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Stock market preview for the week of March 3, 2014

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The S&P 500 appears to be pushing above the midrange resistance level (MRL) found at 1850 to 1865 as it closed higher in four of five sessions and increased 1.26% for the week. The bullishness on the index continues as it has finished higher in 13 of the past 18 sessions.

Thursday’s close at a new record high marked the recovery from the significant drop. The pullback fell 5.76% from the previous record close Jan 15 to the lowest close in the drop Feb 3. After rebounding from that low, the S&P 500 finished February 4.31% higher than January's finish.

Volume increased during the push higher this past week, with the daily average 10.03% higher than that of the previous week. The strongest volume was seen during Monday’s push higher and the weakest in Tuesday’s retreat. The five day volume variance fell further during the past week to 14.19% on Friday.

Major Stock Market Indexes

The index charts of the Dow Jones Industrial Average, S&P 500, NASDAQ, New York Stock Exchange and Russell 2000 appear to breaking through resistance. All of the indexes continued in bullish moves higher during the past week.

Although the NASDAQ slipped into Friday’s close, it continued its charge higher finishing two of the five sessions at 52 week highs.

The Russell 2000 was the second index to recover from the significant drop with a record high close on Wednesday, a completing a turnaround from the worst start it had early in the rebound. It pushed to record high close again on Thursday, but slipped slightly off these highs into Friday’s lower close.

The S&P 500 recovered from the significant drop with Thursday’s record close and increased the record on Friday. The New York Stock Exchange finished the week at record high close, leaving only the Dow Jones yet to recover. Although the Dow has continued to lag in the run to reach new highs, it pushed bullishly higher in four of five sessions and its chart is beginning to look very bullish again.

All of the indexes continued to push higher in runs above the 13 EMA. All but the NASDAQ had seen bearish crosses of the 13 EMA below the 50 EMA in the downturn, but all have since seen the 13 EMA bullishly rebound back above the 50. All are also seeing a widening in the gap the 13 EMA is riding above the 50.

The indexes also appear to be breaking through resistances they had met last week. The moves above these resistances are now beginning to find support near these broken resistance levels. This is generally a bullish sign.

All of the indexes continued to hold in overbought conditions and it does not seem unlikely the indexes could continue to hold in or near these levels. Although the indexes have maintained price levels above the 13 EMA, drops to or near the 13 EMA are probably buy signals in a continued move higher. It seems fairly likely the indexes could move higher in the week ahead.

US Treasury Charts

Even without a pullback in stocks, the 20 year US Treasury Note could have given a false bullish signal in the past week as it pushed higher in the last four sessions. It rebounded back above the 13 EMA and finished all four sessions above it. The run also pushed the 20 year very near overbought conditions. Although the chart has taken a bullish stance again, reasons continue to mount against a continued rally in Treasuries. Many bond funds are now advertising a shift away from US Treasuries. It seems possible they are realizing that corporate bonds pay much better yields and very often have better income streams to meet these obligations. These funds are very large buyers of US Treasury bonds. It would appear the diversion of large portions of these funds elsewhere could increase the downward pressures on Treasuries. Although these funds are not being deposited directly in stocks, many are buying corporate bonds which should increase corporate bond prices. Higher corporate bond prices tend to spill over into equity prices. This chart took a bullish turn, but it could be a false signal and although it may not seem evident at the moment, it continues to seem possible the 20 year is transitioning into a downtrend.

Long term US Treasury charts appeared to take a bullish turn higher. This is somewhat bearish for stocks, but at the same time it seems possible Treasuries move higher could only be temporary.

The interest rate on the 10 year US Treasury Note slipped in three sessions and finished below the 13 EMA in the past four. Two rebounds in the past week were thwarted at the 13 EMA and both finished lower. This chart took a bearish direction change, but fell very near oversold conditions in the process. It also appeared to be finding support in the past two sessions, with this support higher than the previous low. A turn higher here could confirm an uptrend. This chart turned lower in the past week, but it did not seem unlikely it might slip earlier. The drop is near a bullish rebound point, so it maintains a bullish look.

Gold

Gold fell to about 1320 Sunday night, but began a rebound in Hong Kong early Monday that reached a high of about 1339 in New York. It trended flatly lower to finish the day at about 1333.

