Here is the preview of the coming week on the S&P 500 from Traverse City, Michigan.
The S&P 500 fell in three of the five trading days this week, but still managed to finish the week with a 0.38% gain. The index has closed higher in five of the past nine sessions.
Alcoa (AA) reported earnings after the close on Tuesday and beat the current estimates slightly. Alcoa is the first Dow Jones Industrial Average component to report and this report has traditionally been referred to as the “unofficial kickoff of the earnings season”.
The news continues to downplay the current earnings season, yet all five of the S&P 500 constituents that reported in the past week, beat the estimated earnings. Many reports point to earnings expectations that were lowered in the past couple months, but most of the 24 S&P500 constituents that I have seen fourth quarter earnings for, have beaten the estimates from two months ago.
The early reports had been fairly weak in the past couple quarters, but they have been much stronger this quarter. It is too early to tell for certain, but early indications would point to this quarter shaping up to be another record earnings quarter based on the un-weighted operating earnings of the current constituents. Not all are doing well, but even those that were expected to do poorly, are doing better than expected.
So far earnings reports have been fairly sparse, but the pace will pick up beginning next week. A good week of reports could get stocks moving sharply higher again.
Major Stock Market Indexes
The five major stock market indexes, the DJIA, S&P 500, NASDAQ, NYSE and Russell 2000, continued to show bullish tendencies in the past week.
All pulled back slightly early in the week, but have since rebounded to a higher high. All remain very close to the upper trend channel of their uptrends. The NYSE has continued to trade very tightly against this trend line, with the rest trading somewhat lower than this trend at the moment.
The DJIA and NASDAQ continue to lag in this rebound and have yet to capture new 52 week highs, although they continue to close the gap. The NYSE, S&P 500 and Russell 2000 pushed to new 52 week and five year highs during the week.
If earnings reports over the next couple weeks continue to beat estimates at the high rates they have to this point, the indexes are likely to continue to move higher tightly against this trend line or possible even break above it. Although the media continues to harp on poor forward guidance, I have not seen much in the reports I have looked over or listened to. Most point to either a rebound or bottoming in Europe and a rebound in China while they continue to set records elsewhere.
Most companies also continue to report records in business matrixes in these reports, including records in revenues, sales, earnings, booked or backlogged business, cash flows, cash balances, savings deposits, etc. Most are guiding for increases on these records. I just don’t see the red flags the media is pointing to. I’m not saying there are not a few that are pointing to some trouble, but most are not.
Most have added some kind of cautions to these statements, but the overall trend in economic data make these cautions look soft. The potential is high that most will continue to do well with earnings based on those earnings reported late in the third quarter or early in the fourth quarter and the business interconnections that can be drawn from these reports. If most of the companies continue to do well, the indexes are likely to continue higher.
Not all are going to do well, but many that aren’t expected to do well are probably going to do better than expected too. Several have already provided early guidance leading to these ends.
Again the indexes and many stocks have become overbought in this run and it has taken the indexes and many stocks to levels that a pullback might be seen at, so a pullback does not seem unlikely. However if earnings continue to do well, with most stocks still far below even value, there is potential for this run to continue trading tightly or even above the current upper trend lines for some time to come.
Overall the indexes continue to look bullish and strengthen bullish tendencies. At this time it seems likely the indexes will continue to hold in or near overbought for extended timeframes. Pullbacks could remain light for the time being. Drops near or even above the 13 EMA are probably buy signals.
S&P500 Constituent Chart
The constituent’s charts show that most of these stocks are in established uptrends with very bullish tendencies.
We continued to see strong resistance breaks in several constituent stocks with some of these breaks leading to new 52 week highs. As stocks break above resistance levels, others run up to test previous resistance levels, renewing the batch of stocks pushing against resistance. It continues to look likely more stocks will break above resistance in the week ahead.
Not all that are reaching resistance are breaking directly through these resistance levels, but many are, and many that have broken through resistances in the past couple weeks have moved very steeply higher. Several that failed in a recent retest earlier, retreated and rebounded through these resistances in a later test.
During the past couple weeks we have also seen a fairly large number of stocks that have made triple, quadruple, or quintuple (or even higher) top breakouts. Many of these resistance levels have held firm for well over a year. The large number of long term resistance breaks is a good sign the indexes are ready to move higher.
