Here is the preview of the coming week on the S&P 500 from Traverse City, Michigan.
The S&P 500 closed higher in all five sessions during the past week and higher for the second consecutive week, posting a gain of 2.17%. The index has closed higher in each of the past six sessions and in 31 of the past 47.
The Dow Jones Industrial Average broke to a new all-time high early in the week and continued higher from there. Each of the past four trading days finished at all-time highs and each also set new intraday highs. Jobs data was much better than expected Friday so this run could have legs.
The Dow Jones run undoubtedly helped pull the S&P 500 higher, as all components of the DJIA are also S&P 500 constituents.
The push into record highs has brought out all kinds of comparisons between the current Dow Jones components and those in the Dow in October 2007. I tend to think a lot of these comparisons are misleading. One of those is the comparison of the P/E and I took a look this comparison in companion articles to this week’s report. The Dow Jones story can be seen here and the look at historical P/E ratios here.
Major Stock Market Indexes
All the major indexes, the DJIA, S&P 500, NASDAQ, NYSE and Russell 2000, took a decisively bullish move higher during the past week.
All moved to higher highs in the rebound after reaching lower lows, again this is often considered a confirmation move indicating stocks are likely to move higher. All but the NYSE have reached the upper trend line in the previous trend, and most have already begun trading tightly against this trend again.
The NASDAQ looks to have broken just slightly above the upper trend line. This index has lagged in the rebound despite most in the index reporting very good earnings. It still seems likely this index will mount a catch up rally at some point, and this break above trend might point to the beginning of this rally.
The DJIA looks to be in a breakout move above the 14000 resistance level, rebounding quickly from lows and it is now running tightly higher against the upper trend line. The push higher has been fairly steep since it mounted its own catch up rally several weeks ago. Since that time the index looks to be catching up to the trend seen off the lows in June. It still has a way to go, but if it were to catch up, the trend would probably fall back to the slope seen off the June lows shortly after it does.
The interest rate on Ten Year Treasuries has also rebounded recently, but they have not yet reached the upper trend line of their current trend. This would probably indicate there is more upside left in this run before a round of profit taking is seen.
It doesn’t seem unlikely the indexes could begin to trade in or near overbought conditions again, with falls to or near the 13 EMA being buy signals.
S&P 500 Constituent Charts
Most of the S&P 500 constituents’ charts took bullish pushes higher with the recent rebound.
Most of the constituents that were at likely support levels rebounded resoundingly in the past week.
Most that held short term trends moved to or above the upper trend line in this rebound, with many breaking to new yearly highs in this move.
Most that dropped further and held long term trends began moves higher that could add a fairly large value to the index if these trends continue to the upper trend lines of these long term trends.
Many of those that were trading near yearly lows had rather strong rebounds too. If these stocks begin longer term trends higher, they too could add a great deal of value to the index. I believe many of these stocks are very much undervalued at their current prices and several are heavily weighted.
Many of the index stocks moved back towards overbought levels, but most are not yet fully overbought. It doesn’t seem unlikely that at some point some profit taking will be made, but it looks like there is some upside potential left in the current push higher. It also seems likely stocks could hold in or near these overbought conditions for the time being.
I’ve discussed an area that could produce some resistance in the indicators section below. However, at the current time many of the constituent charts do not appear to be in an area that would support this thesis.
Indicators
The -2% L is currently active, we are nearing resistance levels that new and yet unnamed indicators are pointing to. See a more detailed description of the indicators I have developed through my research here. I have not yet updated this page for any of the new indicators.
The relative absence of indicators is generally bullish as it shows a declining chance of volatility.
The -2% H indicator did not provide a correct indication in the past week. The index closed above the drop resistance at 1549.38 and even though we have seen a close above the drop resistance level, since there was not a significant pullback at this resistance level the resistance won’t be fully covered until the index closes at least 1% above this resistance level or until the S&P 500 closes at or above 1564.87.
The rebound above the Feb 19 close of 1530.94 along with the close above the drop resistance in the past week makes the chances of a deeper drop before the index fully covers the drop resistance extremely unlikely. This substantially reduced the chances we will see a move of 2% or greater lower at this level. As a result this indicator fell to a low (-2 L) likelihood level.
Normally a move above 1564.87 would toggle the -2% L indicator off until we neared the next drop resistance, but there are no more drop resistances left. My research shows there are other indicators that might be effective in finding areas that the index could provide pullbacks.
As we move above the last of the drop resistances I will begin to unveil new indicators that might point to areas that could provide potential pullbacks. These indicators are also developed from the data I have on the S&P 500, and like the drop resistances have proven to be effective in back tests, however they have not yet been tested in real life and being so there is no certainty they will work.
I had written earlier that the next most likely place for a pullback after the 1548.38 resistance is probably between 1575 and 1625, and the close proximity to this possible resistance level will keep the -2% indicator active in a low state even after the 1549.38 resistance officially closes. Even though there is a potential for a significant pullback at this level, it does not appear at this time it will include volatile moves (those of 2% or greater in a session).
There are two major reasons the data lead me to this price range. The first is the S&P500 has been pushing upwards and towards a new all-time high for some time. Long runs into new all-time highs often falter briefly not long after reaching them. I believe this is partially due to the overall run length, stocks run long durations in or near overbought conditions during these long runs, and the pullbacks seen after the new highs are reached tend to allow these stocks to fall from these extremes and recharge for a move higher. If a pullback is seen and the run has good reason to continue, as I believe there is in this case, it will likely fall within the 3 to 5% range before it rebounds and continues higher.