It traded within 2 points of 1335 on Tuesday until pushing to about 1344 in New York and again trended flatly lower to finish the night at about 1339.

It pushed back up to about 1345 during Hong Kong trading early Wednesday morning, but trended more steeply lower off this high to reach about 1323 in New York before trending back to about 1332 by the NY close. It trended lower for the rest of the night to finish at about 1326.

Thursday spent most of the day within a couple points of 1330 after rebounding from a low of about 1324 in Hong Kong and touching a high of about 1336 in New York and finished the day at about 1329.

Friday was more or less flat too, turning back at about 1333 several times while maintaining about 1326 before falling more deeply to a low of about 1320 in New York and then rebounding to a New York spot close of 1325.90. That close was and slightly higher than last week’s 1323.60 close.

Although gold finished slightly higher for the week, it might be turning lower from highs. If so this turn lower began lower than projected resistance.

S&P 500 Constituent Charts

Overall the constituents continued to hold very bullish trends.

Although many are trading tightly to overbought levels, it continues to look likely many could maintain these patterns. Those that are trading in cycles from oversold to overbought appear to separating in these trends, indicating the staggering pattern is strengthening again.

Many stocks have continued to push to new highs, while others are nearing new highs.

It looks likely most of the constituents could continue 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, MRL, -2% H, +2% H, 90 E, +10 E and a new 90 D indicators are currently active. The +10 E indicator will expire after Tuesday’s close. The 90 E will expire after Thursday’s close and this expiration will likely cause the -2% H indicator to become dormant and the +2% H indicator to fall to a low (L) state. The index also appears ready to break resistance at the MRL. See a more detailed description of most of the indicators developed through research and featured in these articles here.

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.

+3.16% / -3.36% / +3.16%

The S&P 500 continued to chip away at the resistance in the Midrange Resistance Level (MRL) likely to be found from 1850 to 1865. Monday’s high of 1858.71 reached an intraday record, and pushed well into the MRL before dipping to finish near resistance at 1847.61. Although Tuesday and Wednesday both finished lower than Monday near 1845 and had lower intraday highs that reached above1852, both highs were above the lower resistance level of the MRL at 1850. Thursday was the first session to finish near intraday highs with a close of 1854.29, and as a result finished at a record high close and above the lower resistance level. Fridays’ intraday day high of 1867.92 shot through the upper resistance level of the MRL at 1865 and finished well above the lower resistance level at a record close of 1859.45. Friday’s low also turned higher at 1847.67, near previous resistance seen in the lower MRL level indicating this resistance level could be beginning to offer support.

Thursday’s record high close officially recovered from the significant drop found within the MRL from 1850 to 1865. The drop measured 5.76% from the Jan 15 highest close to the Feb 3 lowest close. Although most measurements are taken from daily closes, resistances also include opening prices and daily highs and lows. Therefore the resistance that the pullback began at was found in the Jan 15 intraday high of 1850.84.

The early projections in November of a possible pullback within the MRL at 1850 to 1865 began in the 5% to 7% range with the drop possibly nearing the upper range. This projection was later refined to 3% to 7% and then 3% to 5% due to reductions in tensions as the resistance neared. Considering the data above, in this instance the interpretation of the potential significant drop within this resistance level appeared to be mostly correct.

The -2% H indicator did not provide a correct indication during the past week. Provided there are no volatile market moves prior to the 90 E expiration on Thursday that would keep this indicator in a high state, the -2% H indicator will become dormant. Most indications appear to point to continued low volatility levels. There has been an absence of volatility for a fairly extended period and the expiration of the 90 E reduces the chances that volatile conditions will appear. If this indicator becomes dormant, it will return to a low state on or about March 19 when a new 90 E becomes active.

The +2% H indicator did not provide a correct indication during the past week. Provided there are no volatile market moves prior to the 90 E expiration on Thursday, the +2% H indicator will return to a low state (+2% L). Although most indicators suggest volatility could remain absent, this indicator will remain active due to a continued possibility that an offsetting move higher could occur in response to the most recent 2% drop seen on Feb 3.

Offsetting moves are most often seen during the thirty trading day period after a volatile move, but most common during the first ten trading days after the volatile move. Since the expiration of the 90 E further reduces the chances of a volatile move, this indicator will fall to a low state at the expiration. This thirty trading day period will expire at the close on March 18, making this indicator dormant, but a new 90 E will become active on March 19 returning it to a low state. Provided there is not a volatile move higher during this time period that would satisfy the offsetting move and return this indicator to a dormant state, or a volatile move lower that would return it to a high state, this indicator will likely remain in a low state until the upcoming 90 E indicator expires.

