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Stock market preview for the week of June 2, 2014

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The S&P 500 pushed to record high closes in three sessions during the holiday shortened trading week. The index matched the week ago gain of 1.21% in its push higher and has increased in 23 of the past 33 sessions.

Average daily volume levels of the four days in the holiday shortened week increased 5.81% compared to the average daily volumes of the five days in the previous week. The week’s largest volume was seen on Friday, with the lowest volume seen on Thursday. The five day volume variance also increased 10.67% over that seen four days ago to 36.19%.

The S&P 500 finished at record highs on Tuesday, Thursday and Friday with Wednesday providing a small setback. The three higher closes has taken the index near the upper boundary of the 100 L at 1925.

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 bullish signs as all five indexes finished the past week with gains.

The NASDAQ and Russell split for the week, each finishing two sessions higher and two lower.

The Russell 2000 gapped to the 50 EMA at Tuesday’s open and continued higher through the session. Although Wednesday finished lower, it held above the 50 EMA through the session and Thursday began to widen the gap the index was running above its 50 EMA. Friday began higher, but the price slipped during the session breaching the 50 EMA briefly before rebounding bullishly to finish the session above it. The push higher during the week eclipsed the high seen in the previous cycle, giving it two higher highs in a row. All four sessions in the past week along with the previous Friday finished above the upper trend line of the recent downtrend, and it appears the Russell could have broken from its downtrend.

The NASDAQ saw a bullish cross as its 13 EMA pushed back above the 50 EMA on Tuesday. The NASDAQ continued to widen the gap it is running above the 50 EMA during the week, with all but Friday’s session low being higher than the previous session. Although the NASDAQ has not yet established an uptrend, the recent run higher makes it look likely it will.

The Dow Jones, S&P 500 and New York Stock Exchange each finished higher in three of four sessions during the week, with all posting small loses on Wednesday.

The Dow Jones finished Friday at a record high close. During the week it established and held a fairly steady gap above its rising 13 EMA. Although the Dow chart would probably look much more bullish without the component changes from last September, the remaining components are taking up the slack in the recent lackluster performance of the additions. At the same time the additions are showing some signs that they might break out of their recent slump and a rebound to or near yearly highs seems possible.

The S&P 500 and New York Stock Exchange finished at record high closes three times in the past week, The NYSE held a fairly steady gap above its rising 13 EMA during the week, while the S&P 500 slightly but progressively widened this gap in its run higher.

The indexes are currently overbought so a pullback does not seem unlikely; however chart formations make it seem possible they could hold in or near overbought conditions for the time being. If a pullback where to occur, dips to or near the 13 EMA could be buy signals.

US Treasury Charts

The 20 year US Treasury Bond pushed higher in the first two sessions maintaining its uptrend before beginning to fall on Thursday. The bulk of this move higher was seen when the 20 year Treasury again gapped widely higher at the open on Wednesday finishing with the highest close in 2014. Although the regular session saw relatively little additional gains, it closed near the day’s highs. The 20 year began to slip off these highs on Thursday with Friday continuing lower.

The 20 year is fully overbought and has not fallen to fully oversold in almost two months even though it has finished 11 of the past 19 sessions lower. Although the price has continued higher during this timeframe due to large opening price gaps, without these gaps, the price drops during normal trading hours have far outweighed the increases. Lacking these gaps, it seems possible the 20 year T-Bond could have established a downtrend during this timeframe due to the lackluster price movements during normal trading hours.

The normal trading hour price action makes it appear that domestic US Treasury Bond investors are taking profits into the foreign investments that are causing the higher opening price gaps. It seems possible if these price gaps cease, profit taking on these foreign investments could continue. This chart appears to be bullish, but continues to show signs of faltering.

Uncovered price gaps are nearly always eventually covered. The 20 year has left several gaps higher uncovered in its recent move higher, but the one of greatest concern to those recently becoming long holders of Treasury Bonds was that of March 12. That gap occurred three days into the recent bullish run off of lows and was very near the yearly low.

Long term Treasuries price charts continue to look bullish, but setting aside the recent large opening price gaps higher, they appear somewhat bearish. Therefore at this time the Treasury charts appear neutral to somewhat bullish for US stocks prices.

The interest rate on the 10 year US Treasury Note fell in the first two sessions before rebounding late week. It was again turned back at the 13 EMA on Tuesday and finished that session a little lower. It gapped lower at Wednesday’s open and finished the session steeply lower, breaking below earlier support and continuing in the recent downtrend. It continued lower early Thursday, but rebounded strongly to finish the session higher, with Friday’s finish adding to those gains. This chart continues to look bearish. It is in fully oversold conditions.

Gold

Gold slipped to about 1291 early Sunday night before beginning a small rebound shortly after the Sydney open that carried it back to about 1293, but slipped off that high to finish the night at about 1292.

