The S&P 500 pushed higher in all five sessions, with the last three closes at record highs as it finished the week 1.38% higher. The index has finished higher in six straight sessions, the longest winning streak since a six session streak broke after the April 22 close. The index has increased in 34 of the past 48 sessions.
Average daily volume levels increased 17.22% compared to the average daily volumes of the previous week. Although every session finished above last week’s average volume, the volume increase was largely due to the week’s largest volume, which was seen in Friday’s push higher and was 41.46% higher than the next highest volume. The week’s lowest volume was seen during Monday’s session. The five day volume variance increased 31.17% above that of the previous week to 48.19%. The variance increase was also due to the large increase in volume seen on Friday, as the other four days saw a variance of only 4.54%.
The S&P 500 spent the early part of the week pushing back above the lower boundary of the Midrange Resistance Level (MRL) at 1940. After breaking free of the lower resistance Wednesday, it continued higher to finish that session above the upper resistance of the MRL at 1950. The index continued higher above this resistance in the late week sessions finishing the week at 1962.87.
Major Stock Market Indexes
All five indexes rebounded to push to highs higher than those seen in the previous cycle, reconfirming their uptrends. All five increased the gaps they have been riding above the 13 EMA during the week and all five returned within earlier established trends higher.
The NASDAQ was the only index of the five not to finish every session higher in the past week. The NASDAQ closed at a new 52 week high on Wednesday, in doing so it recovered from the significant drop it had seen off the March 5 high. It followed that move higher with a slight pullback Thursday, its only loss for the week, but rebounded Friday to post another 52 week high close. The NASDAQ appears ready to continue its push towards a record high and has seen only 39 sessions finish higher than the close on Friday. The NASDAQ steadily increased the gap it is riding above the 13 EMA during the week.
The other four indexes have finished higher in six straight sessions.
The Russell 2000 is the only index not to have recovered from its most recent significant pullback, but finished with the highest close seen since April 2 on Friday and is a little over 20 points from the March 4 record high. The Russell appeared to have jumped back into its catch up rally during the week.
The Dow Jones took a bit longer to rebound from its recent retreat, which appeared deeper than that seen on the other indexes, but closed Friday at a record high.
The NYSE and S&P 500 each reached record highs with Wednesday’s close, and both increased on these records as the week progressed.
Several of the indexes have pushed higher in six straight sessions. Although longer streaks have been seen, runs longer than six days are rare and being so it does not seem unlikely a brief pullback could be near. The indexes are currently in very bullish trend patterns, so it does not seem likely these pullbacks would be deep, and probably could turn higher before reaching the 13 EMA. The indexes are near overbought conditions, but it does not seem unlikely they could continue near these levels for the time being. It seems possible the indexes could continue higher in the week ahead.
US Treasury Charts
The 20 year US Treasury Bond saw some choppiness during the week. Monday moved higher remaining above the 13 EMA for the session, but Tuesday gapped lower starting at the 13 EMA and fell to the 50 EMA before rebounding to finish slightly above the 50. Wednesday opened with a gap higher, and continued higher to finish back above the 13 EMA and with the highest close since June 2. Thursday opened with a gap higher again, but the open turned out to be near the intraday high as it fell steeply lower breaking beneath the 13 EMA and 50 EMA, finishing well below the 50 EMA and with the lowest close since beginning to break lower on May 29. Friday pushed back above the 50 EMA but the rebound stalled just before it reached the 13 EMA. The 20 year US Treasury Bond finished higher in three sessions, but lower for the week as the first two rebounds were countered with a deeper drop in the next session. The 20 year has closed higher in five of the past eight sessions, but the three drops during the period produced a lower close on Thursday than it began the eight sessions at. Although still not in an established downtrend the 20 year broke to a lower low, shows weakness in most price moves higher and continues to show bearish tendencies.
Long term Treasuries price charts continue to show bearish tendencies. Although the initial reaction was higher on Wednesday, this week’s news from the Federal Reserve was not good for long term Treasuries and the move higher was quickly corrected on Thursday. The Treasury charts appear to be somewhat bullish for US stock prices.