The 90 E will expire at Thursday’s close. This indicator is often active during volatile conditions. The 90 E indicator is also known for a high occurrence of significant market price direction changes while it is active.

Even though the -2% H, +2% H and 90 E generally point to higher possibilities of volatility, most other indicators continue to suggest volatility could remain calm. These indicators will likely expire shortly or fall to a low level of likelihood.

A 10 E indicator will expire with the market close on Tuesday. The 10 E indicator suggests there is a high likelihood the index could finish higher during the ten trading day period it is active in a continuation rally from the +10 day indicator. This indicator does not project the gains expected during this time period.

To this point the 10 E performed as follows in the format: highest close / lowest close / last close.

+1.02% / -0.65% / +1.02%

The volume stringer that controls the 90 D indicator was broken on Monday after it reached 11 trading days. The starting date for the 90 D indicator is the last trading day the stringer remained intact, therefore this indicator will be known as the 90 D that became active on Feb 21, 2014.

This indicator became active during a busy period with many things to consider in projecting its possible outcome.

The index is in the process of recovering from a significant drop and rebounding back into the resistance that caused this pullback. Since the significant drop was recovered in the past week, it seems fairly likely this resistance level could be broken and the index could be in a move higher to the next likely resistance level. That resistance is likely to be found within the 100 level (100 L) resistance at 1900.

The resistance band normally found within the 100 L is fairly wide, spanning from 25 points before the 100 level (in this case 1875) to 25 points after the 100 level (in this case 1925). The resistance at this level appears to be potentially significant, or one that could cause a drop of 3% or greater on the index, yet it seems fairly likely it might not be.

At the same time there is another 90 E indicator looming in the not so distant future. The time frames that the 90 E indicators are present show a higher incidence of volatility and a higher incidence of significant market direction changes along with other characteristics that are generally bearish. However this is not always the case, sometimes these indicators act very bullishly too.

Timing could be also a factor, if a potentially significant resistance is met during a potentially bearish indicator; there is a higher chance that the resistance could react with a significant pullback. It seems possible the 100 L resistance could be met during the 90 E. Yet, it seems possible a pullback of 3% or greater could be absent in this occurrence.

The upcoming presence of the 90 E means the (-)/+ 90 D indicator that became active on Nov 25, 2013 is nearing expiration. How it was expected to do is also a factor. Let’s look at the projection of that indicator made in the Dec 02, 1012 preview:

“Although it seems probable there could be a move higher first, it seems relatively likely the new 90 D could see a significant pullback in the first half of its active period. Although the overall moves seen could be fairly large, since a move higher is likely first, it seems possible this drop might not reach levels needed for normal – (minus) rating; therefore it will be encased in parentheses (-) 90D. It seems probable that the index could continue bullishly higher after any pullback seen during the remainder of the Nov 25, 2013 90 D indicator’s active period, but a good portion of that run could be regaining lost ground and it might not reach the level normally associated with a + (plus) rating, yet it seems possible it could. Therefore this indicator will be noted as a (-)/+ 90 D.”

The (-)/+ 90 D indicator that became active on Nov 25, 2013 will expire in 26 trading days. It looks possible that a bullish move higher is in progress. In order for this indicator to be correct for a plus (+) rating, it would need to provide a 10% or greater increase during its presence. It is currently 6.84% shy of this level, so the index would need to run fairly strongly to get there before the expiration. There have been many runs of this proportion during this timeframe, so it is not out of the realm of possibility.

Other potential resistance levels the index could possible encounter during the 90 trading day time period also need to be looked at. There appears to be only one midrange resistance level (MRL) between 1900 and 2000. The resistance within this MRL is likely to be seen between 1940 and 1955. It 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.

The next higher resistance would be the 100L at 2000. As the index works its way into this resistance it will enter the level identified as a potential topping area during data evaluation during 2008 and 2009. The resistance at this level appears to have the potential to cause a significant drop. Due to the earlier and subsequent data evaluations, it appears resistances met between 2000 and about 2100 (recently expanded to 2140) could have the potential to cause a large drop, possibly reaching crash proportions.

