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Stock market preview for the week of January 20, 2014

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The S&P 500 slipped lower in three sessions during the past week and finished with a 0.20% loss. The index has finished lower in nine of the past 15 sessions.

The index pushed below support found at the upper boundary of the 100 L at 1825 on Monday instead finding support at a lower resistance that turned support at 1815. The rebound again acted bullishly and the index pushed to a new record high; however it fell immediately off this high during the next two trading days to finish lower for the week. The break of support at the upper band of the 100 L is also a somewhat bearish indication.

The average daily volume increased 2.67% over the previous week’s average. Volume was weakest on Tuesday, and Wednesday again had the strongest volume. During the past week the five day volume variance continued to be low with a difference from high to low volumes of 12.66%. The higher volumes have continued to be very steady during the past week. The index has finished above the 13 DMA for volume in ten consecutive sessions.

Major Stock Market Indexes

The index charts of the Dow Jones Industrial Average, S&P 500, NASDAQ, New York Stock Exchange and Russell 2000 were mixed during the past week.

The S&P 500 and Russell 2000 pushed to new all-time high closes during the week and the NASDAQ reached a new 52 week high. Both the Russell and NASDAQ finished the week with gains, while the S&P immediately slipped off this high to finish lower for the week.

The NASDAQ and Russell have the most bullish looking charts this week. The NASDAQ has pushed higher and very near the upper trend line of the previous up trend. The Russell also pushed higher near the previous upper trend line of its previous trend.

The other three index charts continue to be very flat giving them a toppish look.

The Dow Jones and NYSE have the least bullish looking charts. Both failed to push to new highs and continued to trade very flatly. The Dow Jones finished the week higher, but the NYSE lost ground. Both of these charts continue to show somewhat bearish failures.

All but the S&P 500 finished the week higher in three of the five sessions, as the S&P fell in three.

All of the indexes broke and closed below the 13 EMA on Monday and all but the Dow rebounded to close back above it on Tuesday. The Dow managed to regain this level on Wednesday but spent parts of every day this week below this level. The S&P 500 held above this level until falling back to it on Friday, but rebounded off it to close back above it. The other indexes have maintained bullish stances above this level since regaining it on Tuesday.

The NASDAQ and Russell are nearing fully overbought with bullish runs higher; however the S&P 500 and NYSE are nearing overbought in very flat trends and this is a somewhat bearish indication.

Some of the charts are showing strength returning to bullish stances, while others continue to show some weakness and give some bearish indications. Indicators suggest a more volatile timeframe could be approaching. They also suggest a deeper pullback on the indexes is still possible. The charts continue to make it seem possible the indexes could slip deeper than they have so far. With several of the charts continuing to show weakness and the nearing of possible volatility, some added caution might be prudent.

US Treasury Charts

The 20 year US Treasury Note price pushed higher in three of five sessions this past week, and appears to have established an uptrend. It has finished six straight sessions above the 50 EMA, falling below it briefly once since the initial break above it on the previous Friday. The 13 EMA is nearing a bullish cross of the 50 EMA. It has finished higher in eight and even once in the past 12 sessions. The run up appears speculative and probably has made treasuries overpriced to likely future FED action, so it continues to seem fairly likely the run could eventually fail. Treasuries are also nearly fully overbought, so a pullback is not unlikely. Just the same it seems possible the overall move higher might continue for a little while longer.

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

The 10 year US Treasury Note interest rate slipped in three trading days this past week. It fell to and bounced higher off the 50 EMA Monday, but the rebound stalled bearishly at the 13 EMA on Wednesday and it slipped back to the 50 EMA on Friday before bouncing slightly higher into the close. This chart appears to have established a downtrend. The Ten Year rate chart has reached fully oversold. Although this chart has taken on a somewhat bearish appearance, it seems likely it will eventually rebound from this drop. It doesn’t seem likely this trend will continue for too long, but it does seem possible that US Treasury rates could continue lower in the short term.

Gold

Gold traded fairly uneventfully between 1245 and 1255 from the open on Sunday until midway through Tuesday’s New York session. It began trending slowly off a 1253 high until it reached 1251 over an hour later, then dropped sharply to about 1242 within 15 minutes. It trended lower in a bouncing pattern from there until reaching about 1234 about two hours after the New York open on Wednesday. From there it trend back to about 1242 and again traded fairly uneventfully between 1237 and 1244 until Friday. It began a rebound at about 1238 in London just before the New York open that carried the price back above 1255 by about mid-session. The price went flat again and traded between about 1252 and 1255 into the New York Spot close of 1254.30, which was higher than last week’s close of 1248.60.

The whipsaw movements seen in the previous two weeks have subsided for the time being; however there was a break lower this past week much like that seen when these whipsaw patterns are present. This time it rebounded relatively quickly, after only a couple days, but many times failures off whipsaw patterns produce longer term breaks lower.

Gold’s rebound from the recent whipsaw failure is viewed as somewhat bearish for stocks.