The interest rate on the 10 year US Treasury Note pushed higher in three of five sessions and finished the past week higher. The 10 year interest rate appears to be slowly breaking down resistance at the 2.65% level. It has finished 15 straight sessions above the 13 EMA and the 13 EMA is nearing a bullish cross back above the 50 EMA. The 10 year interest rate has finished higher in 13 of the past 17 sessions. Although not yet in an established uptrend; the chart continues to show bullish tendencies.
Gold trended higher Sunday night to finish above 1281.
Gold continued higher Monday to about 1285 before reversing trend just before the London open and continuing fairly steadily lower for the remainder of the day to finish a little light of 1268.
The trend continued lower Tuesday in Hong Kong until reaching about 1264 then traded within that low and a couple points higher until shortly after the New York open, where it slipped quickly to 1259. It trended higher off that low to about 1273 before flattening and trading with a few points lower of that high until the Sydney open where it began a slow downtrend that steepened after the Hong Kong open into the nights finish of a bit under 1267.
Wednesday saw gold trend mostly steadily higher with the exception of a couple small jagged drops, one shortly after the London open and one shortly after the New York open, but both recovered fairly quickly. It continued higher until it topped at 1279 shortly after the Hong Kong open, slipping off this high to finish the night at 1277. This was the first day long rally, or nearly a day long rally, seen in gold in over a month.
Thursday trended shallowly higher to 1281 just before the New York open and then rose steeply and steadily to a high of 1321, holding near the high until it slipped off it after the Sydney open and continued lower to 1310 in Hong Kong before rebounding slightly to finish the night under 1313.
Friday gold bumped to about 1315 in Hong Kong before trending lower to 1308 just before the London open. It trended higher after the London open to reach 1320 in New York just before the London close, and trended mostly lower into the New York Spot close of 1314.70 and well over the New York Spot close of 1275.90 of the previous week. Gold recorded a fairly large gain for the second straight week.
Wednesday was the most bullish full day of trading seen in over a month, but produced just over a ten point gain and finished only a little over one point higher than the previous Friday’s close. Again without the late week rallies in New York and London, it looks like gold could have finished lower for the week. Selloffs appear to continue in the markets opposite these rallies, providing little support for these moves higher.
S&P 500 Constituent Charts
Overall the constituent charts continued to show bullishness and most of the bullish tendencies noted in recent articles continued to strengthen.
Several constituents broke above long or short term resistance levels in the past week. Resistance breaks often continue higher often the initial break.
Many of the constituents are at or near 52 week highs with many breaking to new highs after fairly long draughts. Pushes to new highs also often continue after the initial break to new highs.
Several constituents that were in moves lower during the week appear to be turning higher. Several others are near levels that seem likely rebound points.
The constituents are continuing to disperse between overbought and oversold levels. Without a news event to pull them back together, it seems likely they could continue to disperse further. This makes large daily moves higher or lower less likely, reducing the chances of volatility. Low volatility is generally bullish.
There were several constituents that have taken large drops during the past week due to earnings misses or other news events. Several of the constituents that took steep drops due to similar events during the past month or so have fully recovered from these drops and are moving higher. Not all of the stocks that fell earlier have rebounded yet, but many have and it seems likely some of the recent falloffs present the same types of investment opportunities.
Several constituents moved strongly higher after reporting better than expected earnings or due to other news events. These moves higher appear to have more than countered the moves lower during the week. Others that have taken these moves higher earlier have continued to push higher.
Some of the constituents that slipped lower after maintaining overbought conditions for extended periods reached or neared fully oversold. It is not uncommon for stocks to rebound and again begin a period of maintaining in or near overbought after such retreats. Others fell lower than they had earlier, but appear to be moving back towards overbought levels. It seems likely many of these stocks could again maintain overbought conditions.
