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Stock market preview for the week of January 27, 2014

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The S&P 500 slipped lower in two sessions during the holiday shortened trading week and finished with a 2.63% loss. The index has finished lower in 11 of the past 19 sessions and three of the past four weeks. With Friday’s close the index has retreated 3.14% from the record high close seen on Jan 15, reaching a significant level (that of 3% or greater) as the MRL indicator suggested was likely earlier.

The bulk of the week’s losses came in the volatile 2.09% pullback on Friday. As a result the -2% L indicator that activated at the close of last week was correct in suggesting the heightened possibility of a 2% or greater drop on the S&P 500 within a session.

The last volatile move, that of 2% or greater in a session, was seen on Oct 10, 2013 when the index climbed 2.18% higher in a session. The last volatile move lower was seen on June 18, 2013 when the index slipped 2.50% during the session. As can be seen in the Indicators section of past articles, both of these moves were also suggested as likely prior to their occurrence by the +2% and -2% indicators, as have most of the other volatile daily moves seen over the past three years.

The index pushed below support found at prior resistance within the 100 L at 1815 on Friday and into the lower level of 100L resistance range. It continues to seem 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 average daily volume increased 10.33% over the previous week’s average. Volume was weakest on Wednesday and that snapped a 12 day run of volumes higher than the 13 DMA. As is often the case, Friday’s volatile pullback had the week’s strongest volume. The five day volume variance also reflected the recent volatility as the difference from high to low volumes jumped to 36.88%.

Although both Thursday’s and Friday’s volumes were larger, the rebound Monday had the highest volume seen in 18 sessions. Although the bears appear to be winning the current battle, the bulls had not jumped ship. It continues to seem likely the current pullback is a round of profit taking, and the drop will probably remain within or near the 3% to 5% range. It also seems fairly likely the fall could continue closer to the 5% range before rebounding.

Major Stock Market Indexes

The index charts of the Dow Jones Industrial Average, S&P 500, NASDAQ, New York Stock Exchange and Russell 2000 all fell steeply Friday. The Dow Jones was the only index not to finish the session with a loss greater than 2%, as it finished the session just under with a 1.96% drubbing.

Even after dropping 2.15% for the session Friday, the NASDAQ chart maintained a very bullish appearance. The pullback fell through the 13 EMA, but stopped well above the 50 EMA and fairly far above the lower trend line in its push higher after taking a steeper rebound path last April.

The Russell had the day’s largest percentage drop at 2.41%, and fell through the 50 EMA, but rebounded to close nearly at this level. In doing so it maintained within the steeper uptrend it established last April and still has a mostly bullish looking chart.

The S&P 500 finished Friday’s session with the second lowest loss at 2.09%, but slipped and finished fairly deeply below the 50 EMA. Depending on the choice of trend lines, the S&P has either broken below or is resting on the lower trend line. Although it has possibly broken trend, the chart still looks somewhat bullish.

Even though the Dow finished with the smallest loss on the day Friday, it fell rather deeply below the 50 EMA in this drop. The NYSE slipped 2.29% on Friday and also dropped deeply below the 50 EMA. Both of these indexes have broken below the lower trend line in previous trends higher and continue to have the most bearish looking charts.

Although the indexes dropped rather steeply over the past two days, they are not yet oversold leaving the potential for additional downside. However, it does not seem too unlikely they could begin to rebound in the not so distant future.

US Treasury Charts

The 20 year US Treasury Note price pushed higher in three of four sessions this past week, with Thursday running steeply higher. It finished Friday above the Sept 25 high of two rebounds ago, but below the last high on Oct 23. It seems likely it could begin to find resistance near or within the current price range. Treasuries are also fully overbought, making a pullback likely. The 20 year price may continue higher after this pullback, but since upside looks limited, it seems doubtful. Although the chart looks bullish, the price appears to have run well above levels one might consider reasonable for likely future Fed actions. The Fed is likely to announce a further reduction in bond purchases in the coming week, regardless of short term price direction; the reduction or planned reduction in these purchases is probably good reason to shed long term treasuries.

The recent bullishness in US Treasury prices is somewhat bearish for stocks, but these runs appear close to likely turning points lower.