The second reason is the proximity to a “hundred level” in this case 1600. Although not all hundred levels have resistance that caused significant pullbacks, most have. The data shows the initial resistances usually begin at about 25 points before and last to about 25 points after the hundred level. Pullbacks seen at these levels vary, but absent a crash, most significant pullbacks stay within the 3 to 5% range.
In most cases I do not look at intraday highs, but when looking at resistance levels I do. The intraday high on Oct 11, 2007 was 1576.09, meaning the S&P 500 entered into the resistance level at 1600 before retreating. Had the economic collapse not occurred, it is quite likely the S&P 500 would have continued to push its way into and through the 1600 level then, although this process would have likely taken some time back then, probably several months at least but possibly could have struggled over this level for a year or more.
The duration between this initial break and the first retest of this level has taken over five years, so it is fairly likely this resistance level won’t take years to break through in the rebound, but the index is still probably not going to slip through this level without some sort of a fight. The data seems to indicate that chances are fairly high we will see a pullback within this 50 point range. This pullback might not reach significant levels, but it seems reasonably likely it probably will.
The index has already seen an initial resistance pullback in this range that reached significant levels, actually that pullback reached extraordinary levels, as I consider the 2007 - 2009 crash to be what I call a hundred year crash and I doubt any of us will see another like it in our lifetimes.
This initial pullback in 2007 opens the possibility the index could run beyond the initial resistance boundaries before this significant pullback is seen. If a pullback develops higher (probably before 1650), it will likely fall back below the 1600 level in this pullback, unless of course it runs to the 1700 resistance level, at that point if a pullback occurs, it might not reach 1600.
If we were to see a pullback within the resistance boundaries for the 1600 level, where in this 50 point range is the pullback most likely?
It is very likely the run higher will reach a new high and just as likely it will close above the previous intraday high seen in 2007, but that doesn’t narrow it down much. The data leads me to believe the most likely place would be between 1590 and 1610 with the historical charts solidifying this estimate.
There is one other factor to consider if this pullback occurs, it might begin in or near an area that could give the appearance of a triple top, and a pullback from this top might scare some out that would normally hold. This could increase the depth of this pullback beyond the 5% or less that looks likely.
If a pullback is actually seen at this level, I tend to doubt it will drop much more than 5% even with the appearance of a triple top, but there is an outside chance it could near the 7% level. Pullbacks greater than 7% are outside the norm, despite what we have seen over the past few years. The three consecutive years with large drops is a rarity, so it does not seem likely we will see another one for some time.
If the index should break through this triple top, it could bring a rush of investors in as this would be yet another bullish indication. This could produce a run that continues well past the 1600 level and again a push to the 1700 resistance might not produce a fall back to 1600 level.
Does this pullback happen?
Of course there is no certainty that this pullback will occur. The current news has been relatively bright economically. The indexes’ charts are producing many bullish indications. The S&P 500 constituent charts do not appear to support this pullback at this time. Also not all hundred levels have held resistance on a second retest and not all runs to new highs faltered shortly after reaching new highs, although most have in both cases.
I also tend to think stocks are further under value than many others seem to believe. Much of the perception that stocks are overvalued could fall away in the coming year.
There are plenty of reasons to believe there might not be a significant drop at this level. These indicators are also new and untested under real world market conditions, whether they are correct or incorrect in this instance remains to be seen; however, there is a much higher than normal chance we could see a pullback at this level.
It looks likely that if this pullback develops, it could be a buying opportunity and it might be a good time to add.
Current Cautions
There are many reasons to be bullish at the current time, and it seems fairly likely the trend will continue to be bullish for the foreseeable future.
Although the index has closed above the final drop resistance at 1549.38, the resistance will not be closed until the index finishes a session above 1564.87. Chances are very good that this close will occur, but not a certainty.
It is possible that the index could see a significant pullback as it reaches or nears the 1600 level; however the current push higher has seen many bullish indicators that would suggest this run could continue past this level. It seems fairly likely this drop will be less than 5% if it happens, but has the potential to drop further due to an apparent chart formation. It does not seem likely it will exceed 7% if it occurs. If this pullback occurs, it will probably be a good time to add.
Comments
It appears I am not the only one that believes Dell Inc. (DELL) should be paying investors the hoard of cash it owes them. Carl Icahn wants Michael Dell and Silver Lake to pay a special dividend of $9.00 a share, and keep the company public or make a reasonable offer to shareholders after the payout.
Even though the jobs numbers where very good, many continue to point to the slow growth in jobs. One factor was present in this rebound that was not in others is that government jobs continued to be shed in the rebound instead of added. I wanted to look further into this, but have run out of time for this week, so maybe next week.
Even with the lower jobs totals companies returned to record earnings relatively quickly, they also amassed a great deal of cash in the process. Both of these factors will probably help to sustain job growth going forward. Many of the reasons companies have used to put off job additions are also drying up, and most companies are still running very lean, and will probably begin to fill labor needs that they had put off in the months ahead.
Many of these sources of information were used in this article.
Have a great day trading,
ronz
Disclosure: I have investments in DELL. I am currently about 89% invested long in stocks in my trading accounts. I made no investment changes during the past week. I still consider myself slightly oversold and being so I set several buy orders during the week but none filled. Several stocks were also near my sell targets, but none of these orders filled either. I will receive dividend payments from 17 issues in the coming week and 10 in the following week, if I make no further investment changes during this timeframe, these dividend payments will reduce my investment level due to rounding.
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.
Comments