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Stock market preview for the week of January 6, 2014

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The S&P 500 finished 2013 at a record high Tuesday and then began a retreat from the Midrange Resistance Level (MRL) on Thursday that continued slightly lower on Friday. The index fell in three of four sessions during the holiday shortened trading week, and as a result posted a 0.54% loss for the week. .

The index finished 2013 with a gain of 29.60% over the 2012 finish. The index increased in 147 of 252 trading during the past year.

As expected, the daily volume increased by 27.68% during the New Year holiday shortened trading week, but remained lower than normal. Monday had the weakest volume and the pullback Thursday saw the strongest volume. See additional notes on this week’s volume in the comments section below.

Major Stock Market Indexes

The major 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, although some signs of failure are also surfacing.

Overall the indexes remained very bullish through the recent downturn. The Dow, S&P 500, Russell and NYSE set new record high closes during the past week while the NASDAQ pushed to a new 52 week high close.

Both the Dow Jones and NYSE finished higher in three of four sessions, with the Dow sporting the most bullish looking chart this week.

Although the S&P 500 and NASDAQ have fallen in four of the past five sessions, all the indexes have so far kept downturns to a bullish two days or less before rebounding.

The S&P 500, NYSE, and NASDAQ fell close to but have held above the 13 EMA. The Dow rebounded well above the 13 EMA, while the Russell fell through the 13 EMA but rebounded to close at this level and moved back above it in the following session.

All of the indexes had shown flatness leading into the recent downturns, giving the indexes somewhat toppish looking patterns. The NASDAQ and Russell turned lower after a short stint of trading against the upper trend line in the current trend, indicating a larger fall is still possible. All of the indexes are still largely overbought. It still seems possible the indexes could rebound bullishly again, but it also seems possible that profit taking could continue for the time being.

US Treasury Charts

The 20 year US Treasury note rebounded Monday, but fell Tuesday to finish the year at a 52 week low. The 20 year rebounded Thursday and finished flat on Friday. The 20 year note’s price moved higher for the week, but remained near the twice recently broken support. Rebounds have fallen well short of the 13 EMA. This chart continues to look bearish.

The US Treasury price charts continue to exhibit mostly bearish traits, which is generally bullish for stocks.

The 10 year US Treasury Note interest rate split the week with two trading days seeing increases and two seeing losses. The 10 year rate pushed to a 52 week high on Tuesday and although it finished the week off this high, it did finish the week higher. The 10 year rate has not closed below the 13 EMA in 26 trading days, and only broken below it once intraday during that time. This chart continues to look very bullish and show bullish traits.

Gold

After a small rebound to about 1216 at the open, gold began to retreat Sunday night during Sydney and Hong Kong trading falling back to just below 1210 early in Hong Kong trading before leveling off until early Monday morning. In the late Hong Kong session gold began to slip reaching about 1203 by early London trading. It traded between 1203 and 1206 until it bumped up quickly to almost 1209 early in New York trading. The price deteriorated from there, first falling slowly back to 1203 then more steeply late in the New York session to just below 1196. It managed a slight rebound to about 1199 through early Hong Kong trading but fell back to about 1197 and traded flatly there until early Tuesday morning. It bounced to about 1202, fell back to about 1197 and then back to about 1199 by the London open. During London trading it trended slowly higher to 1205 by mid-session and slowly back down to about 1197 early in the New York session. Shortly after the New York open the price plummeted to almost 1185 within ten minutes, traded between that low and 1189 for about two hours, and then shot up from 1189 to 1214 within about 20 minutes. It immediately began a long bouncy decline to 1199, rebounded to about 1207 and tapered off to finish the year at 1205.20 on the New York Spot. Based on the NY Spot gold shed 470 points from the 2012 finish at 1675.20 or lost 28.06% for the year. December was the eighth month gold finished with losses in 2013.

