The S&P 500 pushed higher in the first three sessions this week before a round of profit taking began and pushed it lower in the final two. Wednesday’s run brought the index to a new all-time highest close of 1725.52 and although it pulled back, Friday’s close was still slightly above the previous record. The index finished the week 1.30% higher and has risen in 110 of 182 sessions this year.
Although Friday’s pullback had the highest volume this week, it is not uncommon to see high volume levels during retreats after long runs higher as profit taking generally increases volumes. Prior to Friday, Wednesday’s run higher held the highest volume levels seen since late June. The 13 DMA for volume on the S&P 500 has increased by 17.94% so far in September. The average volume during the period is still slightly below the yearly average, but is closing this gap very quickly. The average volume in the current rebound is a fair amount higher than the average volume during the previous rebound from the June 24 low to the Aug 2 high.
The S&P 500 pushed higher in 13 of 15 sessions from the Aug 27 low into Wednesday’s record high close and most stocks were becoming overbought. This made it seem fairly likely a round of profit taking might be near and the late week retreat was not unexpected.
Major Stock Market Indexes
The major indexes, the DJIA, S&P 500, NASDAQ, NYSE and Russell 2000 continue to look bullish.
All five of the indexes pushed above the previous 52 week high during the week. The Dow Jones, S&P 500 and Russell 2000 reached new all-time highs Wednesday while the New York Stock Exchange pushed to levels not seen since December 2007. All four retreated on Thursday and Friday. The NASDAQ broke from the rather flat range it was trading in Tuesday and continued to push higher into Thursday finishing that session at the highest levels seen in 13 years.
Wednesday’s run higher took all of the indexes above the upper trend line in the run up from Aug 27 lows. The late week pullback has brought most of the indexes back to or under this trend. All of the indexes were also at or near fully overbought levels early in the week, although it doesn’t seem unlikely they could maintain near overbought levels for the time being, the pullback allowed them to retreat from extremes. Overall the pullback looks very much like a healthy round of profit taking. It doesn’t seem unlikely the indexes could slip a little deeper first, but it seems fairly likely they could rebound in the week ahead. Drops to or near the 13 EMA are probably buying opportunities, although there is a fairly good chance that many of the indexes could turn higher above this level in this retreat.
US Treasury Charts
The price on the 20 year US Treasury Note chart broke above resistance, and as a result the stall has extended. The chart is beginning to look like it might be rounding out of a bottom. Although the chart might continue to give the impression of a bottom, upside looks limited and a full retest of previous support is still prone to failure. This chart is beginning to look somewhat less bearish and could give temporary bullish signals, but the 20 year is still about 10% above meaningful support.
The 10 year US Treasury Note interest rate chart fell below the 13 EMA on Monday, and has failed to close above this level since. It has spent the last three days dropping to then bouncing higher off the 50 EMA. The 10 year interest rate has fallen in eight of the past ten sessions since reaching a 52 week high. This pullback has produced a low lower than that seen in the previous cycle, thus providing the first half of a bearish lower low, lower high signal. This chart continues bullish although not as bullish as previously.
Treasuries got a temporary reprieve as the Federal Reserve announced plans to continue its $85 Billion bond and mortgage buying program. Although these purchases won’t stop for a while yet, they will stop at some point. This leaves little real upside potential in treasuries. Although we might see a rebound in treasury prices in the short term longs look risky. The eventual direction change lower could be sudden and steep.
Overall the treasury charts maintained within patterns that are generally bullish for stocks.
Gold shot over 4.5% higher Wednesday to finish the day at about 1365 after the Federal Reserve announcement that it would continue the latest round of QE. This rebound tapered quickly and gold has again begun to edge lower with the New York close Friday of 1325.60 and lower than the previous week’s close of 1327.90. It doesn’t seem unlikely gold could retest support at about 1280 in the week ahead.
S&P 500 Constituent Charts
The source used for viewing the S&P 500 charts was unavailable before the time of publishing, so observations below were of charts viewed during the week. Based on those charts the S&P 500 constituents have continued in bullish trends.
At least some of the constituents stocks forming wedges against resistance levels broke resistance and moved higher during the week, while others began to establish wedges against resistance levels. Some of these stocks also broke the wedges they were in lower, but those that were viewed appeared to have extended the lower wedge line (i.e. from a one week lower wedge line to a one month lower wedge line) and are still in a wedge formation on this resistance.
Most of the stocks viewed in V rebounds have maintained trend into the pullback.
We continue to see stocks in downtrends break trend, either by moving higher or trading sideways through the upper trend line.
Although many stocks are overbought, many are showing signs that they could maintain overbought levels for extended times. Several have fallen to near oversold levels and although they may or may not rebound immediately, it seems fairly likely any drops left are probably limited.