Although the index charts shows it is near oversold, the constituents appear to be in a more diverse level. It does not seem unlikely the index could see a brief pullback due to an extended run, but it seems possible this pullback could be shallow. It seems possible stocks could continue higher in the week ahead.
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% L, -2% L and 90 E 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 that became active on Feb 21, 2014 has performed as follows to this point in the format: highest close / lowest close / last close.
+6.90% / -1.12% / +6.90%
The +/(-) 90 D will expire in 7 trading days.
The S&P 500 pushed back into the lower resistance band of the 1940 to 1955 MRL on Monday with an intraday high of 1941.15 before settling lower to finish at 1937.78. Tuesday pushed slightly higher into the lower resistance band reaching an intraday high of 1943.69 and again finished lower but this time held above the resistance at 1941.99. Wednesday slipped slightly to 1939.29 before finding support within the lower resistance band of the MRL and pushed strongly higher late in the session on good news from the Federal Reserve to finish slightly above the upper resistance level of MRL and a record close at 1956.98. Thursday continued higher pushing slightly outside the upper resistance band with a finish of 1959.48 and Friday continued higher above this resistance to finish at a record high close of 1962.87.
Most often when the index closes three consecutive times above the upper resistance level of a potential resistance it signals the resistance has been broken and it is fairly likely the index will continue higher. Even though it is likely the resistance has been broken, potential resistance levels remain active until the index moves 1% above the upper resistance or it enters into the influence of higher potential resistance. So in this case, the 1940 to 1955 MRL will remain active until the index enters the influence of the potential resistance at 1970.
It continues to look like there is a slight chance the index could find potential resistance at 1970. If resistance is found at this level it is probably not a significant level. It seems fairly likely the index could move past it with little more than a slowdown and it is possible it might not be felt at all.
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 the 90 E is a potentially bearish indicator, it is also occasionally bullish. Most of the other indicators continue to hold bullish postures.
The index pushed back above the upper resistance of the MRL at 1955 during the past week. It has finished three consecutive sessions above this resistance, often an early indication of a resistance break. Although it seems possible this resistance has been breached, it will remain active until the index reaches the 1970 resistance.
The Midrange Resistance Level (MRL) between 1940 and 1955 appears to have the potential to cause a significant pullback (that of 3% or greater), 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.
There is a slight chance that resistance could be seen at 1970, but this resistance does not appear to have the potential to cause a significant pullback. If the resistance at 1970 is seen at all, it will probably do little more than slow the index’s ascent for a relatively short duration. This resistance is within a short distance of the lower boundary of the 100 L at 2000 seen at 1975.
As the index works its way into the 100 L at 2000 (from 1975 to 2025) it will begin to enter the level identified as a potential topping area during data evaluation beginning in 2008. These 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. Although the 100L resistance at 2000 has the potential to produce a large drop, these evaluations suggest it is probably the least likely level within that range that a drop reaching crash proportions would be seen at. It is still possible a crash could be seen there, it is just not as probable as at other resistances within this range.
Although the 100 L at 2000 does not appear to hold crash potential, it does have the potential to provide a significant drop. It also seems possible recent upward tensions in many of the constituent stocks could be exhausted by the time the index reaches this level. If these upwards tensions do exhaust as the index reaches the 100 L, it makes it seem more likely a significant drop could be seen at this level. If in fact this drop is seen, it seems possible it could reach near 5% and probably remain within the 3% to 5% range. This is a preliminary projection; several factors could change these projections once the index reaches this level.
It looks likely the bulk of the resistance in the lower half of the 100 L could be seen from 1980 to 1995. A fall to and rebound from a significant drop in the lower half would probably soften resistance in the upper half of this level likely to be seen from 2010 to 2020 considerably. Although the climb would likely slow as it reaches the upper resistance in this rebound, it seems fairly likely the index could move past it without further incidence.
If the index moves into the upper resistance level without first seeing a significant pullback, the resistance in the upper half becomes somewhat more potentially dangerous due to entering into the level research has identified as a possible topping area from 2000 to 2140. Since this research suggests the resistance of the 100 L at 2000 is probably the least likely area this top would occur it still seems fairly likely a significant drop from this level would remain within the 3% to 5% range, but the move above 2000 increases the risk it could fall deeper, possibly to crash levels.
