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Stock market preview for the week of Sept 2, 2014

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The S&P 500 increased in the four sessions and finished the week with a gain of 0.75%. The S&P 500 finished at record highs in all four higher closes. It also broke above the 2000 level and finished three sessions above it. The index has finished higher in 12 of the past 16 sessions since the rebound from the significant drop began.

See related story here.

The S&P 500 finished Monday with the week’s largest gains and pushed above the upper boundary of the lower half of the 100 L resistance from 1980 to 1995. It continued higher at a slower pace until Thursday’s small loss. Friday rebounded to finish at a new high. The index appeared to slow as it broke above the 2000 level, indicating resistance was met sooner than the 2010 to 2020 level that was expected in the upper half of the 100 L.

Average daily volume levels fell 9.70% compared to the average daily volumes of the previous week. The week’s highest volume was seen on Tuesday and the lowest on Monday. The difference between five day volume variances dropped 5.64% below the previous week to 9.76%.

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 higher in bullish runs during the week, although all appeared to slow somewhat as they met resistances in these advances.

The S&P 500, Dow Jones and NYSE finished four sessions with gains. The S&P 500 finished the week at record highs as it did in all four increases. The Dow Jones pushed to an intraday record high on Tuesday, but has not yet finished at a new record high. The Dow’s rebound Friday fell slightly short of regaining the losses it had in Thursday’s setback. The NYSE moved above the 11,000 level Monday and has finished above it in every session since. Although it has so far fallen short of new highs, Friday’s rebound recovered the losses it had seen on Thursday, and moved slightly higher.

The NASDAQ and Russell 2000 finished higher three times during the week, with each slipping on Wednesday and Thursday. The NASDAQ finished the week and all three higher sessions at new 52 week highs. The Russell 2000 finished the week higher, but slightly lower than Tuesday’s finish. The Russell saw the bullish cross of the 13 EMA over the 50 EMA complete during the week.

All of the indexes appeared to find resistance during the past week that has slowed their climb, but it appears they are working higher through these resistances. The distance their prices are running above the 13 EMA have narrowed in this slowdown, but pullbacks have found rebound points well above the 13 EMA.

The indexes all moved higher on Friday into a holiday extended weekend. Considering current tensions in the world, this appears to be a very bullish indication.

All five indexes have remained in fully overbought conditions and it seems likely they could continue to hold near overbought conditions. Although a pullback is possible, it still seems likely the indexes could continue higher in the week ahead.

US Treasury Charts

The 20 year US Treasury Bond prices increased in four sessions during the week. The only session with a loss was Tuesday, finishing only slightly below the previous Friday’s finish. The largest increase was seen on Thursday as it gapped widely higher, but finished lower than it began. Both Thursday’s and Friday’s highs turned lower near potential resistance. Friday’s high was slightly higher than the high on Thursday and well above the previous high. This chart continues to look bullish, but the 20 year is fully overbought near a potential resistance.

This chart also shows a decoupling from normal trading patterns late in this run, moving higher into a fairly large run up in stock prices. After slipping in the first three days of the rebound in stocks, it has finished higher in nine of the past 13 sessions, nearly the same as the S&P 500’s ten of 13 higher finishes during this period.

The long term Treasury charts appeared to continue to show uptrends and to appear somewhat bearish for stocks.

The interest rate on the 10 year US Treasury Note finished lower in three sessions during the past week and also in five of the past seven. It seems possible Friday turned higher at a higher low than the previous cycle, showing it could maintain a support trend the previous rebound started from. This chart continues to show bearishness, but also hints it might be near a turn higher. If it should turn lower and this support level is broken, it would seem quite bearish for stocks. The ten year is still oversold.

Gold

Sunday night gold fell sharply at the Sydney open to about 1275, before starting a slow bouncy rebound to finish the night just short of 1278.

Monday gold traded within 5 points for most of the day. It slipped to about 1275 by the London open and then bounced higher to reach 1280 shortly after the New York open. It bounced mostly lower to a bit under 1275 late in New York trading then began to trend higher before the Hong Kong open to about 1279 before slipping slightly to finish the day a little under 1279.