Although the 100L resistance at the 2000 has the potential to produce a large drop, recent evaluation of the 2000 to 2100 level suggests it is probably the least likely level within that range that a drop reaching crash proportions would be seen at. This doesn’t mean a significant drop could not occur there, but the data would suggest it probably doesn’t exceed 5% if there is.

The next higher resistance is likely to be seen in the midrange resistance from 2035 to 2055. This level also has the potential to cause a very large drop possibly reaching crash potential. This resistance level also holds the level of concern at 2040. Recent data evaluation pointed to resistance at 2040 as the most likely area that a crash would be seen between 2000 and 2100. The research also suggested if this crash were to occur, it probably finds bullish support somewhere near the two previous tops in 2000 and 2007. Although the crash potential is within 25 to 35% range, this evaluation makes a fall from near 2040 seem more likely to produce a drop of less than 30%.

It doesn’t seem likely the 90 D would be active long enough to reach a resistance higher than the MRL at 2035 to 2055, so resistances above this level will not be explored at this time.

At this point there does not appear to be a catalyst for a drop of this depth. Many things could happen, bearish projections have pointed to these potentials since the rebound from the crash began. Yet data analysis of these potential pitfalls makes them seem unlikely.

So what makes stocks crash absent an outside catalyst? They need to run to overvalued conditions. Many constituent stocks are still quite far undervalued and overall the constituent stocks are near even valuations. It seems that if stocks are to reach what could reasonably construed as overvalued at 2040 they will have to reach it rather quickly and probably still have to see earnings fall off somewhat once there.

Shifting investor sentiment could provide this quick run higher. Recent conversations with those that had little interest in investing before are now becoming interested. Others that took large positions off the table during last year’s run and missed the large gains seen then are showing interest in or already have reinvested their sidelined cash. These sentiment changes usually appear late in the rise. They also tend to give a burst higher, which in turn draws more in off the sidelines. But these late runs often lead to larger pullbacks, sometimes crashes.

This shift in sentiment is also being seen in bond funds. A shift from Treasury Bonds to corporate bonds and other higher interest yielding investments is being seen in several bond funds. Although these purchases are not being made directly into stocks, they will likely edge corporate bond prices higher. Runs in corporate bonds tend to spill over into equities. These funds reductions in Treasury investments will also likely pressure Treasury prices lower. Further price deterioration in Treasuries will only make it more difficult for investors to continue to hold these investments, and could send more of these investments into the equities or corporate bond markets too.

Earnings for the fourth quarter were very good and earnings expectations for the first quarter also look very good. For earnings to drop off economic conditions would need to deteriorate. Although there are normal seasonally jolts being felt in the economic data, a real slowdown does not seem likely. Still perceptions of earnings can be misleading, the market dropped to near crash levels just as many companies began reporting record profits in 2010 and again in 2011 while they were shattering earnings records.

Stocks often run higher for several months after early year pullbacks, but also often see significant falls after these runs.

Most indicators appear to be bullish or are turning bullish. An upcoming potentially bearish indicator is sometimes bullish and it appears possible it could be so in this occurrence. There appears to be a lot of good reasons to believe stocks could run higher in the months ahead. It also appears a run is beginning as the index breaks free of the MRL at 1850 to 1865. There are some resistances in the path and some timing issues that might provide a significant pullback if the potentially bearish indicator is actually bearish and hits resistance during its active period. One of the resistances at the 100L at 1900 or MRL at 1940 to 1955 might provide a significant pullback, but probably not both. If a significant pullback is seen, it probably does not exceed 3% by much. If the index reacts as it seems possible to that point, it could leave time for it to reach the upper resistance levels. The resistance at the 100L at 2000 could provide a potentially large pullback, but a pullback here probably does not exceed 5%. If it slips past this resistance without a significant pullback or one that is shallow it could reach levels necessary for a plus (+) rating. It does not seem likely that it will remain active long enough to pass the MRL at 2035 to 2055, whether a large drop is seen there or not. It seems possible this indicator could start out bullishly, and could possibly see this run reach levels needed for a plus (+) rating. It also seems possible it could expire during a significant drop at one of the two upper resistance levels, but probably finishes higher than it began. Therefore it is rated as a +/(-) 90 D.

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.

+1.26 / 0.00% / +1.26%.