At the current time there does not appear to be a catalyst for a crash. Many crashes occur due to stocks becoming overpriced to earnings. Without a substantial reduction in earnings, it would be difficult to consider stocks overpriced based on the actual unadjusted average P/E’s during the time the S&P 500 was an index. Although some are overpriced, most are not and the average P/E is still fairly low.
A recently completed earnings update shows the first quarter finished with the third highest quarterly earnings ever based on the un-weighted operating earnings of the current constituents and the index pushed to another trailing twelve month earnings record. Current earnings projections for the second quarter show the index is likely to return to a quarterly earnings record. Overall it seems possible these earnings could come in 2% to 6% higher than the current projections, not only due to the perception that many of these projections appear somewhat low, but the recent history of earnings projections coming in mostly better than expected and the overall economic expansion seen during the quarter.
The absence of an apparent catalyst for this crash does not mean one would not materialize as the index reaches this level. There is always 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 earnings were seeing huge increases.
There are reasons to remain cautious as the index enters potentially bearish resistance levels, but there is also reason to remain bullish.
The index is within a timeframe that is sometimes somewhat bearish, but this timeframe has also been bullish in the past.
The 90 E indicator is active and a potentially bearish indicator. The S&P 500 has often exhibited bearish traits during the active periods of the 90 E in the past, but most other indicators continue to exhibit bullish tendencies. The presence of this indicator does not necessarily mean that the market will turn bearish. Although not as frequently seen, the 90 E has also been seen during very bullish times.
The +2 L and –2 L indicators are also active. The presence of these indicators is generally a somewhat bearish indication as these indicators show an increased chance of volatility. However, this volatility is not always bearish and their presence also increases the chances that an offsetting move higher could be seen on the index.
There have been three 2% moves lower without an offsetting 2% move higher. Offsetting moves are most often seen within 30 trading days of the opposing move, however when these moves are not seen during this time period, they are most often seen during the presence of a 90 E indicator.
Most 2% moves are offset after one or two occurrences of moves in the same direction. The chance that an offset will occur during a potential offsetting period also increases as the number of consecutive moves without an offset increases.
The last time an offsetting move higher occurred was on Oct 10, 2013. That move higher was well outside the 30 day period most offsetting moves are seen in, but the move higher was three days into a 90 E indicator’s active period. That 90 E had toggled on during the expiration period of a 90 day indicator that became active on June 18, 2013. That volatile move higher also ushered in a bullish time period on the index.
Several indicators became active recently. Increasing numbers of indicators shows an increasing chance of volatility. If volatility were to increase, it is generally a bearish indication. However; a short burst higher that reached volatile levels and provided an offset for the earlier 2% retreats, perhaps after a retreat to bullish rebound point like the 13 EMA, would probably continue bullishly higher and probably not result in bearish overtures.
The long sideways move at the 1883 resistance appears to have increased upward tensions in many of the constituent stocks. Many of these upward tensions appeared to remain intact. It also appears fairly likely many could remain intact until at least into the 100 L at 2000. These tensions could work to reduce bearish volatility at the potential resistance within the 1940 to 1955 MRL.
Recent chart action in Treasuries and Gold make it seem possible they could add to pushes higher in equities.
Long term Treasury bond price charts continue to show bearishness; although not in established downtrends, they have completely broken from recent uptrends and continue to show bearish traits. Recent Federal Reserve news was initially reacted on bullishly, but quickly corrected with a fall to new lows in the downturn beginning May 29. That turn lower was also near the upper trend line of the downtrend established in the drop off of July 2012 highs. Selloffs in Treasuries often make their way into equities.
Gold finished a second week with substantial gains, but continues to find little support for these higher prices outside New York and London trading hours. Gold continues to maintain within the long term trend lower beginning in 2012.