S&P 500 Constituent Charts

Many of the constituent charts have continued in bullish runs during the past week, but more in these runs are starting to show signs of rounding out of these runs.

Several are showing flatting at recent highs. Several have continued higher, but their charts show a rounding pattern in these runs. Some have pushed to slightly higher intraday highs in several sessions, but finished all these sessions at losses. Several in bullish runs are seeing an increased frequency of breaking below the 13 EMA. Some have recently fallen below the 13 EMA and are now being pushed lower by it. Others have failed to push to new highs in one or more retests and fallen to a lower low in a subsequent pullback.

More have fallen through support levels in the past week. Several stocks that had failed in runs earlier have established downtrends. Several are testing or have broken below the 50 EMA and some have broken deeply below the 50 EMA. Some have fallen steeply due to lowered guidance or earnings misses and continued rather steeply lower.

Failures are not only increasing in stocks that are in runs, some stocks that have trended more or less sideways for a long duration broke below long term support and to lower lows in their last retreat.

Many of the indicator stocks that rebounded higher in the past week have broken lower since. With the addition of several dropping to lows in the past two weeks and maintaining near lows, failures in these stocks are becoming more pronounced, reaching levels of concern.

The constituents near highs have shown deterioration in price since the Dec 31, 2013 high. Please note the following comparisons omit the price data for:

Teradyne Inc. (TER), Abercrombie & Fitch Co. (ANF) and JDS Uniphase Corp. (JDSU) in the Dec 31 data and Facebook Inc. (FB), Alliance Data Systems Corp. (ADS) and Mohawk Industries Inc. (MHK) from the Jan 18 comparison data due to being late in updating these Dec 20, 2013 changes to the index for the Dec 31 data download.

On Dec 31, the average of all the remaining 497 constituents from their 52 week high was 5.25%. By Friday the average had fallen to 6.42%.

On Dec 31 there were 159 less than 1% from a 52 week high, 222 less than 2%, 255 less than 3%, 318 less than 5%, 391 less than 10% and 475 less than 20%.

On Friday there were 68 less than 1% from a 52 week high, 136 less than 2%, 193 less than 3%, 261 less than 5%, 368 less than 10% and 464 less than 20%.

This data clearly shows the constituents nearer to highs are slipping lower, and reflects what the charts appear to be showing.

On Dec 31, the average of all 497 remaining constituents from their 52 week low was 41.54%. On Friday the average had fallen to 38.82%.

On Dec 31 there was 1 less than 1% from a 52 week low, 3 less than 2%, 11 less than 3%, 21 less than 5%, 57 less than 10% and 112 less than 20%.

On Friday there were 2 less than 1% from a 52 week low, 5 less than 2%, 12 less than 3%, 24 less than 5%, 62 less than 10% and 136 less than 20%.

Again, the small increase in those near lows indicates the pullback to this point was seen in stocks that have run nearer to highs, indicating this pullback is top down. This would indicate profit taking in the high runners.

Since the un-weighted closing prices of the 497 constituents finished only 0.14% below the Dec 31 high on Friday, some price deterioration would be expected in stocks near highs, but the un-weighted price decrease is very small in comparison to the upper end drop, again indicating profit taking is probably underway.

An un-weighted one month price chart of the S&P 500 can be viewed here.

These numbers suggest the staggering pattern is working to reduce the index’s decline. The charts show some stocks have established uptrends fairly recently at or near 52 week lows or off other support levels and appear to be maintaining these runs higher. It isn’t unlikely that many of these stocks would continue higher in an overall index pullback, many have in the past. In the event of a further pullback, this could help to buffer the drop. This coupled with the fact it appears to be a round of profit taking, makes it look likely a pullback probably would not exceed 5% on the index if it should continue lower.

The price data along with the current chart formations make it look possible that more will retreat than continue higher in the short term. It seems likely the majority of these pullbacks could come from the stocks near highs. If so, the higher numbers in retreat will probably pull the overall index price down with them.

A better data comparison would have been from Wednesday’s record high close, unfortunately this data was not downloaded; however the charts indicate a similar deterioration of prices at the high end of the scale into Wednesday’s highs. Although not as pronounced as that seen on Friday; the charts make it seem likely that comparison would have shown a substantial decline in the high end stocks too.

Although many of the constituents have continued in bullish runs, overall the charts appear to indicate a deeper pullback in the index price might be underway.

Indicators

The +/(-) 90 D, (-)/+ 90 D and MRL indicators are currently active. Due to indicators, recent chart formations and the relative closeness of the 90 E becoming active, the -2% L and +2% L have activated early. See a more detailed description of most the indicators developed through research and featured in these articles here.

The activation of a 90 E is very near and this indicator is often active during volatile conditions.

The 90 E indicator sometimes acts prematurely or is tardy. As a result occasionally volatile moves are seen outside the normal timeframe of this indicator. The indicator’s active timeframe encompasses the greatest number of instances of volatility as possible while trying to maintain the shortest timeframe.

