Here is the preview of the coming week on the S&P 500 from Traverse City, Michigan.
The S&P500 slipped fairly steeply of session highs on Wednesday and continued a little lower through Friday to finish the week with a 1.07% loss. The index slipped lower four trading days in the past week, but has closed 64 of the past 101 sessions higher.
Major Stock Market Indexes
All the major indexes, the DJIA, S&P 500, NASDAQ, NYSE and Russell 2000, dropped lower in the past week, although all also appear to be finding possible support.
All of the indexes fell slightly below their 13 EMA in the recent downturn, but all have held fairly tightly to their 13 EMA since. All but the NYSE finished Friday above this level. Most finished every session in the fall above this level although several bumped below this level more than once.
While stock prices fell during the week the prices on 20 year US Treasury Notes also finished the week slightly lower than they began. Again treasuries did not appear to show support of the downturn in stock prices. They did climb slightly above the 13 EMA Wednesday, but fell sharply off these highs to finish the session lower. As a result treasuries continued to hold in fully oversold conditions, and the bearish appearance of this chart continued.
The interest rate on 10 year US Treasury Notes slipped to the 13 EMA on Wednesday, but rebounded well above the 13 EMA before the close. The ten year note also breached the 2.00% resistance for the fourth time. If it continues much higher before retreating it is fairly likely this resistance could begin to turn into support. This chart continues to look quite bullish.
Treasuries remain oversold, but sold off further into the slide in stock prices. Many saw the Fed statements of a possible wind down in easing as bearish for stocks, but treasury investors appeared to see that it is in fact bearish news for treasuries, not stocks. As a result the treasury charts continued in patterns that are generally bullish for stocks.
Although it is not impossible that stocks could continue lower and the indexes could fall to fully oversold conditions, most stocks and the indexes appear to have found support, with many already beginning to rebound off these supports. The overall appearance of the pullback to this point makes it look like a round of profit taking that relieved an extended period of fully overbought conditions. It seems possible that the indexes could rebound in the week ahead.
S&P 500 Constituent Charts
A look at the S&P 500 and S&P 400 including recent changes to them by adding Kansas City Southern (KSU) to the S&P 500 and Dean Foods (DF), White Wave (WWAV) and Domino’s Pizza (DPZ) to the S&P 400; shows the majority of both of these index’s constituents continued to hold in bullish chart patterns.
Although some of the constituents of both indexes appeared to break into possible downturns from the runs they were in, most appear to have fallen to likely support levels and many already appear to be rebounding off these levels. Many of those that were in downtrends or trading sideways prior to this retreat also look to be at or near levels that could provide at least temporarily support with many of these stocks looking like they could be turning higher already too.
Most of the constituents that were in bullish runs higher and pulled back look to be at, near or have already begun to rebound off likely support levels. Not all stocks fell in the past week, some continued in very bullish runs and some spiked considerably higher into the downturn.
Even after the pullback seen in the past week, there are no S&P 500 constituents 4% or less from 52 week lows, one was less than 5%, only nine were less than 10% from 52 week lows, while two are over 300% above 52 week lows. None of the constituents finished Friday at 52 week highs, but 22 were 1% or less, 65 were 2% or less, 143 were 3% or less, 294 were 5% or less and 425 were 10% or less from 52 week highs.
Overall the constituents continue to look very bullish. Although it is not impossible that there could be a continued pullback, it looks possible that a rebound could already be in progress.
The 100 L toggled on Tuesday and with it the -2% L indicator also toggled on. Although the ten day indicator did not toggle on, it is also near a high state. The +2% H, -/+90 D and -/+9 Day remain active. See a more detailed description of the indicators developed through research here.
The recent increase in active indicators shows there is an increasing chance of volatility. With the exception of an increase in the +2% indicator, most indicators continue to point to a low likelihood of volatile moves at this time.
The -2% L indicator did not provide a correct indication in the previous week.
