It was another choppy week in the stock market...but the internals of the stock market did improve, suggesting that a resumption of the overall uptrend is likely before the end of the month, writes MoneyShow.com Senior Editor Tom Aspray.
The current stock rally is clearly becoming more selective, as the industrial and materials sectors appear to have topped out.
Two of my favorite sectors since earlier in the year, health care and consumer staples are now the darlings of Wall Street, making headlines everywhere from MoneyShow.com to The Wall Street Journal. Though they still look positive, the space may be getting a bit crowded.
The sentiment of the public for stocks seems to be getting more skeptical—only 27% called themselves bullish in a recent AAII sentiment poll, levels not reached since last summer. Futures data also indicates that the small speculators are still short, and though “this time might be different,” the small guys are rarely on the right side.
Additionally, a majority of the newsletter writers are looking for a correction. The market generally does what it can to make the majority wrong.
The economic numbers last week were not that encouraging. Leading indicators dropped 0.3%, after jumping 0.7% in March, and existing-home sales were also lower.
Next Tuesday, we get the latest reading on new-home sales, followed by the latest durable-goods numbers on Wednesday. Everyone will be closely watching for the preliminary first-quarter GDP numbers, due Thursday along with the latest jobless-claims data. These will be followed Friday by personal income, consumer sentiment and pending home sales.
The commodity markets also got considerable attention last week, as wheat rose sharply early on before getting hit by some profit taking. This has global implications, as it will further tighten food supplies in countries already racked by civil unrest.
European wheat futures have jumped 30% in just the past nine weeks. Even copper came to life, as it reached a two-week high, yet the technical readings do not yet suggest a low is in place.
Crude oil and precious metals stabilized last week, as they are trying to form short-term bottoms. This is especially true for gold, which closed more than $21 higher on Friday. Last week, it was reported that Chinese demand for gold had doubled, finally exceeding India.
There was more bickering in the Eurozone about the restructuring of Greece’s debt, which was rejected by both the ECB and German Chancellor Merkel. This was a particularly unpopular decision for Merkel, as many German economists and politicians favored this plan. Despite this, the Euro was a still bit higher for the week.
Overseas markets were mixed, as surprising losses by the State Bank of India pushed their stock market to a two-month low. Inflation in India does not seem to be slowing, which makes a further rate hike likely.
Russia, another BRIC country, is doing quite well, as it gained 15% in the first quarter. Russian stocks are still cheap comparatively, with a P/E of 8, compared to 16 for China and India, and 9.6 for Brazil’s stock market.
The iShares MSCI Emerging Markets Index Fund (EEM) has dropped to important support, so the strength of the next rally will be important.
NEXT: WHAT TO WATCH
|pagebreak|WHAT TO WATCH
The selling in the stock market Monday and early Tuesday was pretty much as expected, but the late rebound on Tuesday was encouraging. Strong gains on Wednesday were indicative of a turnaround, as the market internals appear to have completed bottom formations. (Read more about this in “Market Timing 101.”)
My intermediate-term trend analysis remains positive, as the NYSE Composite and the S&P 500 Advance/Decline line both made new highs in early May.
S&P 500
The Spyder Trust (SPY) held the support zone at $131.70 to $132.40 on Tuesday, as the low was $132.12, which is now a key level of support. Despite the lower close Friday, the fact that the S&P 500 A/D line held above its previous lows is positive.
The SPY has initial resistance at $135.36, and a daily close above $136.11 will confirm a resumption of the uptrend. The next upside targets are at $138.50 and then $141.
Dow Industrials
The chart of the Diamonds Trust (DIA), like the S&P 500, violated its short-term uptrend during Tuesday’s session, but closed the day above it. This likely triggered some selling for those whose stops were too close.
The important support level now for DIA is at $123.85, which was last week’s low. Then the April low and major support is at $120.65.
Initial resistance is now at $126.48, and a close above $127.67 will signal a move above the early May highs at $128.63. There are additional upside targets at $130 to $133. The Dow Industrials should see some psychological selling at 13,000.
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Dow Transportations
The Dow Transportation Index held up better on the correction, and rallied impressively from last week’s lows, even though it gave up some of the gains Friday.