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 Tuesday, but the rebound stalled short of the 13 EMA on Wednesday. It slipped steeply below the 50 EMA Thursday continuing lower still on Friday. The drop brought the rate to the lower trend line in the recently established downtrend and the Ten Year rate chart is fully oversold. The chart makes a rebound in rates look likely in the week ahead. It does not seem unlikely a trend reversal taking rates higher again is probably not far away.

Gold

Gold began Sunday night with a quick push to 1260 shortly after the Sydney open, but it slipped from this high and traded flatly between 1258 and 1254 until shortly after the Sydney open on Monday night, where it began to trend lower from about 1256. This drop steepened late in Hong Kong trading Tuesday morning before leveling out briefly after the London open, but then continued in a steep retreat into New York trading reaching a low of about 1236. It gradually rebounded to about 1245 before the New York close and traded uneventfully between there and 1239 until it began another break lower late in the New York session from about 1240 on Wednesday, the fall leveled off during trading in Sydney at about 1237, but dropped again into the Hong Kong open reaching a low of about 1232 late Wednesday night. It traded between the low and about 1238 until it began to rebound strongly shortly after the Hong Kong close Thursday during London trading. This rebound continued steeply into the late London and early New York trading reaching about 1266, after falling briefly to 1258, it leveled off between 1262 and 1266 into the New York close. It fell to about 1260 Thursday night during Sydney and Hong Kong trading then traded between 1259 and 1261 until after the Hong Kong close Friday. It again rebounded steeply to about 1272 during London trading, but slipped slowly to about 1261 after the New York open before rebounding gradually to a New York Spot close of 1268.90, which was higher than last week’s close of 1254.30.

Gold has rebounded to near a level that could provide resistance, and it does not seem unlikely this resistance will turn gold lower again.

The news keeps telling of the increases in Asian gold interest siting increased purchases in China, Japan, Korea, etc. Other than a few short, well planned and highly publicized blips higher here and there during Asian trading, the charts continue to show little evidence that there is much buying going on in Asia. Nearly all major price moves higher are originating during New York and London trading while many of the price pullbacks are originating or occurring during Asian trading.

It looks like some in US and UK are buying the media hype, but the charts continue to show the Asians appear to be mostly taking profits on these run ups, not fueling these rallies.

S&P 500 Constituent Charts

Many of the constituents took substantially pullbacks in the past week. The charts continue to give signs this was a round of profit taking.

Most moves lower accelerated into the final two trading days of the week, but several saw the falls they were in prior to this diminish into these two days, giving the appearance they could be starting to round out of these falls.

Although many of these charts appear to have potential downside left and some look like they have begun a downtrend that could carry their prices lower even into an overall market rebound, quite a few look to be in or near areas that they are likely to rebound from.

Many of the constituents maintained within up trends in the recent fall. Many that did not are not very deep below previous trend.

Many that have begun rebounds after long falls look to be continuing these moves higher.

Most of the constituents moved lower in Friday’s fall. Based on the constituent price data downloaded after Friday’s close, 481 constituents dropped shedding 2.41% of their un-weighted and unadjusted share price. The constituent’s shed 2.69% of their un-weighted and *unadjusted share price during the past week based on the data downloaded last week.

*Mastercard (MA) share price for Jan 17, 2014 was adjusted for the recently completed 10 for 1 split, but this data was not handled in other manners consistent with un-weighted S&P 500 indexes. Please note all current un-weighted index versions of the S&P 500 are adjusted due to the frequent and numerous changes to the index constituents. Charts of these un-weighted index versions will be very close to the actual un-weighted price action of the index, but they will not move exactly to the actual constituents due to these adjustments.

A look at the sector’s performance over the past week and on Friday is as follows in the format:

Sector: Weekly Percentage change / Friday’s Percentage Change

Energy: -1.38% / -2.11%

Materials: -4.39% / -2.77%

Industrials: -4.39% / -3.53%

Consumer Discretionary: -2.06% / -2.03%

Consumer Staples: -1.61% / -1.02%

Health Care: -2.35% / -2.75%

Financials: -3.39% / -2.37%

Information Technology: -2.34% / -2.59%

Telecommunications Services: -2.55% / -1.51%

Utilities: -0.45% / -1.29%

These drops are not uncharacteristic of those seen during normal profit taking. Although not always the case, the sectors that get hit hardest in pullbacks often rebound the strongest in a rally higher.