The +2% H indicator did not provide a correct indication in the previous week. Although the recent pullback increases the chances of a move higher within this proportion, the +2% H will likely fall to a low (L) level of likelihood at Tuesday’s close. The period it remained in a high level is based on the time period most offsetting moves occur in. There have been several instances when this offsetting move fell just outside the period with the highest likelihood, therefore the +2 % indicator will remain in the low state for ten trading days before toggling off, provided there are no volatile moves before then.
The ten day indicator is also the nearest to a high state it has been in several months. At this point it doesn’t appear likely it will toggle on, but near toggles of this indicator are often bullish. When this indicator toggles on it shows a heightened chance of the S&P 500 moving in excess of 3% higher (with a specific target of 5% or greater) during the following ten trading days. The last appearance of this indicator saw a 4.87% increase during the following ten days after a Dec 28, 2012 toggle, but it failed to toggle on for the 4.81% increase seen in the ten trading days following May 1, 2013. Although it has a very good success rate at indicating potential 5% increases considering a 5% or greater move within ten trading days happens only about 2% of the time, but it has failed miserably in three instances too.
It is very rare to see a ten day indicator become active this far into long runs higher, with only one occurrence since development. In that instance it had a correct indication of a 5% move higher.
The -/+90 day indicator that became active on March 14, 2013 has performed as follows to this point in the format: highest close / lowest close / last close.
+6.78% / -1.38% / +5.53%
The -/+9 day indicator that became active on April 2, 2013 has performed as follows to this point in the format: highest close / lowest close / last close.
+6.3% / -1.82% / +5.05%
The S&P 500 moved within the 100 L resistance range with Tuesday’s intraday high reaching 1687.18 before pulling back sharply to close at 1655.35. Although in most instances of data collection daily highs are ignored, in the case of resistance levels they are not.
The index’s push into the influence of the 100 L indicator also set the -2% indicator into a low state. Although the intraday drop Tuesday neared the 2% level with a 1.88% pullback from the high to the close, intraday drops are largely ignored for this indicator with the exception that an intraday move of 2% or greater occasionally satisfies an offsetting move condition. However, the large drop intraday drop did nudge the +2% indicator into a higher likelihood.
Although the current pullback at the 100 L might reach significant levels, it continues to appear unlikely.
Early indications are that we are probably at least six to eight weeks away from a meaningful pullback, one that might reach 7%, although it could be much longer before we see this pullback as these indicators are not yet set in stone. Even with the possibility of a larger pullback looming ahead, this pullback probably provided another buy opportunity, as it seems possible stocks could move as high as the potential fall before we reach it, and these indicators could also during this timeframe.
Currently investors appear to be moving from lower risk investments or investments that are perceived to have lower risk into those with somewhat higher risk, but much higher yields or higher growth potential. The resulting chart formations normally begin to be seen about six to eight weeks before a larger pullback. Although early chart formations would suggest this is beginning; they could easily change before they reach levels that make this type of pullback more likely. A larger than expected pullback at the 100 L now, would likely reduce or eliminate the potential of the latter pullback, as it would likely break the current trend before they reach levels that suggest the larger pullback is likely.
Occasionally these conditions occur and the market continues higher without a significant pullback being seen, and occasionally the pullback happens sooner than expected. With the index currently at a resistance level that could provide this pullback, it seems possible that this pullback could happen early, but there are several reasons to think it could happen within normal timeframes.
Although investors sold the early news of the Fed possibly beginning to rein in on easing sooner than they expected, the early reaction to this news is almost always negative in stocks, but almost always turns positive. It takes a bit for investors to realize that when the Fed begins to reduce stimulus, they believe the economy is strong enough to continue upward without it, and that the talk of this reduction is actually very good news for stocks. It generally isn’t very good news for Treasury bond holders, as it means that interest rates will likely be on the rise too. As treasury interest rates rise, treasury prices slide. Most often this produces a selloff in treasuries and provides a stock rally as these investors swap from T-bonds to stocks.
The news from the Fed would suggest the move lower in treasury prices is likely to continue, and being one of the investments perceived to be of lower risk, it seems possible that this could buoy stock prices. It continues to seem likely treasury prices will fall to the lower trend line in the major trend, and a rebound in stock prices would probably continue to push treasuries towards this trend line.