The weekly chart still looks strong, and on a close above 5,540 it should rally to new highs in the 5,650 to 5,700 area. The upper weekly trend line on the weekly chart (line a) is at 5,770.
The 38.2% retracement support of 5,313 held last week, as the low was 5,311. It is the pivotal level to watch.
The technical action for the Transports is positive, as the weekly on-balance-volume (OBV) continues to make new highs, with prices and turned up from its WMA last week.
Nasdaq-100
The PowerShares QQQ Trust (QQQ) still has a good chance to lead the market on the next rally, with key resistance now in the $59 to $59.34 area.
The support in the $57 area was tested last week, as the low was $56.98. A drop below this level would be negative.
Russell 2000
The weakest market sector remains small-cap stocks, as iShares Russell 2000 Trust (IWM) continues to perform badly. It tested stronger support (line d) at $81.40 last week. A break of this support level will signal a drop to the weekly support at $77.80 (line e).
The Russell 2000 A/D line is still acting weaker than prices as it failed to make a new highs in April and violated near term support last week.
IWM will require close monitoring, as it needs to close above the recent highs at $85.54 to stabilize the daily chart. There is additional resistance at $86.81, with the upper resistance (line c) at $88.
The weekly OBV is negative, as it is below its WMA and has formed lower highs (line f). This negative divergence is consistent with a top formation. A break below OBV support (line g) would be more negative.
NEXT: Sector Focus
|pagebreak|Sector Focus
- The Consumer Staples Select Sector SPDR (XLP) and the Health Care Select Sector SPDR (XLV) made further new highs this week, but are getting very close to my next upside targets. Both are also reaching their weekly starc+ bands, which indicates now is a high-risk time to buy
- The Financial Select Spyder (XLF) broke below the March and April lows two weeks ago, and made further new lows last week. Most of the largest banks are likely to move even lower, as their weekly technical picture is negative.
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Oil
The July crude-oil contract again tested the longer-term uptrend last week, and closed higher. This suggests that crude oil is ready to rebound, but the technical damage from the recent plunge makes new highs unlikely.
There is initial resistance at $102.81, the 38.2% resistance level, with stronger levels at $105.19. A rally here would not be surprising, and the $107.57 area may even be tested.
Initial support now sits at $97.50 to $98, and then $95.30.
The OBV edged higher all last week, as support (line b) has held for now.
US Dollar
The rally in the PowerShares DB US Dollar UP ETF (UUP) appears to be stalled below $21.80, with the daily downtrend at $22.38.
There is has been some loss of upside momentum, and a bullish dollar article in The New York Times is not consistent with a bottom. I would be looking for a pullback to—and possibly below—the recent lows over the next few weeks.
Initial support sits at $21.35, which if broken will be a short-term negative.
Gold
As I mentioned last week, SPDR Gold Trust (GLD) could be forming a short-term bottom, and Friday’s sharply higher close suggests it is in place. Once above the recent swing high of $148.19, GLD should test the $150 to $152 area.
New highs are clearly possible for GLD, with the 127.2% Fibonacci target at $156.60.
Initial support can be found at $146.50 to $144.80, and a close below $143.40 would abort the bottom formation.
Silver
The iShares Silver Trust (SLV) traded in a tight range last week, and also looks ready to move higher. But I do not expect new highs in SLV on this rally.
There is minor resistance now at $34.80, which if exceeded should signal a move to the stronger resistance at $37.90. The 50% retracement resistance stands at $40.17.
There is chart support at $33 to $32.86, with the 50% support level at $31.30 to follow.
Interest Rates
The yield on the ten-year Treasury hit new correction lows, and got close to the 200-day MA before bouncing. The bond market still looks quite crowded, and rates are likely to edge up this week.
The Week Ahead
The short term last week is consistent with the end of the correction. With Friday’s lower close, the market needs to rally early this week to further support the bullish case. A move above Thursday’s highs will be the first sign.
A move back to or above the early May highs should be an opportunity to raise some cash.
If gold does rally as expected, don’t get enticed by the long side unless you are a nimble short-term trader. Gold could make new highs, and then we could get a wicked reversal.