The lowest close only considers closes lower than the S&P 500 closing price on the starting date, if there are none lower it is reported as zero percent.

Current Cautions

The S&P 500 appears to be breaking through the Midrange Resistance Level (MRL) likely to be seen from 1850 to 1865. This resistance appears to be submitting, but has not been broken. Being an established significant resistance some caution should still be exercised.

The pullback and rebound continue to fit normal patterns seen during rounds of profit taking. It appears the MRL resistance could be broken in this retest and it seems possible the index may be ready to move above it.

Once this MRL resistance level is passed, it seems fairly likely the index could move on to the next likely resistance level held within the 100 L at the 1900 level, seen between 1875 and 1925. This resistance level has the potential to produce a significant pullback.

However, preliminary data would suggest that it is unlikely a significant pullback will be seen at the 1900 100L, but if one were to be seen, it probably would not exceed 3% by much. Timing is somewhat critical in this projection. It is felt that it is not possible to give an accurate timeline that the index might reach this resistance level at this point. If the timing used in this projection is off, this projection could change substantially later.

Average daily volume increased during the past week, but did so in a push higher and remained near normal levels. This is generally a bullish indication.

The 90 E is active and is often active during volatile conditions. It also has a strong history of pointing to market price direction changes and appears it could have pointed to a move higher in this occurrence.

The -2% H and +2% H indicators are currently active and these indicators are often active during volatile conditions. The S&P 500 has seen two volatile daily moves while these indicators were active. 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.

A new 90 D indicator will become likely active soon. It appears that it could begin very bullishly, but end in bearish pullback that has the potential to be large.

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 eight to 17 months if it reaches this level near the upper trend line and within 35 to 41 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. If this is actually the level it appears to be, the index will probably reach it while it is near or possible above the upper trend line making this appearance probable within the next 12 months. If this is the actual level of concern, the pullback off this level is likely to be in the 25 to 35% range, but would probably not exceed 30%. The rebound from this crash would likely come near the tops seen in 2000 and 2007, although it could come somewhat higher or lower than this level. If this pullback comes earlier than expected (at a lower price level), it seems likely it could be much shallower, possibly not reaching crash levels. If seen later in the run than expected (at a higher price level), it could be somewhat deeper. It also seems possible the index could run above the upper trend line into the 2040 level of concern. If it does it could reach this level sooner than the 12 months expected.

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.

Comments:

These evaluations held within these articles do not necessarily mean a crash will be seen at or near 2040. This level only appears to hold the highest likelihood of causing a crash within the levels identified as a potential top in prior and present research. There is no way to say for certain how deep a fall will go beforehand. There is no way to tell for certain resistance will even be seen at this level, there is no established resistance at that level; the index has not reached it before.

However; there is reason to be concerned at this level. This research uncovered indicators that have so far pointed to the resistance level that caused significant drops in the rebound from the 2009 crash lows in all but one case, months or even years before the index reached these levels. Not all of the identified levels caused significant drops, but all held resistance that was apparent in the charts. These resistance levels were not exact, but many were very close, within +/-1% or less .

The interpretation of these resistance levels has not always been correct. The potential drops at levels have been incorrectly projected several times, but these projections have been mostly correct many times too.

The absence of an apparent catalyst now does not mean one could not pop up later. A few days before March 11, 2011, the index looked like it might rebound well before reaching the 5 to 7% level that was projected at the 1321.97 drop resistance. Then the Japan Earthquake and tsunami struck resulting in a drop that continued to within the projected levels with an overall drop of 6.42%. It could have been just an uncanny coincidence, but the drop projections were made well beforehand and covered in past articles.

The sentiment change touched on above appears to be just beginning, and it could last a very long time. Being so it could push equities past the likely top. But if the index were to drop and rebound near or above the previous highs of 2000 and 2007 as it seems likely, this confidence would also likely rebuild much quicker than it did during the rebound from the very deep lows in the past two crashes. This influx of new investors or those changing investments could be around for many years to come and could push the index very much higher.

If a crash or near crash were to occur, it still seems likely to be a good opportunity to invest.

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 is currently about 86% invested long in stocks in his trading accounts. Although his investment level remained unchanged over the past week, he purchased one issue with the cost of this purchase nearly offset by the sale of one issue 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 19 issues in the coming week and 17 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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