Others within the lower risk investments took fairly deep drops in the past week, but most of these falls were from earlier rebounds with this fall looking to have established downtrends in many of these investments. It looks possible that many of these investments have reached support and they could rebound somewhat now, but is also seems possible the trend will continue lower.
The Fed very seldom moves abruptly, so they will likely talk about the possible reductions for a couple months before actually beginning them. When the Fed actually begins these reductions it will probably cause another knee jerk reaction in stocks, and this announcement could fit the normal timeframes too. The actual event often causes a larger pullback than the talk of it beforehand. Again, a reduction in Fed stimulus or easing is often met with initially with pullbacks in stocks, but stocks usually rebound strongly from these pullbacks. If this pullback were to occur, it would probably be a good time to add.
The S&P 500 entered into 100 L resistance level and the index saw a pullback immediately afterwards. It continues to seem likely that this resistance level does not hold significant resistance (resistance that could cause a drop of 3% or greater). Although the first test of resistances at 100 L can be somewhat difficult to determine prior to a pullback beginning, and even though a few chart formations look somewhat bearish at this time, most indications have continued to be bullish to this point, so it seems fairly likely the pullback will remain minor.
It is also fairly likely the bulk of the resistance at this level will be felt in the lower half of the normal range this resistance is seen in, meaning at or before 1700. Although not a certainty, it seems fairly likely a close above 1700 probably breaks this resistance level. Regardless of the apparent resistances, the 100 L indicator will remain active until the index closes at or above 1725 as a pullback could still be seen within this range.
Although the data and chart formations suggests the resistance at the 100 L level will probably be insignificant and cause less than a 3% drop, there is no certainty that it will be an insignificant resistance. Chart formations are beginning to suggest a significant pullback looms further ahead based on normal timeframes, but occasionally these pullbacks happen sooner than expected so there is reason to exercise some caution.
There continues to be many reasons to be bullish at the current time including the Fed giving a vote of confidence to the economy with talk of a possible end or reduction stimulus, strong earnings reports in the majority of the constituents, strong earnings projections, along with many of the constituents trading at appealing valuations. The charts seem to point to continued bullishness in stocks; although they are beginning to show evidence that a larger pullback than we have seen to this point could be seen later. Even with a possible larger pullback on the horizon, it continues to seem quite likely the overall trend will continue to be bullish for the foreseeable future. Any pullbacks along the way continue to look like they are probably an opportunity to add.
There have been recent increases in positions looking for a large pullback, even a crash in stocks. This increase in short positions could be a bearish indication. It seems possible that most of these positions were taken by those that left the current run too early that are hoping to push stocks lower to add. It is not uncommon for investors to follow one bad move with another in hope of catching up and indicators suggest that these short positions could have been taken too early. If stocks were to rebound it could force these shorts to cover and those scrambling to cover these positions could increase the run higher considerably. Although the increase in bets on a pullback could be bearish, it also increases the chances of a short term burst higher in stock prices.
Many of these sources of information were used in this article.
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Have a great day trading,
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Disclosure: I have investments in DF and WWAV. I currently have no investments in KSU or DPZ although I have been interested in both of these stocks for some time. I have also featured DF and DPZ in past articles. I am currently about 82% invested long in stocks in my trading accounts. The increase in my investment level over the past week was due to the purchase of three issues with this cost partial offset by dividend payments. I consider myself somewhat oversold at the current time; however I have and will continue to sell stocks that reach long or short term targets. I will also continue to add stocks I feel are at a great value mainly through day and short term buy orders; although I have no short term orders open at this time. I will receive dividend payments from 11 issues in the coming week and 12 in the following week, if I make no further investment changes during this timeframe, these dividend payments will not change my investment level.
Disclaimer: What I provide in the Stock Market Preview is my perception of the current conditions and what I think is the most probable outcome based on the current conditions, the data I have collected and the extensive research I have done into this data along with other variables. It is intended to provoke thought of the possible market direction in my readers, not foretell the future. I do not claim to know what the stock market will do. If the stock market performs as I expect, it only means I am applying the stock market history to the current conditions correctly. My 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.