Tuesday gold pushed fairly strongly higher in Hong Kong to about 1291 before the London open. That rally fizzled in London falling back to about 1287. It retested the high early in New York, but fell short and then backed off to about 1283. It traded flatly near this low until breaking lower late in New York and reaching a low of about 1279 in Sydney. It trended higher to reach 1285 in Hong Kong, then lower to finish the day at 1283.

Wednesday saw gold trade flatly. It trend higher to a high of about 1287 in London before rebounding from a few point drop to match this high early in New York. It slipped to about 1281 and then traded between 1284 and 1282 until repeating the low in Sydney. It trended higher off this low back to about 1287 in Hong Kong before slipping to finish the night a bit over 1285.

Thursday saw gold trend higher in bounces, peaking at about 1296 shortly after the New York open. It fell to about 1287 off that high then rebounded to trend flatly within a couple points of 1290, finishing the night a little below 1290.

Friday gold traded within about 8 points for the session, falling to a low of about 1283 in London before the New York open. It rebounded to about 1291 in New York before slipping into the New York Spot close of 1287.20 and higher than the previous week’s spot close of 1280.80.

The weekly gain broke a two week string of losses in gold.

S&P 500 Constituent Charts

The majority of the constituent charts make it seem possible the index could continue to rebound slowly for the time being, but many continue to look toppy making this continued rebound uncertain.

Some constituents have broken above resistance in the rebound from the significant drop and some appear to be establishing moves higher from these breaks, but there are relatively few continuing higher in these resistance breaks. It seemed possible the rebound from the significant drop could send some stocks into apparent resistance breaks, but that these breaks could falter shortly after the index reached new highs. Several that looked to be in these moves higher earlier have begun to round out of these runs during the week. A couple that appeared to begin to flatten or retreat late in the previous week continued higher late in the past week too, so not all of these runs are dying.

Many are still failing to move higher after initial resistance breaks. Some finished the day they broke higher below the resistance they broke above, and have yet to move higher back to the resistance level after these drops. Many of those that made these breaks before the recent significant pullback on the index have trended sideways to down since, many have been in these patterns for several months.

The lack of sustained resistance breaks in this rebound is a concern. Rebounds lacking resistance breaks tend to fizzle out as the constituents run into and fail to move above resistances, eventually bending lower in a retreat.

Many of the constituents turned lower at resistances lower than they fell from in the rebound, appearing to begin or continuing into the down side of rounding top on their long term charts. As these topping patterns continue to develop, drops often steepen in subsequent pullbacks. The patterns therefore give these constituents a higher potential to move lower than they fell in the last significant retreat in a future significant pullback.

It appears the numbers of upward tensions are again fading. These tensions could extend into resistance breaks in constituents still moving higher, but there are few sustained breaks occurring in the constituent charts at this time. Upward tensions also tend to burn out as stocks fail at resistance levels.

As these stocks fail to move higher, downward tensions begin to increase. These downward tensions are often unlocked as the index reaches a likely resistance.

The index is currently within a likely resistance level and this downturn could happen within this resistance. This seems unlikely as it currently appears the index is working its way above this resistance. At this point it seems fairly likely it could continue to do so.

Amongst other criteria, these downward tensions are often gauged by distances constituents are above likely support levels and the numbers that could turn lower to these supports. If all or most of these constituents continue in these rounding topping patterns, it appears the numbers and potential drop levels could be large enough to tip the index over in a significant retreat. If this tip over occurs, it could cause a larger retreat.

Based on past failures in topping patterns, this turn lower is likely to weigh on constituents still showing bullishness and turn many of them lower too. Many in these runs have left uncovered gaps higher. Uncovered gaps either higher or lower are most often eventually covered. If this turn lower occurs, it leaves the potential for these gaps higher to be covered in a retreat. This in turn adds substantial potential downside in a move lower on the index.

Chart formations in constituent stocks continue to suggest there is reason to remain cautious, but they also still seem to show the index could continue higher for the time being.

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 +2% L, -2% L and 100 L indicators are currently active. The 10 E expired on Friday, although it seems possible it could remain active until Wednesday due to a possible false toggle of the +10 day indicator. A new 90 D indicator will become active soon. See a more detailed description of most of the indicators developed through research and featured in these articles here.

