The S&P 500 finished higher in only two sessions but posted a 0.31% gain for the week. After trending lower in the first three sessions the index gapped higher at the open on Thursday and continued to move higher to finish near session highs and at a record close. Friday saw the index continue to struggle with likely resistance in the upper half of the 100 L as it started the session higher, but spent most of the day at a loss until a last minute rally broke the index to a second straight record finish. Although the index finished the week with two straight record closes, it fell short of the record high during the week.
Resistance near 2121 had formed an upper wedge line in a wedge pattern that the index had crossed in earlier sessions, but failed to finish above until Thursday’s close at 2121.10. The index finished Friday only slightly higher than it opened but broke slightly higher above the upper wedge line with that higher finish.
CNBC had a very interesting interview with Daniel Farley the CIO of the Investment Solutions Group at State Street Global Advisers in the past week. During the interview he discusses some of the reasons that stocks could be increasing even though two thirds to three quarters of those polled believed that the developed markets could see a pullback of up to a fifth in the next 12 months.
Mr. Farley explains that there is currently an aversion to holding cash and fixed income due to the extremely low interest rates. He states that investors are focused on long term goals, and these goals cannot be made with these lower returns. He noted investors are hoping to “power through a challenging short term environment, to get to long term goals,” using diversification as a means to protect against this downturn if it should develop.
It was also noted that these investors are not investing in risk aversion tactics. Those involved in the interview questioned these investors’ savvy, to which Mr. Farley noted the lack of protection into this perceived downturn appeared to be due to a lack of education in ways to protect against it. Although there is often reason to invest contrarian to majority concerns, according to the statistics stated in the interview, the majority appears to be leaving themselves naked to a potential pullback.
Since they have not protected against this potential downturn and believe it could happen, it seems possible many could intend to protect against losses in the old fashion way, selling into or before the developing downturn. This interview appeared to present evidence contrary to an earlier report by Bank of American Merrill Lynch featured in last week’s article, as the State Street poll contends investors continued to add equities during the past 12 months even with this fear of a potential downturn. It also seems possible these polls could support each other’s findings. The time frames in these two surveys differ; these investors could have indeed added to equities in the past year as the Merrill Lynch charts also shows to be the case, yet due to these concerns and the lack of protection into a downturn, they have sold equities since the beginning of the year.
It therefore still seems possible many that left themselves unprotected for this potential downturn could have already left and were probably selling into market strength just as volume levels appeared to indicate. This large decline in investor base leaves stocks in a weakened state. With fewer holding stocks; fewer selling could cause larger price changes. It therefore seems possible a sudden turn lower could slip steeply lower.
Although many believe they can weather a downturn in stocks before it happens, they often see a sentiment change as this downturn begins to unfold. This sentiment change tends to increase dramatically if prices fall below expectations. Since these investors have no other protection but to sell to avoid loses, it seems possible a downturn could eventually send those left holding investments into a selling frenzy.
The Major Stock Market Indexes
The index charts of the Dow Jones Industrial Average, S&P 500, NASDAQ, New York Stock Exchange and Russell 2000 pushed higher in the past week. The past week saw a recurring theme, as the week’s gains were largely due to the strength of a single day’s move higher. That move also again started with an opening gap higher on Thursday. Several of the indexes appeared to breach slightly above recently developed wedge patterns that set upper wedge lines at recent resistance levels, but saw these breaks fail to move above the overall resistance range within these levels. Some moved higher Friday, but spent most of the trading day lower before salvaging gains in the final minutes of trading.
All but the New York Stock Exchange finished the week with only two gains. The NYSE saw three higher closes but finished the week with only a small gain. The NYSE saw a wedge pattern develop during the week with a lower wedge line running up recent lows against an upper wedge line along resistance found near 11200. Friday finished at a record close and slightly above this upper wedge line. This break is potentially bullish, but even though this was the highest close above this resistance, the NYSE failed to reach the record high above this resistance seen in an earlier push above it, and therefore remains within this potential resistance. The NYSE saw it largest gains on Thursday, which opened with a unfilled gap higher that accounted for nearly a half of the session’s gains, leaving a potential weakness. The NYSE reached overbought conditions as it pushed into this resistance.
The S&P 500 started the week with three losses. It saw its largest gains on Thursday, which opened with a small “official” gap higher, but within seconds of the open had already seen nearly a half of the session’s gains. The S&P 500 also saw a wedge pattern develop and saw Friday finish with a potentially bullish push above the upper line of this wedge. Like the NYSE, it finished at a record close, but without reaching a new high and within a resistance level. It also left potential weakness with Thursday’s gap higher and reached fully overbought conditions.
