Market Report 5/31/16

With the Memorial Day Holiday weekend over and the official start of Summer here, the market (SPX) is less than 3% away from an all-time high.

I’ve been saying for a couple weeks now that the SPX is trapped between support and resistance and going into the last day of May and into June, that’s still where we are.

Here’s the daily chart with the support and resistance zones marked.

SPX_D_5302016

Notice I drew small black circles around all the previous highs that occurred up in the area of current levels. Since the market has not made a new high in over a year now, and was previously rejected from all those circled areas, it will be interesting to see if this time it can push through the resistance and make an all-time high.

It’s totally plausible. But keep in mind that in 2014-2015 each new nominal all-time high was followed by a pullback – some very significant.

In other words, everyone got all excited every time the market high a new high and then shortly thereafter there was a correction.

Before we get too excited here it seems to me that the “resistance zone” on the chart doesn’t look it will be pushed through all that easily. In the very near-term the market feels like it’s a bit overbought since we had several large gap-ups recently that accounted for the bulk of the recent move up.

Now the market did break that downward-sloping trendline I had on the chart and things have improved technically. But the next hurdle is the double-top zone and then all that prior resistance.

The angle of attack is important too. I would way that the best case scenario would be for some consolidation between the support and resistance areas and then an attack at the all-time high. If the market keeps pushing higher and gets too overbought there’s a good change it will reverse.

Keep in mind that the closer it gets to the high the more excited everyone gets and the financial media gets all whipped-up into a frenzy. It seems like we are approaching that sort of sentiment now given the strength last week.

But realistically the new-high area is just “back where it was” a year ago. I can visualize a scenario where the market makes a high and then retreats.

To me, a new high really doesn’t mean anything unless it gets follow-through and manages to stay over most of those highs I circled on the chart. In other words, for the market to really “break-out” it would likely need to build a base – a consolidation area – and then bust through the highs and pull away from the area of all the resistance.

I would want to see the resistance area become new support.

But we’re getting ahead of ourselves. That’s something that would take time to play out if it’s even in the cards. Again, a march straight up to a nominal new high from here would likely result in a reversal that could take it all the way back to the area of the support zone.

I’m honestly thinking that’s the most likely scenario – a range bound market that chops around in a wide range between say 2020 and 2120. It may poke a bit higher than that if the momentum is there but I’m honestly thinking it will be a “sell the rips and buy the dips” environment.

I’m expecting a wide choppy range for the next couple months and I don’t think buying the highs is the way to go. I think the smart money will be selling the highs and buying the dips.

Of course the most important thing to me is not the overall market but the overall environment and how “stocks are acting”. Lately the action has been a bit more positive and the McClellan Oscillator has moved about the zero line so we could be looking at a decent trading environment.

Since it’s a Holiday weekend and I have company in town I won’t get into any of the macro stuff this week. There are a lot of cross-currents as far as that’s concerned but my primary objective this shortened week will be to find individual stocks that have constructive chart patterns. That and determining which sectors are coming into favor.

Other than that I have a decent list of stocks with constructive charts and I’ll bring them to the shows this week and perhaps start a couple new swing trades. I’m not liking the price action in AAL and thinking there’s a good chance that one gets stopped-out. MSDO still looks good although it had a setback last week. UA seems to have made the turn as far as a trend change but it needs to get some upside momentum going soon.

I have a close eye on RYI now that it’s finally looking like an actually pullback might be happening. As I’ve been mentioning, RYI seems to have the most persistent uptrend out of any stock I see and while it’s extremely extended on the weekly chart, a pullback might be tradeable if that amazing trend resumes subsequently.

So this week we’ll take a look at how everything is unfolding as we move from May to June and we’ll see if the momentum from last week carries over. Rather than get all excited about the market nearing new all-time highs, I’ll be more interested in the underlying price action and how various sectors and individual stocks are behaving.

I’ll see you this week on the morning shows.

PS. Here’s an interesting chart I ran across that’s worth pondering.

dow_vs_spx-earnings