Many of the constituents are oversold, but many are not. Some look like they could continue to hold in or near overbought even into a further pullback. Charts are showing signs that the fall might be near a rebound, however it looks like the index might continue a little lower first.

Indicators

Although the indicators featured in these articles are not always correct, they many times and being so they are worth reading about and taking note of.

The +/(-) 90 D, (-)/+ 90 D, MRL, -2% L and +2% H indicators are currently active. The 90 E will become active on Tuesday. See a more detailed description of most of the indicators developed through research and featured in these articles here.

The 90 E will become active on Tuesday and this indicator is often active during volatile conditions. As explained in last week’s article, these volatile conditions are sometimes seen early, as was the case in this instance as Friday’s fall of 2.09% reached volatile levels a couple days before this indicator became active.

The 90 E indicator is also known for a high occurrence of market price direction changes while it is active. In order to be considered a market direction change the index price must do one of two things. Fall to a significant level, meaning the difference between the highest closing price and the lowest closing price must be 3% or greater lower. The drop from the Jan 15 high was a market price direction change lower, since the lowest closing price seen on Friday is over 3% lower.

The other price direction change happens when the index recovers from one of these significant drops, in order to recover from a significant drop the index must close at a price equal to or greater than the highest close it fell from. Market price direction changes higher are most often bullish, as the index normally continues higher after a recovery from a significant drop. It continues to seem fairly likely this direction change higher could occur in this instance during this indicator’s presence.

The +/(-) 90 D indicator that became activate on Oct 7, 2013 will expire in 15 trading days and a 90 E will become active on Tuesday. The +/(-) 90 D has performed as follows to this point in the format: highest close / lowest close / last close.

+10.28% / -1.23% / +6.81%

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% / -0.68%

The S&P 500 again retested the lower boundary of the MRL at 1850 in Tuesday’s rebound, but the intraday high was turned back at 1849.31 within the influence of this resistance range but below the previous high. The index again began to slip back from this resistance. Although it finished Wednesday with a slight gain after trading in a fairly narrow price bandwidth, the intraday high only reached 1846.87. Thursday’s move lower became more pronounced with Friday’s 2.09% drop reaching a volatile level.

Friday finished at 1790.29 and at session lows. Friday’s closing price does not seem like a likely support area, as it has not offered support in the past. The closest area were resistance had turned to support in the run higher was near 1770. Resistance turned support was also seen near 1760, 1750 and 1745. One of these levels would seem a more likely turning point higher than Friday’s close.

The recently activated -2% L had a correct indication in the past week as Friday closed 2.09% lower. Although this volatile move lower was seen before the 90 E became active, it seems possible that volatile conditions might be relatively short lived. The chances of another move lower of these proportions in a session seems remote at this time, yet not impossible. This indicator will deactivate with the 90 E expiration, unless future market conditions hold it open longer.

The +2% L indicator did not provide a correct indication during the past week. The large drop Friday opens the possibility of an offsetting move of 2% or greater higher and increases the chances that a move of this proportion might be seen significantly. As a result of this higher likelihood, the +2% indicator moved to a high state (H) of likelihood. This indicator will stay in this high state until a move of 2% or greater is seen or for 30 trading days, the timeframe when most offsetting moves are seen. Depending on the circumstances surrounding the change on the indicator and current market conditions at the time, the indicator could fall to a low state (L) again or become dormant.

The greatest chance of offsetting moves occurring is within the first 10 trading days after a volatile move. A 2% offsetting move higher would be a very bullish indicator. It is not uncommon for a 2% move higher to happen early in the rebound of runs that recover from significant drops. Most recoveries from significant pullbacks move higher to the next resistance level, in this case the 100 L at 1900.

Current Cautions

The recent drop on the index has reached significant levels and the index has had a volatile trading session. These are bearish indications, so there is reason to have some continued caution.

However, the pullback continues to fit normal patterns seen during rounds of profit taking and it seems likely it will probably remain in or near the 3% to 5% drop level.

The third retest of lower boundary resistance in the 1800 level MRL at 1850 to 1865 sent the index lower with Friday’s volatile move lower penetrating the 1815 support. Friday’s close appeared to leave the index in an area that probably won’t offer support, so it seems possible the drop could continue to likely support at the second 1700 level MRL seen at 1760 to 1770 or alternate support in the first 1700 level MRL at 1735 to 1745 (or possibly 1750).