The Dow Jones also began the past week with three losses. It saw a minuscule “official” opening gap that did not reflect the components larger opening moves higher in the week’s largest gains on Thursday, leaving a potential weakness. It saw this large move higher break a wedge pattern with an upper wedge line along resistance found near 18200 in two previous tops. After spending much of the day lower, the Dow pushed slightly higher with a rally near the close on Friday. The Dow finished short of new highs, as it has not yet recovered from its March 2 retreat, and within this drop’s resistance. The Dow is also fully overbought.
The NASDAQ started the week with two losses, pushed slightly higher Wednesday before Thursday opened with nearly half the session’s gains. Thursday finished near the resistance it has seen near 5050, and after pushing slightly above it on Friday, the NASDAQ slipped to finish with a loss. The NASDAQ also finished within resistance, with potential gap weakness, and fully overbought.
The Russell 2000 finished Monday with a small gain and retreated in the following two sessions. The Russell opened Thursday higher, but nearly covered this gap in a later retreat before it rebounded to finish the session with the week’s largest gains, also breaking a wedge pattern higher above resistance near 1240 in this move. Friday started higher, but retreated to and rebounded off the 13 EMA and finished with a small loss. The Russell is not yet overbought.
Several of the indexes saw potentially bullish wedge breaks, but all finished the week within resistance levels they have had difficulty moving above. Most are overbought. All saw their largest gains Thursday, but left open gaps in this run higher, leaving a potential weakness in its wake. Although some salvaged gains Friday in a late session rally, lackluster economic data kept the indexes mostly lower through the session.
The US Treasury Charts
The 20 year US Treasury Bond finished three sessions higher, but lower for the week. Monday gapped lower for the week’s largest loss, Tuesday started lower but rebounded to a gain before Wednesday finished with the lowest close since Nov 24, 2014. Treasuries moved shallowly higher on Thursday before gapping higher on Friday with a continued run stopping short of the 13 EMA before retreating into the close. The 20 year saw a bearish cross of the 13 EMA below the 200 EMA on Wednesday and the 200 EMA began to bow lower during the week. This chart continues to look bearish. The 20 year has been oversold for some time so a brief rebound could be seen, but it seems possible it could continue to slip until a larger sell off than any recently seen in stocks turns it higher again.
Although Treasury prices fell for the week as stock prices rebounded, the move lower continued in a mostly decoupled pattern from normal movements with stock prices. It seems possible this decoupling could be broken with a sell off in stocks.
The interest rates on the 10 year US Treasury Note saw two higher closes in the first three, with Wednesday finishing with the highest close since Dec 5, 2014. It slipped in the final two sessions, with a small loss Thursday followed by a large gap lower on Friday. Friday broke to a close below the 13 and 200 EMA just after the 13 EMA made a bullish cross back above the 200 EMA on Thursday. The 200 EMA had also begun a slight bend higher before the pullback, the first move higher in the 200 EMA since May 2014. The chart continues to show potential bullishness, but is overbought so a retreat is not unlikely. The Ten Year rates seem too low, so it probably rebounds higher from that retreat if it is seen, provided a selloff in stocks does not move assets back into Treasuries.
Gold pushed slightly above 1190 Sunday night before retreating off this high to finish the night near where it started a little above 1188. It fell lower on Monday to about 1184 in Hong Kong, but rebounded into the New York open to about 1191, falling steeply to about 1179 later in the session. Gold rebounded off that low and traded near but mostly below 1185 until pushing sharply higher to about 1196 in London Tuesday. Gold slipped back to about 1189 in New York before rebounding and trading within a few points lower of 1195 until beginning a slight trend higher in London Wednesday. The trend steepened greatly after the New York open and carried gold to about 1219 before slipping lower and trending flatly within a couple points higher of lower of 2115. That trend lasted until it began to bounce higher again in Hong Kong Thursday. These bounces continued to a high of about 1227 in New York, but trending lower to about 1214 in London Friday. Gold again began to bounce higher, at first slowly but then more steeply after the New York open. The bounces continued to a high of about 1226 but then rounded slightly lower into the New York Spot close of 1223.50 and quite a lot higher than the previous week’s New York Spot close of 1187.50.
Gold saw a second week of gains, with most of the week’s increase seen in a push higher in New York Wednesday. The push higher Wednesday coincided fairly closely with stock market lowest finishes, but gold continued higher as stocks pushed higher into the end of the week. Gold might be taking in some of the recent sell off in bond markets.
The S&P 500 Constituent Charts
Several constituents continued in strong moves higher during the past week, but the numbers in these moves still seems to be waning. Many have seen flatness near recent highs for several weeks and some have turned lower from this flatness. Some have seen the largest retreats in several months and have charts that continue to show possible weakness.
Many constituents remain within or near resistance levels that they have started large and long trends lower from earlier. Some appear to have begun retreats from these resistances.
