yearly review of investments shows that the repositioning activity in the latter part of the past year reduced gains seen prior to this activity. Although some of the repositioning activity reduced potential returns for 2013, he believes that over the long haul this repositioning will likely provide better returns. He therefore has decided to continue with these activities.

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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