The +2% L did not provide a correct indication in the past week.

The –2% L did not provide a correct indication in the past week.

Although it seems likely the resistance in the upper half of the 100 L was softened considerably by the recent significant drop, the index appeared to find resistance somewhat earlier than expected in the upper half of the 100 L resistance. The rebound slowed nearer to the 2000 level than the original resistance projection from 2010 to 2020. This possibly means the slowdown could break higher somewhat earlier than expected as this resistance band might have shifted lower. It could also mean this resistance level was wider than what appeared likely and the slowdown could continue longer than expected.

In either case it still seems possible the index could move past the 100 L in this rebound without further incidence. The index appears to be making its way slowly higher through this resistance. Although research suggested the break above 2000 could put the index in a potentially bearish range and there are many indications that the market could turn lower, research also suggested the resistance at the 100 L was probably the least likely resistance to cause a large drop.

The S&P 500 saw its largest gains for the week on Monday as the index opened higher and at the session lows of 1991.74, pushing above the 2000 level to 2001.95 before settling lower to finish at 1997.92. Tuesday again opened higher at session lows of 1998.59, reaching a high of 2005.04 before settling lower, but managed to hold on for the first close above 2000 with a 2000.02 finish. Wednesday again opened higher at 2000.54, but saw a low of 1996.20 and a lower high than Tuesday at 2002.14, before finishing only slightly higher at 2000.12. Thursday opened lower and failed to break back above 2000 during the session with a high of 1998.55 and fell to a low of 1990.52 before rebounding to finish at 1996.74. Friday opened higher at 1998.45, but slipped to a low of 1994.65 before rebounding to finish at 2003.37, and only a cent off the session high.

The S&P 500 broke above the upper resistance in the lower half of the 100 L at 1995 on Monday and it also breached the 2000 level for the first time in that session before slipping back below it and finishing the session above the 1995 resistance boundary. Tuesday pushed to the intraday high for the week before settling lower and held on for the first finish above 2000. Wednesday slipped back below 2000 but rebounded above the 1995 resistance and finished slightly higher. Thursday was the only day this past week not to break above 2000, as it slipped below the 1995 resistance but rebounded close to the intraday high prior to the significant drop and finished back above 1995. Friday retreated, but rebounded close to the 1995 resistance and finished back above 2000 with the week’s second highest intraday high.

Resistance in the upper half of the 100 L appeared earlier than expected as the index slowed during its break above 2000, but it appears to be working its way higher through this resistance. The index found bullish support in Thursday’s pullback near the July 24 intraday high of 1991.39 and again on Friday when it found support near 1995 before rebounding and finishing the week at an all-time high.

The 10 E indicator expired with Friday’s close, although it seems possible it would not actually expire until Wednesday due to a potentially false toggle of the + 10 day indicator. The Wednesday finish was mistakenly reported as Tuesday in the past week’s article due to overlooking the Labor Day holiday. The 10 E indicator finished as follows in the format: highest close / lowest close / last close.

+2.47%, 0.00%, 2.47%

A new 90 day indicator will become active when the current volume stringer that controls this indicator breaks. A projection will be included after this indicator becomes active.

Average daily volume levels decreased 9.70% week over week and the difference in the five day volume variance decreased 5.64% to 9.76%. Volume levels are consistent with bullish moves and the low variance levels are consistent with the absence of volatile conditions. Although it does not seem unlikely volumes levels could increase some due to the somewhat low levels at the current time, it seems fairly likely these bullish volume conditions could continue for the time being.

Current Cautions

The S&P 500 has broken above 2000 and into a level research suggests could contain a large pullback. Data evaluations make it appear resistances met between 2000 and about 2140 could have the potential to cause a large drop, possibly reaching crash proportions.

The S&P 500 is nearing a potentially bearish time period. The index has started or continued lower from breaks above the upper trend line many times in September or October. These two months have pronounced presences in downturns from the upper trend line. A couple of the most notable retreats include the largest crash ever seen on the S&P 500 that topped in Oct 2007 and the largest crash ever seen on the Dow Jones that topped in Oct 1929.