Several constituents have developed wedge patterns against support found at or near moving averages. Some are entering time frames that increase risks for losses or have historically provided poor earnings performance and these time periods have increased investor flight in the past. Others continue to have earnings related concerns that rose in their recent earnings reports or from warnings given in these reports. Still others have announced plans that appear out of investor favor. Several have already seen fairly large retreats from recent highs, but there appears to be reason for breaks lower in these wedge patterns. If these breaks should occur, there seems to be substantial potential downside in these moves.
Most of the constituents appear to be in, nearing or falling from fully overbought conditions. The index has also reached fully overbought conditions. The large numbers in overbought conditions seems to leave limited upside potential in the current move higher.
More constituents moved higher Friday than lower, but many saw this move higher develop late in the session after spending the day retreating from or near resistance. Many of the constituent’s made only small gains, are overbought and finished within resistance that they seem likely to turn lower from. At the same time many that finished lower did so in continued moves lower from a likely downturn resistance in falls from fully oversold conditions.
Many of the constituents covered the gaps higher seen in the Friday rally two weeks ago, but many renewed these unfilled gaps at Thursday’s open and several have yet to fill the precious gap. Many of the constituents have unfilled gaps from earlier runs higher. These gaps are likely to be filled at some point.
The constituents continued to see weekly declines in the current year earnings projections in the past week. The current constituents’ earnings projections slipped by $7.33 in the past week on an even weighted basis. Economic weaknesses seen worldwide are lasting past time frames that a spring rebound normally begins. The lack of solid economic data this late into the spring shows the potential for soft second quarter earnings and also begins to raise concerns over third quarter earnings.
The indicators featured below are not always correct, but they have been many times. Being so they are worth reading about and taking note of.
The 100 L and –/(+) 90 D indicators are currently active. See a more detailed description of most of the indicators developed through research and featured in these articles here.
The –/(+) 90 D indicator became active on Feb 26, 2015. This indicator along with many supporting indicators continues to show potential bearishness. It has performed as follows to this point in the standard format: highest close / lowest close / last close.
+0.57% / -3.34% / +0.57%
Volatility indicators spiked higher late in the week. The increases indicate heightened potential for volatile daily price activity. Although the potential for volatile conditions appears greater than normal, since all of the normal supporting indicators are absent, the +2% and -2% indicators did not activate into this increase. They would instead activate if a volatile daily move were seen. Volatility indicators do not show likely direction, only the presence of conditions that have a higher likelihood of providing volatility. Although market conditions leave some potential for a bullish beginning, current conditions seem more likely to result in a bearish move. Volatile conditions are generally bearish in nature.
The S&P 500 saw Monday open a little lower at 2115.56 but rebounded to a session high of 2117.69 before turning to a low of 2104.58 and finishing at 2105.33. Tuesday started with a gap lower to 2102.87 with the high nearly covering this gap at 2105.06 before turning to a low of 2085.57 and finishing at 2099.12. Wednesday started a little higher at 2099.82 and continued to a high of 2010.19 before slipping to a low of 2096.04 and finishing with a small loss at 2098.48. Thursday gapped higher to the session low of 2100.43 and continued higher to a high of 2121.45, finishing slightly off the high and at a record close of 2121.10. Friday opened higher at 2122.07 and continued to a high of 2123.89 but spent most of the session at a loss reaching a low of 2116.81 before rebounding in the final minutes to finish with a record close of 2122.73.
Monday found resistance within likely resistance from 2112 to 2125 in the upper half of the 100 L, but slipped to finish below this resistance. Tuesday started lower and continued to fall into the likely resistance from 2085 to 2100 in the lower half of the 100 L, turning higher at the lower boundary of this resistance. Wednesday found resistance near the upper boundary of the likely resistance in the lower half of the 100 L and then retreated to again find support in likely resistance in the lower half of the 100 L. Thursday gapped higher and continued higher into likely resistance in the upper half of the 100 L before stalling. Friday pushed slightly higher into this resistance, but slipped lower into the resistance before being saved at the bell for a gain in the upper portion of likely resistance.
Tuesday’s rebound point near very near but above the lower boundary resistance of likely resistance in the lower half of the 100 L was potentially bullish as it stopped short of the previous cycle lows. Thursday’s gap higher carried to a higher cycle high and Friday managed to hold a finish slightly higher and slightly above wedge pattern resistance, but did so unconvincingly in the final minutes of trading after spending most of the session lower. Volatility indicators appeared to spike higher late in the week, just as the index appeared to be failing yet again at key resistance and has become fully overbought. If this volatility is seen it seems remotely possible it could begin bullishly, but the rally already appears to be running on the fumes left in an empty tank, so it seems possible the potential for volatility to become bearish is greater.