Many of the short term charts viewed showed signs that these stocks could begin moving higher again fairly soon, and several moved higher off these likely rebound points into Friday’s close.
It seems likely that most of the constituents are overbought, but it also seems likely many could maintain in or near overbought conditions for extended times. Most of the charts appeared to show a normal round of profit taking into the late week. A drop to the 13 EMA looks like a potential buy signal on most stocks.
The +9 Day indicator is currently active. The 100 L deactivated after Wednesday’s close. The 100 L becoming dormant also deactivated the -2% L. The +10 E expired after Thursday’s close. See a more detailed description of the indicators developed through research here.
All but one indicator has expired over the past few weeks, and generally a decrease in active indicators shows a decreasing chance of volatility. Periods of low volatility are generally bullish. Although the S&P 500 had a significant pullback during the expiration period of many of these indicators, the pullback was not volatile and occurred under very low volume conditions. The index rebounded quite bullishly from the low in this pullback. It continued to trade with low volatility during the rebound and reached a new all-time high in 15 trading days with 13 of those days finishing higher. It seems reasonably possible the index could continue to rebound very bullishly from this drawback.
The -2% L indicator did not provide a correct indication in the past week. The -2% L indicator deactivated with the 100 L indicator after Wednesday’s close. The -2% L indicator was being held on solely by the 100 Level Resistance Indicator as all other controlling indicators had become dormant much earlier.
Wednesday’s close above the 1725 upper bandwidth of the 100 L indicator deactivated this indicator. Wednesday’s finish of 1725.52 might be ignored in some cases due to it being just slightly above the upper limit; however in this instance the first Midrange Resistance Level (MRL) is very close to the upper bandwidth of this indicator. As a general rule in of data collection for the S&P 500 when two indicators overlap or are very near each other (less than 1%) the lowest indicator is considered closed as soon as it leaves the normal boundaries of the indicator.
Although the index dropped back within the boundaries of this resistance level, at this point it looks like a normal round of profit taking coming after a fairly strong and long run higher. Into Wednesday’s close the S&P 500 had moved 5.83% higher rising in 13 of 15 sessions form the Aug 27 low. It didn’t seem unlikely a round of profit taking would be seen this past week and it seems fairly likely the rebound could continue after this round of profit taking. Therefore I believe this indicator has remained dormant into the current pullback.
The 100 L pointed to two significant pullbacks during the time it was active. The first began in the lower half of this resistance level as the index dropped from an intraday high of 1687.18 on May 22. The drop measured 5.76% from the May 21 highest close to the June 24 lowest close. The second began in the upper half of this resistance level falling from the Aug 2 close of 1709.64 which was also the intraday high. The drop measured 4.63% from the Aug 2 highest close to the Aug 27 lowest close.
The interpretation provided for this resistance level was mostly incorrect in this instance. The data appeared to suggest this resistance level would probably not provide a significant pullback, yet it provided two.
Leading into the first significant pullback it appeared that the strongest resistance would be felt in the lower half of the 100 L resistance and it did provide the larger of the two retreats. Timing patterns at the time suggested a pullback on the index larger than any seen to that point in the rebound was likely; however it appeared it would come from a point above the 100L resistance level and start about six weeks later than it did. Events that unfolded after that projection appeared to force these timing patterns forward, and as it turns out the duration of the fall was very close to the time period that the data appeared to suggest the retreat would begin at.
Leading into the second significant pullback, the data continued to suggest relatively light resistance in the upper half of this resistance level, giving only about a 10% chance that a significant pullback would be seen in the upper half of this resistance level. Although low volatility and several of the other indicators maintained throughout the pullback, which is generally a bullish indication, volume did not. It appears this lack of volume, or more specifically a lack of buyers and not increased selling pressure, probably caused the index to backtrack within the upper half of this resistance level.
The +9 day indicator that became active on June 18, 2013 has performed as follows to this point in the format: highest close / lowest close / last close.
+4.46% / -4.77% / +3.52%
The +9 day indicator will expire in 24 trading days.
The +10 E indicator that is active suggests that a continuation move higher is possible after the expiration of the +10 D. This indicator expired after Thursday’s close and performed as follows during the time it was active in the format: highest close / lowest close / final close.
+4.26% / 0.00% / +4.06%
In this instance the +10 E appears to have been correct as it performed as expected. However, as mentioned earlier it seemed likely that news of the Syrian Crisis released shortly after the activation of the +10 D indicator caused that indicator to fail and it also seemed likely it shifted the starting point. It seems possible a rebound similar to that seen during the +10 E extension period could have been seen during the time the +10 D indicator was active had this news not been released at that time.