Early Monday morning gold pushed back to about 1294 before trending lower in bounces to about 1291 by the London open. It rebounded back to about 1293 and traded tightly to this level through the US holiday shortened session. It slipped back to 1291 after the New York Globex open Monday night, trending in bounces higher to about 1293 after the Hong Kong open, then slipped back to finish the night at about 1291.

Tuesday trended fairly steeply lower until reaching about 1260 shortly after the Hong Kong open Tuesday night. It rebounded back to about 1265 and traded closely to it for the remainder of the night, finishing at about 1264.

Wednesday gold trended higher to reach about 1266 shortly after the New York open, but dropped back to 1256 by midsession. It rebounded back to 1260 before the NYMEX close and then bounced slowly lower to reach 1255 about midsession of late night trading in Hong Kong. It rebounded off this low to finish the night at about 1258.

It continued higher to about 1260 early Thursday before reversing trend and falling to about 1251 just before the London open. It trended slowly higher again to reach about 1260 midsession in New York. Gold slipped slowly lower off that high to 1256 in Sydney, but then pushed higher again to about 1261 early in the session in Hong Kong. It slipped slowly off that high to finish the night at about 1257.

Friday gold traded within a point of 1257 until slipping lower near the London open to 1253. It bounced between 1252 and 1256 until slipping steeply lower near the London close during New York trading then more slowly lower to reach a midsession low of about 1243. It trended mostly higher off this low into a New York Spot close of 1249.30, which was a fair amount lower than the previous week’s 1292.30 New York Spot close.

Gold took a fairly bearish turn in the past week, fracturing support levels established after breaking lower from the March rebound. Gold began a slight downtrend after the initial drop from March highs that resulted in a more or less sideways move along that support but saw gradually lower highs in rebounds during that time. This established a downward biased wedge on that support line.

This sideways move and wedge pattern broke lower at about the time it ran into the upper trend line of the downtrend established in the break lower from the third rebound in 2012. March’s high also turned lower near this upper trend line. The upper trend line of this downtrend will probably offer resistance, as could the recently broken support level. These resistances could limit upside potential in gold.

It therefore seems possible the recent break lower could send gold to a retest of earlier lows. This makes support at about 1190 look like an important testing ground, with a break below this support being a very bearish sign.

This week’s drop sent gold to a small monthly loss on both the London Fix and New York Spot.

A continued breakdown in gold could be bullish for stocks.

S&P 500 Constituent Charts

Overall the constituent charts continue to show bullishness.

Many of the constituents are in very bullish runs consisting of one or two day pullbacks followed by several days of moves higher. Many are riding higher above the 13 EMA and many are rebounding higher after drops to or near the 13 EMA.

The constituents continue to increase the numbers breaking above long or short term resistances.

Increasing numbers are breaking to 52 week highs with others nearing these levels.

More of the constituents that have not yet turned higher are showing signs they could turn higher from recent pullbacks. Several broke above upper trend lines in recent downtrends. Some moved to higher highs, others rebounded from lower lows and some established uptrends after having two consecutive higher highs and higher lows. Some broke above the 50 EMA after having fairly long draughts below it. Many of these stocks are moving higher above the 13 EMA or are beginning to ride above it more often than not. Some are still basing, but appear to be nudging higher in these bases.

Many of the constituents that took large moves higher on good earnings news appear to be rebounding after initial pullbacks in these higher moves. Some have already breached the initial highs while others appear to be rebounding off support levels like the 13 EMA. It seems likely many of these stocks could continue higher in these runs. Some that took these large moves higher on good news have continued fairly steady higher, without much of a pullback after the initial surge.

Many of the Biotech’s that took large pullbacks earlier have seen substantial rebounds off lows in those falls.

The staggering pattern continues to strengthen.

The index is overbought so it seems possible that a pullback could be seen in the week ahead. It looks likely that many of the constituents could move higher into that pullback limiting the drop or even nudging the index higher. A fair number of the constituents have established trends of holding in or near overbought levels. It seems possible some of the constituents that have not yet established a trend of holding in or near overbought levels are in runs that could do so and this could add further buoyancy. The S&P 500 currently holds the most bullish chart of the indexes covered. Even though the index is overbought, a pullback is not a given. It seems possible if one is seen it could be short and fairly small and therefore it seems possible the index could move higher in the week ahead.

Indicators

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

The +/(-) 90 D and 100 L indicators are currently active. See a more detailed description of most of the indicators developed through research and featured in these articles here.

The +/(-) 90 D that became active on Feb 21, 2014 has performed as follows to this point in the format: highest close / lowest close / last close.

+4.76% / -1.12% / 4.76%

The +/(-) 90 D will expire in 22 trading days. Due to this expiration a 90 E will become active in 9 trading days. The indicator becomes active 13 trading days before the expiration and remains active for 13 trading days after the expiration resulting in a 27 trading day active period.

Although not always the case, as can be seen in several instances in past articles the 90 E has been present during periods that the S&P 500 has exhibited bearish traits. The indicator is not always present during bearish times, occasionally it is present during bullish moves too and a couple of these instances are also covered in past articles. The past two occurrences of this indicator saw a little of both beginning with a bearish period and ending with a more bullish move.

