Market Report 4/4/16

The first Quarter just ended and the S&P got that little extra “April Fools’ Day” push all the way to the underside of the “back to where it came from” zone I drew on the chart a couple weeks ago.

In last week’s post I noted that it looked like the market was stalling and acting like it might want to roll over but as I wrote in the post “I think the “pain trade” is a bit more of a move higher – then a reversal.”

All it took was Janet Yellen’s speech to the Economic Club of New York to light things up as she suggested a more gradual pace to rate hikes than participants seemed to be expecting.

Nevermind the fact that final 4th Quarter GDP was a mere 1.4% and last week the Fed lowered their Q1 estimate to 0.6% and earnings have been falling for several quarters now. The idea of low rates for longer sparked that “extra leg up” I’ve been saying was possible for a few weeks now.

Even though the current rally is stretched, the trajectory is unsustainable and the underlying fundamentals don’t support it, remember that I mentioned you can’t fight the trend and the trend is still up for now.

I remember mentioning that they might even make it look like the market was about to roll over (which it sort of did last week) but then jam it up a bit more to chase out some new shorts and take out the stops for anyone that has been bearish since the lows. I read on a blog this weekend that hedge funds still have a massive short position and can’t even fathom that.

This rally could obviously end at any moment – and I hate to sound like a broken record but I keep an open mind and try to avoid bias. It seems like last week the conventional wisdom turned to a “don’t fight the Fed” so the market will just continue to go up mentality. That makes me nervous too.

But as I’ve mentioned in the last couple posts, the possibility exists that they continue to drive it a bit higher and pointed out the next couple major areas of resistance. Honestly the SPX is right up against a huge zone of overhead supply between here and 2100.

Here’s a look at the chart.


As I noted on the chart, the current trend is still up. The price battled with the lower downward-sloping trendline but managed to close above it Friday. The larger downward-sloping trendline might present a more formidable hurdle.

The similarities I’ve been pointing out between the last August-November pattern and the current one are close enough to call it an analog. If that relationship continues then I’d expect there’s still a wee bit of upside left. But at this juncture, with the current price right up against the underside of the “back where it started” (meaning a retracement back to where the original sell-off began) it’s hard to imagine there’s a whole lot left before we see some sort of a pullback.

The most interesting thing to me is to study the prior top and subsequent dip – last Nov 3rd to Nov 13th and the price action right after that.

Just because the pattern is very similar leading up to that point doesn’t mean it’s going to repeat exactly. The analog has tracked in an amazingly similar fashion thus far but at some point the current price pattern will decouple and start to track differently I would suspect. For now it still serves as a useful guide. So a rally up to the big downward-sloping trendline is one scenario, but I’d be surprised it it broke right through that and kept going.

More likely the current run is reaching the end of the road and a normal dip would be expected. The market has had a huge run-up and is stretched, seems overbought and the VIX is in the basement. At the same time I’d have to guess most of the shorts have been forced to cover and the sentiment is almost the opposite of what it was in Jan-Feb.

And on CNBC they are asking “is now the time to buy?”

As I’ve been mentioning, at the first sign of a real pullback the writers and pundits will come out of the woodwork to tell us the market is about to crash or that it’s headed all the way back down to the February lows. But as far as the chart, I see a lot of support down at the 200-day moving average and in the 2000-2020 zone. So I won’t be panicking when we start to see a normal down-cycle.

Notice on the chart above that way back in November the price broke down below the 200-day and a few days later rallied right back above it. The dip buyers stepped in and I almost expect something similar this time around.

Keep in mind that the SPX and Dow are a lot stronger than the Russell 2000 small caps, which is still 13.9% below it’s high.

The overall market aside there are a lot of stocks with constructive patterns and a lot of sectors starting to act a lot better. As long as heavy selling doesn’t start hitting the tape I expect there will be a lot of decent trading opportunities as we head into earnings season.

Once earnings season really gets going, that could be one catalyst for a pullback.

I posted a few new charts in the Chart Feed and will probably add more as we get into the week. I see quite a few constructive charts in individual stocks and all of a sudden the biotechs / pharma stocks seem to be showing signs of coming back into favor. I posted JUNO as an idea but there are a lot more that look good – IF we see a continuation of this buying.

Some energy stocks aren’t looking so bad either – even with oil having pulled back last week. Metals and mining and even the gold / silver stocks could be setting up for a move higher.

Earlier last week I posted an idea on CENX and decided to go ahead and go for it and I posted an update in the Chart Feed for the open position.

While I keep mentioning that the current rally is likely on it’s last leg – as long as certain stocks are set up well there’s no reason not to take some trades here and there. I don’t mind 1-3 open positions for quick trades but I wouldn’t be buying for the medium-term up here. I’d wait to see how the inevitable pullback manifests.

Don’t get caught up in the hype in the financial media about how the Dow and S&P are so close to the all-time highs again. The more important thing is how individual stocks are acting on a day to day basis and which sectors are acting well.

As we go into the new week I’ll be bringing new more new ideas and likely a couple new trades and we’ll just have to take it as we go and see what the market decides to do from here. We have support below and resistance overhead so anything’s possible.

Be sure to scroll back through the Chart Feed and take a look at how some of the past “ideas” I marked up look now and be sure to add the new ones to your watchlist. Keep in mind that instead of posting “too many charts” I try to keep it moderate and save the rest for the live shows.

Speaking of which, please join me this week for the shows if you can and be sure to log in each day for any changes to the stop or target on open positions.