The New Year started quietly in Wednesday night trading as gold held closely to 1205 in Sydney, but the New Year fireworks began shortly after the Hong Kong open. The first skyrocket exploded higher to about 1212 in a twenty minute burst beginning at the open, after which gold slipped to about 1211 and leveled off for over an hour before the next missile burst higher in about a ten minute run to about 1223. It skidded to 1221 and leveled off briefly before bumping higher to 1225, but by Thursday morning it had again fallen back to about 1221. Early Thursday morning Hong Kong trading had taken gold to about 1227 where it began a long trend lower lasting to the New York open and falling to about 1215 during London trading. It rebounded quickly to 1221 shortly after the New York open then trended higher to 1230 before slipping back to 1225. Gold held steady at about 1225 in Sydney, but ripped higher to 1235 in the first half hour of Hong Kong trading before falling back to finish Thursday at about 1230. In the first two hours Friday morning gold had risen to 1237 in Hong Kong trading before it began to slip near the London open. It continued to trend lower through London trading reaching 1228 just after the New York open and then trended higher to 1240. It slipped off that high to about 1236 and spent the next four hours bouncing between 1236 and 1239 finishing with a New York Spot of 1238.00, and almost 2% higher than the 1213.80 of the previous week.

The New Year’s fireworks in Hong Kong were attributed mainly to Japanese investments in gold in response to news that devaluation of the Yen appears to be working to improve economic conditions. This news encourages further devaluation, and the Japanese are supposed to be rushing to a “safe harbor.” The Yen’s decline is supposed to have given the illusion that gold is maintaining value there, falling only a few percent in 2013 based on a currency that has shed about 25% for the year.

The few quick bursts higher probably were not caused by a rush of investors and rallies were small otherwise. It seems like most investors there would have figured out the “safe harbor” is more likely buying a basket of currencies that will increase in value against the Yen than gold. It seems possible any buying these rallies could be just another weak link added that could break in a price drop.

S&P 500 Constituent Charts

Although the constituent charts continue to show mostly bullish traits, many are giving indications that a round of profit taking could be beginning to take form.

Quite a few of the constituents noted in long trends higher that had reached the upper trend line in long term trends noted prior week, turned lower off this trend line in the past week.

Quite a few of the constituents that had positioned themselves against long or short term resistance levels in the previous week appear to have been turned back by these resistances. Although it doesn’t seem unlikely they will again retest these resistances, it appears they could trend lower before rebounding back to these resistances.

Many of the stocks that have been in long runs higher are rounding lower from these runs and many have fallen through the 13 EMA in these turns lower. Although many have since rebound back to or above the 13 EMA, this is the first break below the 13 EMA many of these stocks have seen in months. Most fell deeper during previous breaches of this support.

Several stocks that were in bullish runs failed to reach a higher high in recent rebounds and have already fallen to a lower low in the retreat. Although many appear to be holding bullish support lines like the 13 EMA, some have already failed at this support and some have tested the 50 EMA in these turn backs.

Some of the indicator stocks failed to rebound from recent lows. Although this failure is not widespread, it is worth noting.

Most of the constituents are in or near overbought conditions. Several that had been holding overbought conditions for extended periods have broken lower support in these trends, so it doesn’t seem too unlikely they could fall closer to or into to fully oversold in a continued pullback. Overall the constituent’s charts give the impression that a round of profit taking is beginning and could continue.

Indicators

The +/(-) 90 D, (-)/+ 90 D and MRL indicators are currently active. The 100 L became dormant in the past week. See a more detailed description of the indicators developed through research here.

The overall reduction of active indicators seen earlier generally shows a reducing likelihood of volatility. Most other 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 29 trading days and a 90 E will become active in 16 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% / +9.26%

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% / +1.60%

The index pushed a full percentage point above the 100L resistance and finished more than three consecutive days above the upper boundary and as a result the 100 L is now considered dormant.