It also seems possible this shifting could mean that the ten day extension period actually began with the +10 E expiration. It therefore seems possible that the normal ten day extension period of the +10 D could still be active.
The S&P 500 fully recovered from the significant drop Wednesday as it moved to a new all-time high close. For record keeping purposes this closed this significant drop.
Wednesday’s close was also just above the normal bandwidth of the 100 L causing this indicator to become dormant. The index has since reentered the bandwidth of this resistance. Normal data gathering rules due to the close proximity of the first midrange resistance is one reason it was not reactivated but other considerations were made. Although not a certainty, most indicators seem to point to a continuation in the rebound and the perception that the current drawback is due to a normal round of profit taking have aided in considering its active status.
Volume levels continued to increase during the past week and the 13 DMA is up 17.94% so far in September. Although volumes are still slightly below the yearly average, the gap is closing quickly. This average volume is higher than that seen during the previous rebound from a significant pullback. The increasing volumes into this rebound appear to be an indication that money is beginning to move off the sidelines and back into stocks.
It does not seem impossible this flow could continue to increase. Although an actual number is not available, research suggests a very large bank of cash is waiting on the sidelines as much of the profits taken in Treasury and Gold sales have not yet been reinvested. Recent news stories also point to fund managers that are building cash reserves by diverting fund inflows into cash investments. It doesn’t seem unlikely that if stocks continue higher that this influx of new money could begin pouring into equities, especially as we draw nearer to the year’s end. If the selloffs in gold and treasuries continue, it could easily amount to over a trillion dollars in new money. The higher prices and volumes on the indexes could be partially due to this influx beginning.
Timing patterns continue to suggest stocks could rebound due to large selloffs in US Treasuries. This rebound in stock prices could be very large if the drop in treasury prices continues. Treasuries fell through the last meaningful support earlier leaving only minor support levels and remain about 10% higher than the next meaningful support. It seems fairly likely the minor support levels that hold in drops could fail in a retest. Treasuries broke higher through minor resistance in the past week.
Several indicators have recently expired and others will be expiring during the coming weeks. A decrease in active indicators is generally bullish.
The first of two likely midrange resistance levels will likely be found between 1735 and 1745 (possibly to 1750). The data suggests that the resistance at this level might slow the ascent of the index, but this resistance could have been reduced with the second significant pullback within the 100 L and another large selloff in US Treasuries that could fuel a rally past this resistance.
The second midrange resistance level will likely be seen between 1760 and 1770. It continues to seem possible the second resistance level could hold significant resistance. Not all data needed is available to fully investigate this resistance level at this time; any projections made prior to this data being complete are preliminary and could change over time.
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.
I have read of many concerns over how the Federal Reserve will ultimately divest from its purchases of mortgages in the latest round of QE.
The real question is: Why would they want to divest?
These mortgages where given during the most stringent requirements to get a mortgage I have seen in my lifetime, and when housing prices were at the lowest levels seen in many years. These two factors make them possibly the safest mortgage investments of all-time. Although the interest rate they are paying is low by historical standards, they are likely to have a very low default rate.
Even though these rates are low, they were given at rates quite a lot higher than that the government is paying in interest on the long-term Treasury bonds sold during the same time period, thereby reducing the real debt load by offsetting some of the interest the government is paying on its total debt.
Although many look at these as liabilities when looking at the balance sheet, they are not, they are assets. Not only are they assets, but they are income producing assets that are reducing the debt load. If the Federal Reserve retires the money taken in on these loans as they are paid, thereby reducing the cash printed to make these loans, and uses the interest to lower its debt burden, then how exactly does it benefit them to sell these assets? The only way the government stands to benefit more than holding these assets to maturity is to sell them at a premium.
It would appear those that are trying to make these loans out to be liabilities are trying to make them sell at a loss, so they could benefit. These investments should be sold at a premium or not sold at all.
Many of these sources of information were used in this article.
Subscribe to receive Email alerts for new articles as they are published near the top or bottom of this page.
Have a great day trading,
All of my past articles can be accessed here.
Disclosure: I am currently about 85% invested long in stocks in my trading accounts. The decrease in my investment level over the past week was due to the purchase of two issues with the cost of these purchases more than fully offset by the proceeds from the sale of three issues and dividend payments. I consider myself somewhat oversold at the current time; however I have and will continue to sell stocks that reach long or short term targets. I will also continue to add stocks I feel are at a great value through a variety of buy orders. I will receive dividend payments from seven issues in the coming week and 27 in the following week. If I make no further investment changes during this timeframe these dividend payments will not change my investment level.
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.