The period from September to October is almost three times more likely to see volatile market moves lower based on the monthly average of these downturns. Many of the largest daily, weekly and monthly drops seen on the index occurred during the two months, also occurring at levels far above the monthly averages.

The index recovered from the significant drop seen within the 100 L. It has continued higher and broken above 2000. Although it continues to seem unlikely a large drop within the 100 L resistance occurs, the index is in a position that seems likely to see this type of drop.

The index appeared to slow before reaching likely resistance from 2010 to 2020 in the upper half of the 100 L. This slowing could mean the likely resistance band was misplaced too high or it could mean this resistance band is wider than it seemed likely to be. In either case the index appears to be working higher through this resistance, so it still seems possible the index could move past the upper half of this resistance level without further incidence.

If the index continues past the 100 L, the next higher resistance is likely to be seen in the midrange resistance (MRL) from 2035 to 2055. This level appears to have the potential to cause a very large drop possibly reaching crash potential. The 2035 to 2055 MRL also holds the level of concern at 2040. Data evaluation pointed to resistance at 2040 as the most likely area that a crash would be seen between 2000 and 2140. 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.

Current chart formations tend to make a fall in excess of 10% seem possible within the 2035 to 2055 MRL, depending partly on the outcome within the 100 L resistance level. If the rebound from the significant drop within the 100 L carries the index into the 2035 to 2055 MRL, it seems possible the MRL could produce a drop that reaches the lower trend line or lower support line and probably stays within the 10% to 18% range. Chart formations make it seem possible a drop that reaches crash proportions could be seen, although it seems somewhat remote at this time. If a drop to crash potentials is seen, it does not seem likely it would exceed 22% by much.

A possible signal that an area of resistance could hold potentially larger drop potentials is the presence of several volatile daily moves (those of 2% or greater) within a relatively short time period, for instance three or four within a few weeks more or less. The larger the number of volatile moves, the more potentially dangerous a resistance becomes. These volatile moves won’t necessarily all be seen once the index reaches the resistance level, but at this point it seems fairly likely they could be. The index is entering into a time period that holds a higher than normal percentage of these volatile moves.

Some concerns as the index moves above the 2000 level include:

The index has again broken above the upper trend line. It also reached the 2000 level early than projected due to the run above the upper trend line.

Breaks above the upper trend line often produce larger retreats on the index at some point, although it is not uncommon for the index to see one or more significant drops before seeing this larger retreat. The index has rebounded from two significant retreats since initially breaking above the upper trend line.

There is no way to say with 100% certainty when this fold back will happen, but the constituent charts appear to be giving indications that it could happen in the next significant retreat. These indications appear to be happening in conjunction with research that suggested this top could be seen within levels the index has entered.

Constituent chart formations make it seem possible the index is nearing an area that this larger drop could occur at. Several constituents are again flattening against resistance levels. Some constituents are flattening at resistances that are below the previous high and some are turning lower from these resistances. The stocks that are turning lower are showing rounding tops. As these topping patterns continue to develop, drops often steepen in subsequent pullbacks.

Increases in these topping pattern failures are reason for concern. Although they are probably not yet at levels that would cause a large drop, many appear to be in positions they could turn lower from in a retreat. Current chart formations make additional failures in these patterns seem likely. It seems fairly likely deeper falls could be seen on many of the constituents in retests of support levels in a subsequent drop.

Tops very seldom happen with all stocks failing at once, the numbers tend to grow until the weight of those that failed overwhelms those in bullish runs, dragging all lower in the larger retreat. It seems possible these numbers could reach a tipping point in a future retreat.

Additionally resistance breaks are becoming scarce. Resistance breaks are necessary for a bullish run to continue. Few have broken higher and maintained these trends afterwards. Most that have broken higher in these patterns recently only went a short distance higher, then flattened again or fell off these highs. Some of those that broke higher into the rebound from the significant drop appear to be rounding lower from these runs. At the same time a couple that appeared to flatten in these recent breaks higher pushed higher late in the week.

Some of the constituents have continued in bullish runs, but many of these runs left unfilled gaps. Gaps generally fill at some point, and it seems fairly likely they could in a larger downturn.

It also appears upward tensions in the constituents are again beginning to wane as many of the recharges from the most recent significant drop appear to be burning out. Some constituents appeared to over extend moves higher caused by earlier upward tensions. This could increase downward pressure on these stocks when they finally turn lower.

