Half Empty or Half Full?

As we head deeper into earnings season and the S&P 500 notched its 26th closing high for the year, MoneyShow’s Tom Aspray assesses the risks on establishing new positions.

Very strong earnings pushed many stocks higher again, Wednesday, though it was clearly a mixed performance as the Nasdaq 100 was up 0.62% while the NYSE Composite gained just 0.02%. The Dow Industrials closed lower while the S&P 500 was able to close above the July 3rd highs.

The earnings for the 2nd quarter have exceeded expectations as Factset reported that the S&P 500 companies could increase their earnings by 5.6% this quarter, up from the pre-earnings estimate of 4.9%.

During the spring, many feared that earnings would not justify the current high stock prices. At the May lows only 45% of the S&P 500 were above their 50 day MAs. As of yesterday’s close, 66% are above their MAs as it peaked at over 80% last month. It is trending lower, and normally, the best buying opportunities occur when it is turning up from low levels.

Stocks have been stronger this week than I expected in last week’s market review but the technical indicators remain mixed. The S&P 500 and Nasdaq 100 both look positive technically and could be starting a new push to the upside.

The NYSE Composite is still acting quite a bit weaker and further strength is needed to signal it has begun a new uptrend. The small-cap Russell 2000 still looks negative and its recent rally just appears to be a pause in the downtrend.

So is the glass half empty or half full and what should investors do?

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Chart Analysis:  The daily chart of the NYSE Composite shows that it formed a doji, Wednesday, which is not a sign of strength.

• A 1% gain would take the NYSE to a new closing high with the 20-day EMA at 10,971.
• There is key short-term support now in the 10,850 area, line a.
• The quarterly pivot is a bit lower at 10,758 with the monthly projected pivot support at 10,797.
• The daily chart shows that there is more important support in the 10,500-10,600 area.
• The NYSE A/D line broke its uptrend, line c, on July 16 and then dropped to support at line b.
• A break of this support would be negative.
• The A/D line has moved slightly above its WMA but is still below its former uptrend and previous highs.
• The McClellan oscillator has risen from its recent low of -196 to -14 on Wednesday.
• The oscillator is still below the zero line and stronger resistance at line d.
• It does not yet show a completed bottom formation like it did at the May lows (see circle).

The Spyder Trust (SPY) was able to break out of its recent trading range with its close above the resistance at line e.

• The monthly projected pivot resistance is at $199.87 with the daily starc+ band at $200.30.
• The chart formation has upside targets in the $201-$202 area.
• The S&P 500 A/D line made a new high on Monday, which is a positive sign.
• On Wednesday, it again turned up from its rising WMA.
• The daily on-balance volume (OBV) has moved well above its WMA but is still below the early-July high.
• The weekly OBV (not shown) will make a new high with a higher close this week.
• The 20-day EMA is at $196.76 with more important support at $195.43.
• A daily close below $195 would turn the focus on the downside.

NEXT PAGE: Small-Caps & Materials Rallying Too

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The iShares Russell 2000 (IWM) has just rallied back to its slightly declining 20-day EMA and the 38.2% Fibonacci retracement resistance.

• The 50% resistance level is at $116.33 with the 61.8% at 117.32.
• The Russell 2000 A/D has only risen slightly from last week’s lows as it is still well below former support at
  line b.
• There is also important resistance at the 21-day WMA of the A/D line.
• The daily OBV broke its uptrend (line c) last week and is still below its WMA.
• The weekly OBV is trying to turn up from its WMA so the close this week will be important.
• There is initial support at $113 with the recent low at $112.20.
• The quarterly projected pivot support is at $110.78.

The Select Sector SPDR Materials (XLB) was up 0.42% on Wednesday and is up 9.29% YTD.

• The daily chart shows that resistance at line d is now being tested.
• The monthly pivot resistance is at $50.73 and the completion of the trading range (lines e and d) has upside targets in the $51 area.
• The quarterly projected pivot resistance is at $52.57.
• There is initial support now at $49.67 and the gradually rising 20-day EMA.
• The lower boundaries of the recent trading range are in the $49.16-$49.27 area.
• The quarterly pivot is at $48.41.
• The daily relative performance has turned up and is testing its declining WMA.
• The RS line has more important resistance at the downtrend, line f.
• The weekly relative performance (not shown) is still below its WMA.
• The daily OBV has moved slightly above its WMA and is still well below its early July high.

What It Means: Those companies that have beaten their earnings estimates have been nicely rewarded with solid single-digit gains. Stocks that have missed, on the other hand, have routinely seen double-digit declines, which used to be the exception but are now quite common.

This makes the risk high on most new positions, especially with the mixed technical outlook. A higher close this week will turn my short-term outlook back to positive.

Apple, Inc. (AAPL) closed with sharp gains, Wednesday, and after the close Amazon.com (AMZN) will report its earnings. AMZN formed a doji in Wednesday’s session and my analysis indicates that both are currently in high-risk areas.

How to Profit: No new recommendation

Portfolio Update: Long the Spyder Trust (SPY) from $185.02 with a stop at $193.90. Changing the order to sell 1/3 of the position at $199.35 or better.

Also long the Select Sector SPDR Materials (XLB) from $47.08 with a stop now at $47.47.