Market Report 5/9/16

A couple weeks ago I pointed out the similarity between these two weekly candles. I didn’t really call it an analog but the wicks and the overall look of the candles after the market had a big run-up stood out.

I mentioned at the time to look out for a lower-high and lower-low the following week and that might portend that the market was finally due for a pullback.

Well we are in the midst of a pullback now and the big question is how deep it goes or if perhaps it’s run it’s course and the market might turn back up. From the 4/20 high of 2111 to Friday’s low was -3.3% which is your basic run of the mill “dip”. Friday closed strong and the SPX seemed to find support at the 50-day moving average.

Here’s a chart of the daily SPX with key levels marked.

SPX_D_582016

Basically the SPX is stuck between support not far below and resistance just above. I think that downward sloping trendline is the key level to watch.

As you know I use the 9-ema a lot these days and what we have seen recently is a normal down-cycle where the market dropped below the 9-ema and the 9-ema is sloping down. In order to say the current pullback has run it’s course, the first thing it will need to do is get back above that 9-ema and then break above the downward-sloping trendline.

Until that happens it’s prudent to be cautious – even if we see a bit of follow-through on Friday’s turnaround. There are still a lot of participants that believe the market is headed to new all-time highs and it’s just a matter of time until it gets there. But I know for a fact it has to get through that trendline first.

I noted last week on the Weekly chart that the “two similar candles” had essentially formed a double-top and it would make sense to be a bit cautious. After all we are in a seasonally weak time of year and the “fundamentals” of the market (SPX earnings) have been declining since Q1 2015.

It’s a well known fact that earnings (profits) drive the market in the longer-run and I’ve pointed out over and over recently that it’s tough to rationalize a strong market breaking out to new highs and beyond given the fact that the main driver – earnings – aren’t supporting it.

Now the optimists I see on TV day after day like to say “things will pick up in the second half” but that’s just “hopeful” talk. We know there are other factors at work here, the main one being the Fed holding interest rates low for longer than they said they would.

Now we are back to the “mixed signals” where the market participants are saying June is off the table but the Fed keeps hinting June is a possibility. Several of the major firms came out last week and said they expect one more hike this year in September. This sort of thing has been going on for years now and it’s very tedious but it is indeed a factor.

We are getting toward the tail end of earnings season and it hasn’t been so good all-around. My rough estimate is that 4 out of 5 “earnings reactions” were negative – meaning that the stock of the company that released earnings got crushed right after the announcement. There’s nothing more dangerous than holding a stock over earnings and I’ve been saying that for years and this reporting season is no different.

Just think about all the big-cap brand-name companies that missed earnings this time around. It was practically the norm.

I’ll be glad when it’s far enough in the rear view mirror that the charts can settle down a bit. Many times a couple weeks after earning are released there are opportunities to spot really good patterns after the charts have reset.

Here’s a look at where everything stands year to date.

YTD_582016

For all the talk of the market being up near the all-time highs, it’s barely up for the year and it’s been almost 1-year since it’s made that high. In other words the market has gone nowhere for over a year. Friday’s close was the same level as it first reached back in mid-November 2014. When we were sitting down to Thanksgiving dinner in 2014 the SPX was higher than it closed last week.

That’s just some perspective.

Anyway that doesn’t mean that there aren’t opportunities in individual stocks because the standard behavior these days is that money moves around from sector to sector and as I always say it’s really just a sort of popularity contest.

Right now there are a lot of sectors that look rough overall but there are bright spots too.

It’s really just a matter of figuring out which stocks and sectors are attracting the “flow” and identifying whether it’s just a couple day phenomena or whether the sector is getting a true up-cycle.

As we know and as I pointed out quite some time ago, the gold and silver mining stocks seem to be the real leaders. They had a swift pullback and then got snapped right back up late last week and many are breaking out to new highs. That along with energy stocks (and the market overall) seems to be influenced by the strength or weakness in the Dollar, which is also a function of the Fed.

The direction of the Dollar from here is a significant factor and it makes sense to pay attention to it.

So this week should be interesting since we have so many cross currents but as I said I’ll be looking for opportunities for quick trades in stocks with constructive charts.

Join me for the morning shows this week and we’ll dig into the charts and see what the market has in store. I’m sort of on the fence as it’s trapped between support and resistance so we’ll just have to see how it acts and react accordingly.