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.

Volume increased by 10.33% this past week and the five day variance shot up to 36.88% reflecting the volatile conditions seen in the past week.

The 90 E will become active Tuesday and this indicator is often active during volatile conditions. It also has a strong history of pointing to market price direction changes.

The correct indication of the -2 L in Friday’s 2.09% fall, set the +2% L indicator into a high state of likelihood (+2% H). This is due to a heightened chance of an offsetting move of 2% of greater higher on the index.

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.

Comments:

As explained in past articles the resistance at the first 1700 level MRL had a conflict as to the upper boundary of this resistance. As the index reached these levels both the 1745 and 1750 levels showed evidence of being a resistance level. Further research suggests the 1750 level could actually be a separate MRL, but since it did not have the normal resistance range associated with these resistances, it might have been misinterpreted at the time as a conflicting resistance boundary. Rather than change coarse now and create confusion over resistance/support levels in future articles, it will continued to be noted as it was originally, the first 1700 MRL at 1735 to 1745 (or possibly 1750).

Recently there have been several reports on the utilities sector that shed a bad light on this sector. These reports gave what appear to be good reasons to avoid the sector. Although this was probably good advice nine months ago, when the news was more relevant, it probably does not hold true any longer due to substantial retreats in many of these stocks and the changes seen since.

One area of concern in these reports was a slow rebound in electrical usage. As a result projected earnings increases in the sector are low, but they are probably too low.

A fairly big part of this reduced usage was caused by a long string of extremely mild winters. The recent cold blast seen over a large part of the country should increase usage dramatically. Even homes that don’t use electricity for heat will likely see increases in electric bills as nearly every alternate source of heat uses electric fans, motors or pumps to move or extract this heat, and the extreme cold will require these devices to turn on more frequently.

Many companies have and will continue to see large increases in wind and solar production. Although costs for these installations are still fairly steep, many states required them and in doing so allowed for increased prices for energy produced at these facilities and or allowed gradual reimbursement of these expenses through charges on electric bills. Although these costs came off the bottom line upfront, they will be trickling back in later.

Although the electrical production of these green installations may not be 100% predicable, there are no fuel costs and any production will reduce the need to produce electricity in facilities that do have fuel costs.

Those that have excess production from green energy facilities will also be able to sell this production at a premium to those that do not meet required green energy thresholds. Some of the electric companies are specializing in these installations and have seen profits soar.

Electric companies were also forced to reduce transition line losses, and this too came at a cost to profits. Again some were allowed to pass this cost onto consumers gradually. At the same time these large reductions in line losses will reduce the costs to produce electricity in the future.

Please note that production levels of the past included these lines losses, and the reduction in these losses also reduced the need to generate electricity to cover these losses. Take care of the numbers presented in these reports, some used production levels to argue lower usage levels, but did not adjust these numbers for the reduction in line losses. Usage levels are lower than seen previously, but not as low as some of these reports make them look.

Many of the deadlines to have green energy or improvements to reduce line losses are nearing, and as these deadlines pass or as these projects are completed early, these costs will disappear, but the income to offset these costs will continue to flow for many years to come.

There are other costs to be concerned about specific to coal or nuclear facilities, but not all companies will have facilities that will generate these charges.

Based on the constituents and sectors of the S&P 500, the sector holds the best dividend return with an average yield of 3.979%. The sector also has a trailing twelve month (TTM) P/E of 15.87, second only to the Financial Sector’s 15.60.

The sector also offers stability in downturns. Based on differences in the closing prices on Jan 10 and Jan 24, the sector pulled back the least at an average drop of 0.702%, compared to the best TTM P/E of the Financial Sector that had a retreat of 4.266% over the two week timespan. One week timeframes along with the drops seen Friday for all sectors are included in the S&P 500 Constituents Charts section above. Given the sector yield, if a company paid a dividend during this period the investor more than likely still saw a gain.

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 does not have any investments in MA. He has investments in many of the companies within the S&P 500 Utilities Sector and added in this sector this week. Ron is currently about 86% invested long in stocks in his trading accounts. The increase in his investment level over the past week was due to the purchase of two issues with this cost partially offset by 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 seven 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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