The indicator was expanded from the original 12 days before and after an expiration of a 90 D or 9 day indicator to the current +/-13 days due to several occurrences a day before or a day after the original timeframe was established, along with several past occurrences. However there are other instances when volatile moves are seen within a few days before this indicator becomes active or a few days after it has become dormant.

Since indicators continue to suggest a significant drop on the S&P 500 is fairly likely and several recent chart formations seem somewhat bearish, the -2% L and +2% L indicators have been activated early due to the possible of an early appearance of volatility. Both 2% indicators are in a low state at this time, meaning that there is a higher risk of volatility than normal, but the chance of a volatile move is less likely than when these indicators are in a high state. If market conditions warrant, they could change to a high state later.

The +/(-) 90 D indicator that became activate on Oct 7, 2013 will expire in 19 trading days and a 90 E will become active in 6 trading days or on Jan 28. The +/(-) 90 D has performed as follows to this point in the format: highest close / lowest close / last close.

+10.28% / -1.23% / +9.70%

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% / +2.01%

The S&P 500 again retested the upper boundary of the 100 L found at 1825 in the drop on Monday. The low Monday reached 1815.52 and broke fairly deeply below the normal range support is found around support levels. It instead rebounded off an earlier resistance found within the 100 L. This indicates the upper boundary support of the 100 L has been broken.

The rebound off support found at an earlier resistance within the 100 L again pushed bullishly higher on Tuesday and Wednesday. Wednesday’s rebound carried the index to a new intraday day high of 1850.84 and slightly higher into the MRL before slipping to a new record high close of 1848.38, just $0.02 above the previous record close on Dec 31, 2013. The pullback from within the MRL resistance continued through the remainder of the week and the index finished at a loss for the week.

Again the rebound seemed to lack follow through. Although the index rebounded fairly bullishly for two days and reached a record high, the following two days dropped and wiped out the gains for the week.

In the event of a future pullback the break of the bullish support level at the upper boundary of the 100 L is a bearish indication. The failure at this support level probably gives the bears the upper hand to drive the index price lower still if support at 1815 is retested.

Lower resistance levels will likely offer temporary support, but it seems possible solid support might not be found until the second MRL in the 1700s level seen at 1760 to 1770, with alternate support being seen at the first 1700 MRL at 1735 to 1745 or possibly 1750. There continues to be a conflict over the upper boundary of this resistance/support level.

Current Cautions

The current conditions and chart formations appear to warrant a little extra caution for the time being.

The third retest of support in the upper boundary of the 100 L broke through this support level. Each test fell deeper and the third test broke considerably below this support level. The break of this support level is a somewhat bearish indication in a future pullback. Even though the index rebounded rather bullishly off a lower resistance turned support in the rebound from the 100 L, the break of the bullish upper resistance band of the 100 L probably gave the bears the upper hand in pushing the index price lower if a retest of the 1815 support is made.

The rebound from earlier resistance at about 1815 pushed bullishly higher to an intraday record high and close Wednesday, but slipped back off these highs during the next two sessions and the index fell to a weekly loss. The run again seemed to lack follow through as it lost its legs quickly and failed to maintain gains above those seen before Monday’s break lower.

It continues to seem fairly likely the 1800 level MRL at 1850 to 1865 could cause a significant pullback. Recent chart formations seem to indicate this pullback could be underway.

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. It seems possible the next solid support level might not be found until the second 1700 level MRL seen at 1760 to 1770, with alternate support being seen at the first 1700 level MRL at 1735 to 1745 (or possibly 1750).

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.

Although it looks possible earnings could set another quarterly record in the fourth quarter, there are likely some bumps along the way. Some of the bumps have already surfaced, but there are likely to be others later. These fourth quarter earnings bumps could add to investor anxiety.

Earnings levels normally drop in in the first quarter as it is the earnings offseason for many businesses, and these seasonal earnings changes will likely be seen in guidance given in upcoming reports. This “softness” is often misread as signs of weakness. As a result investors tend to become more cautious early in the year and are easily spooked.

The indexes rebounded bullishly on Tuesday, but three of the five lacked follow through and their charts continue to show bearish signs. Several of the constituent charts that had showed topping patterns earlier have since established downtrends.

Most of the indexes are in or near overbought levels and some have remained rather flat while nearing overbought levels, which is a somewhat bearish indication.

The indexes that did push bullishly higher are near their upper trend lines. Although they could continue higher tightly to these trends, they could also pullback.

Volume increased a little again this past week and maintained a low variance, being a somewhat bullish indication.

The activation of a 90 E is near and this indicator is often active during volatile conditions.

Due to the indicators, recent chart formations and the relative closeness to the 90 E becoming active, the -2% L and +2% L were activated early.

If this volatility is seen, it seems fairly likely that it 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.

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.

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.

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 has no investments in TER, ANF, JDSU, FB, ADS, or MHK. Ron is currently about 85% invested long in stocks in his trading accounts. The decrease in his investment level over the past week was due to the sale of two 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. 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 six 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.

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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