Recent bullish moves on indexes like those seen on the NASDAQ and Russell 2000 most often continue to recover from the significant drops they had seen earlier and most often continue higher in this rebound before seeing another significant pullback.
Ultimately the direction that the market takes from here could be influenced by news events. Most of the recent economic news is encouraging and most earnings reports are good. Even some of the earnings reports that were perceived by investors as disappointments held silver linings that have helped to move some of these stocks higher since. Some have continued to be overlooked, but future earnings reports will likely uncover these gems.
Average daily volume levels increased 17.22% week over week and the five day volume variance increased 31.17% to 48.19%. The large increase in volume seen on Friday was somewhat volatile; however the market did not see a volatile price move and the price moved higher into this volume spike. Volume spikes into higher price moves are generally bullish.
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 although some flexibility in these investments could become necessary later.
If the index continues within the trend established off the crash lows, it seems possible it could reach the 2000 to 2100 level in six to 15 months if it reaches this level near the upper trend line and within 33 to 39 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. More details of this potential resistance can be seen in past articles.
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. 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 $1000 to $500. 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.
The ECB cut rates while the Federal Reserve looks to increase rates. Money flows to the highest interest rates, it always has. It is the main reason the Euro outpaced the dollar during the years it was strengthening, the ECB consistently increased rates before the US.
Foreign money bought Euros and the money was parked in Europe’s banks to get these higher rates. It effectively decreased the supply of Euros and increased demand pushing the Euro’s value higher. It won’t happen overnight, but if the US leads in raising rates and continues to hold this lead, it is likely the dollar will strengthen.
The Regan administration used this fact to strengthen the dollar by spiking interest rates higher. The Bush administration used this fact to weaken the dollar in an attempt to increase exports.
Data shows the Regan administration’s plan worked, although it started out a little choppy, as the dollar strengthened the US economy went into a 20 year boom. Why? There are many reasons, but probably the most important was it effectively increased the money supply in two important areas. Banks had more money because they had more foreign deposits. More money meant more loans, more loans meant more growth. It also unlocked much of the investment capital stashed in gold. As the dollar strengthened, gold investors sold and put this money to work elsewhere.
Data shows the Bush administration’s plan didn’t work. Both imports and exports grew, but the growth rate on exports actually decreased nominally, while the growth rate on imports increased. To make matters worse, we paid more for what we imported and got paid less for what we exported. Instead the trade deficit ballooned, increasing 44.91% from the onset of this policy in 2001 to the pre-crash high in 2007.
Some may claim the deficit ballooned because oil prices peaked at over four times where they began during the Bush administration and after falling briefly, returned to near these levels. At the same time a weakening in the dollar was at least partly to blame for the huge increase in oil prices and US oil imports have fallen off drastically in the past five years resulting in a net decrease over peak levels. The point is moot; the above data results were a comparison of exports against the total nonpetroleum imported goods and services. Oil was not to blame although the deficit increased substantial more when it is included, to a total increase of 111.28% during the same time period. It certainly does look like a weak dollar could be.
Part of the increase in imports was actually caused by the weakening of the dollar. Companies in the US moved operations out of the US and into countries with strengthening currencies to take advantage of currency exchange rates which increased earnings, but other factors affected some of these decisions including lower wages and the absence of US taxes on these earnings. These products were then imported for sale in the US.
Many of the wealthy also moved assets outside the US to avoid this devaluation. This in effect reduced the money supply.
Data analysis of trade deficits were based on the U.S. International Trade in Goods and Services reports along with other data provided by the Bureau of Economic Analysis including the most recent annual update for 2013 data released on June 6, 2014. Many of the other sources of information used in this article can be found here.
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Disclosure: Ron is currently about 80% invested long in stocks in his trading accounts and this investment level decreased over the past week. The decrease was the result of the purchase of one issue with the cost of this purchase more than fully offset by the sale of three issues and 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 five issues in the coming week and 28 in the following week. If no further investment changes are made during this timeframe his investment level would not change.
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.