Market Report 5/2/16

The title to last week’s post was Fed Week with the Market up at Resistance.

Take a look at the Weekly chart I posted last week and the notes about the similarity of the circled weeks.

If you read that post you know I was concerned that a break below last weeks low might signal the beginning of the long-awaited and overdue pullback. Well we broke it last week and are faced with essentially a “double-top” on the weekly chart.

Here’s the current Weekly chart with notes.

SPX_Weekly_4302016

SPX 2111 – Remember that number.

That was the most recent high and it’s the level the S&P is going to need to surmount to make a new high.

What will be the catalyst?

“the Fed isn’t going to raise anytime soon and not as many times as everyone expected this year”?

“there’s no where else for money to go with interest rates so low”?

“S&P earnings, which peaked in Q1 2015 are likely to turn around as things pick up in the second-half“?

“the market will rise by virtue of a falling dollar and rising oil and commodity prices”?

I could probably go on and on with a list of potential cases for a break-out – the “bull argument” as they say.

But I remain skeptical in the near-term as the market just had a lower-high on the weekly timeframe and that’s actually the 3rd lower-high since the market “peak” last May.

Headed into this May we are faced with a moribund domestic economy, another quarter of declining earnings and the sense that “all isn’t as well as it’s cracked up to be”. Otherwise it would make sense for the Fed to be raising rates and they’ve backed off that quite a bit. I thought they were going to threaten to raise in June given the recent strength in the market but they didn’t even do that.

Since it’s a new month when the market opens Monday, I wanted to take a look at the longer-term view. Here’s the weekly chart going back 7-years. Keep in mind nothing happens quickly on a weekly timeframe with this wide of a view. Click the chart for full-size.

SPX_W_4302016

As I mentioned, it’s the “lower highs and lower-lows” that concern me right now so I’m leaning cautious until / unless we see 2112. In the mean time there is a huge support zone between 2000 and 2025. 2000 is the 38.2% Fib retracement and we have the 50,100, and 200-day moving averages in that zone – as well as previous levels of support and resistance at 2020.

In the near-term we could be looking at the long-awaited and long-anticipated dip or pullback or whatever you want to call it. I’ve been suggesting that the rally was eventually going to run out of steam even though the duration kind of surprised me. I was also skeptical that it would run all the way back up within 5 points of the prior high, but that’s all in the rear-view mirror now.

Last week I got a sense that things changed – and not for the better.

For one thing on Friday, the SPX had a full candle below the 9-EMA, which hasn’t happened since Feb 12th – the day after the low. But there’s one point I want to make about the chart above before I move on.

The “line in the sand” is SPX 1800 if it happens to take the direction of the red arrow. It’s a long way down from here to there but out in the future – if the market breaks that rising trendline going back 7-years – and breaks below 1800 run for the hills.

Getting back to the near-term, we saw signs of distribution or profit-taking or whatever it was last week and caution is warranted here. While the overall market may be looking at at a bit of a pullback there may still be pockets of strength and I almost expect similar action to the “sector rotation” we’ve been seeing recently – providing some decent trading opportunities.

It’s so important to distinguish between timeframes. If I’m looking at that chart going back 7-years and cautious that doesn’t mean we can’t have a couple big up days this week or next. The trading environment has been fairly decent and that may continue.

Several weeks ago I posted a link here to the entire gold and silver mining sector stock and they’ve made considerable moves higher. Steel and aluminum, basic materials, industrials and energy have been strong.

That’s also another gradual shift that might be worth pursuing if it continues. It seems counter-intuitive with a “slow economy” but those are the areas that are winning the “popularity contest” now and it’s likely due to a weak dollar.

With all that said there are so many moving parts – and so many things that could turn on a dime – it’s like putting together a complex jigsaw puzzle.

I’m not ruling out an eventual new all-time high, but it seems likely – from a technical perspective – that we’re looking at a pullback right now. Keep an eye on this weeks high and low. If we get another lower-high on the weekly then it will confirm that line of thinking.

The thing of it is, that the market needs a pullback here. I mean come on, it just had that HUGE run from 1810 to 2111 which is +16.6% in a straight line. I said a long time ago that the trajectory was unsustainable. We should welcome a pullback here and perhaps it will just turn into a normal pullback to that support zone I mentioned.

But I always like to remind myself to not get complacent. After all, last August the SPX dropped -11% in 6 days. And of course we all remember the more recent January plunge. Both were fast and furious and it’s obvious that could happen again. I like to keep those two “corrections” in the back of my mind so as not to get too complacent.

This week is a full-on barrage of earnings releases. As I mentioned on the show Friday it seems like almost every “constructive chart” I’m running across right now has earnings this week. And you know I don’t hold a stock over earnings so we’ll have to be very picky on the next trades. Soon a good place to look for new ideas will be stocks that released earnings a couple weeks ago that have settled down or pulled back.

A pullback in the overall market will re-set a lot of charts. Many are very extended and a normal “cycle-down” should offer opportunities in the future.

With that said I will be on the lookout for a couple new trades this week and if for some reason the market “acts resilient” I won’t hesitate to jump in there and take some trades. I’m considering the idea of short-sector ETF’s if things pick up momentum to the downside.

A lot rests on the price of oil by virtue of the dollar and all those other pieces of the proverbial puzzle. Regardless of the macro picture there’s always opportunities for good quick swing trades and stocks that do well because they are “in favor”.

I’ll do my best to ferret them out for you and bring new ideas on the shows, in the Chart Feed and other sections of the service.

It’s officially May and we’ll just have to see what the market wants to do now. You might remember me saying many months ago “I remain skeptical until / unless the market makes a new all-time high”. Well it’s been a year since that happened and I still feel the same way.

Join me Monday morning at the market open and I’ll show you some stocks I like right now. After the show I’ll get some new ideas posted and we’ll take it from there.