The index recovered from the first significant drop from likely resistance between 2112 and 2125 in the upper half of the 100 L. Although not always the case, rebounds from significant drops that recover previous highs most often push past the resistance level and move higher to the next likely resistance. Resistance within the upper level of the 100 L still appears stout, and has turned the index back several times after it recovered from this drop, so this continued rebound is not a given. The index appears to be running out of gas as it reaches this resistance again, making a retreat seem fairly likely.
The average daily volume decreased 10.87% below the previous week. The highest volume was seen in Wednesday’s small retreat and lowest volume in the week’s largest retreat on Monday. The five day volume variance decreased by 9.97% to finish the week at 12.75%. Volume levels have softened over the past couple weeks.
Greece fell back into recession after a very short period of growth. Although the downturn was blamed on fears over new investment due to uncertainty in Greece’s financial future, these fears were present when they broke from the recession too. The drop coincides closely with a rebound in commodity prices and slowing world economies, and these were probably much bigger factors in their return to recession.
Any that believe the Euro bond buying did anything more than make the rich richer, could be in for a surprise. Given the selloff in bonds, it certainly made the European Central Bank poorer, long term. Ouch, that one might sting further down that road they have been kicking the can down. Funny thing about stimulus, you have to spend it on the economy for it to work. Infrastructure is usually a good avenue, especially in depressed areas of the economy. Education is good too, even if just low or no interest student loans to those that cannot find work. Buying mortgage debt works too. Government purchases in technology or investments that advance technology, like a space program. There are thousands of things that the ECB could have done to increase economic activity that would have been beneficial. Buying long term overpriced rich countries’ debt at negative interest rates is probably about as low on the list of stimulus as you can get.
Many might disagree with a space program as an economic stimulus. Consider this, if the US had not had a space program, Apple (AAPL) and thousands of other technologies or software companies probably would not be around today. A vast majority of the technological advances in computer technology were the direct result of or decedent from the need for small powerful light weight computers in spacecraft. Space travel pushed technological advances 10 to 20 years forward of what they probably would have been made by businesses without it, if they would have been made at all. It does not seem too far-fetched to think that we might still be waiting for the first cell phone, laptop computer or flat screen TV without the US space program.
Spikes in indicators that show an increased likelihood of volatility were seen late in the week. This volatility may or may not be seen, but if it is, even if it were to begin bullishly volatile conditions are generally bearish in nature. It seems possible a volatile move higher could reverse shortly afterwards.
Earlier inversed volume levels during rebounds and retreats on the index appeared to point to a possible outflow of investments in stocks. A recent report by Merrill Lynch appeared to support that notion and although findings in a poll reported by State Street Global Advisors appears to conflict with the earlier Lynch report on the surface, it seems possible these two reports could actually support each other’s findings due to differing time frames that investors were questioned about.
The indexes continued higher in the past week largely on the outcome of a single day’s trading that began with a large opening gap higher. Open gaps higher nearly always fill eventually. Although these runs higher could appear bullish, bullish moves higher are usually seen in long strings of relatively small daily moves higher. Quick bursts higher caused by opening gaps that wane quickly are potentially bearish.
The likely resistance in the upper half of the 100 L continues to show strength. It appears the index was again stymied by this resistance in the late week run. The high level of constituents in overbought conditions seems to limit upside potential.
Many conditions continue to make a large drop on the index seem possible. Many chart formations and past occurrences of these formations make it seem possible the index could see this retreat before the end of the year.
The next likely resistance level above the 100 L at 2100 could be seen at the 2140 to 2160 MRL. This resistance has the potential to cause a significant pullback. The potential for these drops could change drastically depending upon the outcome at the lower resistance and being so no drop projections have been made for this resistance at this time.
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.
Data provided for the S&P 500 was derived from the historical daily data tables, similar data can be found at AOL Finance. Earnings information was gathered from Yahoo Finance, CNBC, Edgar Filings, Scottrade Elite, AOL Finance and Morningstar, although other websites may have contributed small amounts of information. Stock and Treasury charts used for analysis and commentary were provided by StockCharts.com or from those that Ron created from his data. Gold charts used for analysis and commentary were provided by Kitco.
Have a great day trading.
Disclosure: Ron currently has no investments in AAPL. Ron is currently about 55% invested long in stocks in his trading accounts reflecting an increase over the past week. The increase was the result of the purchase of one issue with the cost of that purchase partially offset by dividend payments. Ron feels he is overbought given the current market conditions and will likely continue to reduce his overall investment level. Since his investment level is already below the levels originally planned for months ago, he may also reinvest a portion of these sales. Ron will receive dividend payments from five issues in the coming week and nine in the following week. If no further investment changes are made during this time frame, these dividend payments would reduce his rounded investment level.
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.