The S&P 500 pushed to another new all-time high close on Tuesday with the intraday high reaching 1849.44 before pulling back to close at 1848.36. The intraday high was within the range of influence of the MRL that appeared to have a likely resistance between 1850 and 1865. The index shed 0.89% on Thursday and dropped to a low of 1827.74 before rebounding into the close. That rebound point indicates the upper boundary at 1825 of the 100 L is now offering support. Friday finished 0.03% lower than Thursday, but the intraday low rebounded at 1829.13 and well above this support level.

The initial pullback within the influence of likely resistance within the MRL appears to have found bullish support at the recently broken resistance of the upper boundary of the 100 L, but it seems possible this support could be retested again. Although recent economic news throughout the world was rather bullish, stocks did not respond to this news very bullishly so it continues to seem possible 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.

Current Cautions

The 100L resistance is considered dormant.

The index appeared to find initial resistance near the lower boundary and within the influence range of the likely resistance of the MRL at 1850. The intraday low of this pullback rebounded bullishly above but within the influence range of the upper boundary of the recently broken 100L.

The index charts continue to show mostly bullish tendencies, but some subtle signs that the pullback could continue deeper are beginning to be noticeable.

It continues to seem fairly likely this resistance could cause a significant pullback and if this pullback is seen, it seems likely the index could fall in the 3% to 5% range. Although tensions on the index were substantially reduced earlier, it seems possible the index is within a timeframe that is more susceptible to a significant retreat, and therefore it seems possible the retreat could be near the 5% level.

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.

As is normally the case, the daily volume rebounded during the New Year trading week, but remained lower than normal.

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.

The timeframe generally associated with the Santa Claus Rally ended with the New Year. The beginning of the year is generally a bullish timeframe too; however rounds of profit taking that result in significant drops are more common during this timeframe.

The index charts continue to show signs of topping and are still nearly fully overbought.

The +/(-) 90 D indicator that became activate on Oct 7, 2013 has reached a level that it seemed likely it would 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

The source normally used for volume data, Yahoo Finance, did not include the volume levels for the S&P 500 on Monday. Therefore alternate sources were used for this information in this week’s article; unfortunately these alternate sources use a different volume format than Yahoo does. Since the formats differ Monday’s volume was mathematically estimated using the data that was available as a basis at approximately 2.295 billion.

It is important to note there are significant differences in the data formats from the alternate sources. For instance the alternate sources reported daily volume for the S&P 500 on Friday at about 388 million. These volumes are likely weighted to the index since the top ten volumes on the S&P 500 on Friday totaled over 440 million with Bank of America (BA) having a volume of over 130 million alone. Being weighted these volumes do not always agree proportionally to the un-weighted volume. As a result even using the best mathematical estimation as possible, this estimate could be significantly different than the actual volume seen on Monday.

The week over week increase in the daily volume for the alternate source data was 29.53%, and although this increase agrees fairly closely to the 27.68% found with estimated volume for Monday, these too sources were often far apart in weekly volume changes in the past data. Therefore being close adds little credibility to the estimate used. It seems likely that Yahoo will eventually update this omission, but until they do this estimate will be used, unless a more suitable replacement is found or calculated.

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

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Have a great day trading,
ronz

All of Ron's past articles.

Disclosure: The author has investments in BA. He is currently about 86% invested long in stocks in his trading accounts. He sold three issues and received dividend payments during the past week. The author 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 eight issues in the coming week and 13 in the following week. If no further investment changes are made during this timeframe these dividend payments will not change his investment level.

Although his investment level increased over that of the previous week, the increase was due to the beginning of the year basis change. In order to present an investment level unaffected by week to week market fluctuations the investment level in these articles is based on the end of year balance of the previous year. The change to the balance for 2013 on Jan 1 resulted in about a 4% increase in his investment level over the 2012 balance used prior to this week. The author made 186 trades during 2013 and outperformed the S&P 500 slightly for the year.

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 the author’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 readers, not foretell the future. The author 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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