Although the numbers of constituents in this category is not large, chances seem remote that some of the constituents that have continued in runs or held high prices could produce earnings to justify their current stock prices in timeframes investors are normally willing to wait. These constituents remain at higher risk for larger losses if a larger drop on the index is seen later.

At the current time there does not appear to be an outside catalyst for a crash. Chart analysis makes it seem possible this catalyst might not be from an outside influence, but instead from a pullback caused by a large number of failures in current topping patterns. Chances still seem somewhat remote that a fall would reach crash proportions in this drawback, although several constituents have dropped in excess of 20% in earlier pullbacks from highs.

The absence of an apparent outside catalyst for this crash does not mean one would not materialize as the index reaches this level. There is also the possibility investors could overreact to news events that probably should not take the market to these depths. Pullbacks seen during the summer of 2010 and 2011 were much deeper than rational evaluation of the data indicated they probably should have been. These falls also came during a time when huge increases in earnings were being seen, with near or over 70% of the constituents beating their earnings projections. This makes it seem somewhat possible this fall could come even if earnings are reported higher than expected.

Ultimately the direction that the stock market takes from here could be influenced by news events.

There continues to be many reasons to be bullish at the current time; however the index is nearing an area of potential concern and some caution should be exercised. Any pullbacks in stock prices seen along the way are probably a good opportunity to add although some flexibility in these investments could become necessary. If a large pullback is seen on the index, it could be prudent to increase equities holdings into this drop. It could also provide the best remaining opportunity to take profits in gold holdings.

These data evaluations do not mean a crash is certain within the 2000 to 2140 range. The data evaluations only identified this level as one with a high potential to cause a large drop, possible reaching the 25% to 35% range; although a fall seen low in this range might not reach these levels. This range also holds most of the specifications identified in the first crashes of a market entering into a secular bull.

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.

If the market should fall to crash levels, the blue chips, stocks with very low or no debt, and stocks with histories of stable dividends tend to fair best in pullbacks on a percentage basis. Caution should be used in stocks that have seen dividend increases well beyond those normal seen. Moderately priced stocks tend to lose less on a dollar per share basis. From a psychological standpoint this could be an important consideration, it is easier for an investor to hold a stock that falls from $50 to $25 without selling than it is to hold a stock that falls from $100 to $50. Even though the percentage lost was the same, the larger dollar value erosion of share price gives many the perception of a greater loss and a much larger distance for the stock to rebound to regain these losses, and this perception could lead to further sales of higher priced stocks in a downturn.

A crash in stock prices could be the last hurray for gold investors for many years to come.

Data provided for the S&P 500 was derived from the historical daily data tables, similar data can be found at Google Finance.

Stock and Treasury charts used for analysis and commentary were provided by ScottradeELITE.

Gold charts used for analysis and commentary were provided by Kitco.

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Have a great day trading,
ronz

Disclosure: Ron is currently about 75% invested long in stocks in his trading accounts, unchanged from that of the past week. Ron made no trades in the past week and although this rounded investment level remained unchanged, it was reduced somewhat by dividend payments. Ron feels comfortable with his investment level 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 17 issues in the coming week and 19 in the following week. If no further investment changes are made during this timeframe, his investment level would not change due to these dividend payments.

Although Ron’s 401K movements are not normally covered, with the break above 2000, he made some adjustments to his 401K’s in the past week to reduce his exposure to the stock market in these accounts. He plans to make additional moves in these accounts if the S&P 500 continues higher and it nears 2040.

Ron has two 401K’s one from his current employer and one from a previous employer. In one he reduced by 10% to 66% invested, down from about 84% invested a couple weeks ago. The other account he reduced by 14% to 26% invested, with a similar reduction made prior to the downturn in July. Although there is no certainty a large drop will be seen, there is enough evidence that one could be seen that he feels taking these precautions were prudent.

Unlike his stock accounts which he has built positions in companies he wants to hold for the long haul, he may go flat in one 401K. Since this account is from a former employer, if a downturn is seen he plans to move this account due to the ridiculous fees and ludicrous trading restrictions.

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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