It seems possible this indicator could become active as the index enters potential resistance at the 1940 to 1955 MRL. The resistance at this level appears to have the potential to provide a significant pullback on the index, but it does not seem likely this resistance is strong enough to provide a large pullback if a significant pullback is seen. There are some fairly good reasons to believe the index could move past this level without seeing a significant drop, but if a significant pullback is seen, it seems likely it could remain shallow, probably within the 3% to 5% range.

The S&P 500 record high finish Friday of 1923.57 pushed near the upper resistance level of 100 L at 1925. Although the index is overbought, which might cause a short term pullback at this resistance, resistance in the upper portion of the 100 L appears soft so it seems possible the index could break above the 100 L in a rebound from that pullback. It also seems possible the index could begin to hold in or near overbought conditions, therefore this resistance level could be broken in a continued run higher.

Current Cautions

The index rebounded to recover from the significant drop seen within the 100 L. The upper resistance level of the 100 L appears to be softer than the lower level. It seems possible the index could continue to trend higher and break free of the 100 L.

The next likely area resistance could be found once the index passes the 100 L at 1900 is in the Midrange Resistance Level (MRL) between 1940 and 1955. The MRL appears to have the potential to cause a significant pullback, but probably not a large pullback if one were to be seen there. It also seems possible the index could move past this level without incidence.

It appears possible the index could reach the 1940 to 1955 MRL in conjunction with the expiration period of a 90 Day indicator. The expiration period of a 90 Day indicator activates a 90 E indicator. Although not always so, the 90 E indicator is potentially bearish as the S&P 500 has often exhibited bearish traits during the active periods of this indicator in the past. Therefore the presence of a 90 E indicator at this resistance increases the chances a significant pullback could be seen. The expiration period also falls within a timeframe that is sometimes somewhat bearish for stocks.

At the same time, the long sideways move at the 1883 resistance appears to have increased upward tensions in many of the constituent stocks. It does not seem likely these tensions could be fully relieved in the relatively short move to the MRL, which could limit the downside potential at this resistance. Although the potential for a significant pullback could increase if the index should reach this resistance with a potentially bearish indicator active and during a potentially bearish timeframe, barring any unforeseen circumstances, it continues to seem unlikely a pullback at this level would be large and still might not reach significant levels.

Recent chart action in Treasuries and Gold make it seem possible they could add to pushes higher in equities. Although Treasury Bonds have pushed to the highest levels seen in 2014, they have performed poorly during US trading hours indicating a domestic selloff could be underway. Selloffs in Treasuries often make their way into equities. Gold appears to have begun a bearish move lower and if it continues, this selloff could also add to a move higher in equities.

There is a slight chance that resistance could also be seen at 1970, but this resistance does not appear to have the potential to cause a significant pullback. If the resistance at 1970 is seen at all, it will probably do little more than slow the index’s ascent for a relatively short duration.

Average daily volume levels of the four days in the holiday shortened week increased 5.81% compared to the average daily volumes of the five days in the previous week. Although a volume increase was seen, it was relatively small and was seen in a continued move higher. It was also probably affected somewhat by the shortened trading week. The week’s largest volume was seen on Friday, with the lowest volume seen on Thursday. The five day volume variance also increased 10.67% over that seen four days ago to 36.19%, but still within levels normally seen during bullish moves higher.

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.

If the index continues within the trend established off the crash lows, it seems possible it could reach the 2000 to 2100 level in seven to 16 months if it reaches this level near the upper trend line and within 34 to 40 months if it reaches this level near the lower trend line. The data suggests the Midrange Resistance Level (MRL) at 2035 to 2055 could hold the resistance level of concern within this range at 2040. More details of this potential resistance can be seen in past articles.

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 always exact, and these resistances could react sooner or later than expected, it is also possible the resistance will not be seen at all.

Comments:

Recently attention was drawn to the retail sector that had underperformed during the long sideways move on the S&P 500. Although some continued to perform well, the financial sector was also hit fairly hard during this time period as some in this sector fell rather drastically. Recently many of these charts are showing signs they are beginning to rebound from lows. Many in this sector have continued to hold low P/E ratios since the financial crisis, even those that saw earnings rebound quickly and have continued to see earnings growth. Pullbacks in many of these stocks appear to be buying opportunities.

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

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Have a great day trading,
ronz

Access link to all of Ron’s past articles.

Disclosure: Ron has invested in several financial stocks over the past month or so and continues to look for opportunities in both the retail and financial sectors. Ron is currently about 81% invested long in stocks in his trading accounts. His investment level decreased over the past week due to the purchase of one issue with the cost of this purchase more than fully offset by the sale of one issue with a larger than normal position size 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 and also continue to add stocks he feels are at a great value through a variety of buy orders. Ron will receive dividend payments from 18 issues in the coming week and 21 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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