The recent pullback was fairly shallow in many of the constituent stocks, leading to a higher low. Many have also already rebounded to a higher high, continuing this bullish pattern. Many also continue to trade tightly higher on their upper trend lines.
Most but not all the constituent stocks are in uptrends, some have continued to fall and some look like they might begin to trend lower. Several have recently broken from downtrends and began to trend higher to cover those that might retreat here. This is part of the staggering pattern, a tradeoff in a portion of the stocks between uptrends and downtrends. Those that downtrend often turn back higher later from a level higher than the fall previous to it, and those that uptrend often push to high higher than the previous uptrend. This tends to push the overall index price higher, even though stocks are rising and falling during the uptrend.
Although the index only moved slightly higher in the past week, overall the constituent charts continue to look very bullish. It continues to seem likely stocks will move higher in the weeks ahead.
The -2% H (precautionary), 90E and +10D indicators are currently active. A +10E will become active at the market close on Monday. See a more detailed description of the indicators I have developed through my research here.
The -2% H (precautionary), indicator did not provide a correct indication in the past week. It continues to look unlikely that we will see a downward move of this proportion in a session.
The 90E will expire with the close on Thursday.
The +10D indicator that toggled high on Dec 28, 2012 will expire with the market close on Monday. The +10E indicator will toggle on as the +10D toggles off. The +10E indicates that it is likely there will be a continuation run after the +10D expires. The +10D indicator has so far fallen just of providing an indication of a 5% move higher, to this point it has performed as follows in the format: highest close / lowest close / last close
+4.97% / 0.00% / +4.96%
Lowest close only considers closes lower than the starting date, if none are lower it is reported as 0.00%.
The S&P 500 has slowed its assent slightly just prior to reaching the lowest levels of the 1515.96 and 1520.27 drop resistances with both found at about 1475. Although we have seen a slight slowing, overall it continues to look likely this resistance level will remain light.
The depth of the fall from this level generally causes many holding S&P 500 index funds to drop out at some point in the fall, so the numbers holding funds at this level are much lower than seen at resistance levels reached earlier in the rebound. This generally makes the upper drop resistance levels weaker, and usually reduces the depths of falls seen at these levels. The early significant pullback, and the later scare during the tax selloff after the elections, probably set many of those that remained holding for a rebound to this level for the exits, reducing the remaining resistance.
Many of the constituent stocks in the index at that time have surpassed the levels they fell from during this pullback long ago. Most of the relatively few that have not are still far from the resistance levels that will be found at these levels when reached. These factors also substantially reduce the potential resistance at this level as we reach it.
Many of the constituents are also currently breaking through short or long term resistance levels and stocks generally tend to trend higher after resistance breaks. Some of these long term resistance breaks were from higher levels than those the constituents held at the pullbacks from the 1515.96 and 1520.27 drop resistances and these breakouts have moved substantially higher. This would indicate stocks are likely ready to move higher.
The earlier significant pullback that fell from levels prior to the lows of these drops makes it look like the bulk of the remaining resistance is concentrated low in this resistance level, probably with buyers that added the lower drops seen in the few days following these pullbacks. This could make the internal resistance within these drops extremely light, meaning the index could move from a break above the resistance seen about 1475, to the upper resistance levels at or above 1515.96 and 1520.27 very quickly, possibly in a day.
Current Cautions
We are again nearing the 1515.96 and 1520.27 drop resistances. The recovery from the significant drop caused by these resistances levels makes it extremely likely these resistances will fall during a continued rebound. Although the index will probably not push directly through these resistances, there is very little chance they will cause another significant pullback (one of 3% or greater).
A 90E indicator is currently active. Although this indicator was present during bearish periods in most of my past articles, indicators continue to point to a bullish run in this instance.
Many of these sources of information were used in this article.
Have a great day trading,
ronz
Disclosure: I have investments in AA. I am currently about 94% invested long in stocks in my trading accounts. I am also short 20 year US Treasuries. During the past week I purchased one issue with the cost of this purchase nearly fully offset by the proceeds from the sale of two issues and dividend payments, leaving my investment level virtually unchanged from that of a week earlier. I continue to plan to offset sales with purchases relatively quickly and continue to look at new issues to expand my portfolio. I will receive dividend payments from 11 issues in the coming week and 3 in the following week, if I make no further investment changes during this timeframe, these dividend payments will not change my investment level.
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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