STRATEGIES

Every high-flying market is bound to find patches of rough air, and the charts show a potential decline is in store. However, several plays should defy these trends, as MoneyShow.com senior editor Tom Aspray writes.

Even disappointing retail sales numbers and a pickup in unemployment claims couldn't stop the market from closing higher last Thursday.

However, market internals indicated that the market was struggling to move higher. Each day it seemed a bit weaker, until the sellers stepped in on Friday—the potential of an S&P downgrade of France’s debt rating was the good reason to sell they were waiting for.

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Though the losses were not severe enough on Friday to confirm a top, the action does suggest that stocks are likely to be under pressure this week. This view is supported by the interest-rate markets, as yields dropped on Friday.

The chart of the ten-year T-Note Yield has completed the flag formation that I discussed in December.

The euro also came under additional pressure on Friday. The weekly uptrend was broken in September, and the close this week was well below the early 2011 lows. This is not a positive sign unless you are planning a European trip. A drop below $1.25 looks likely, with the next major support in the $1.20 area.

This decline comes despite the fact that the European Central Bank seemed encouraged by how well the Spanish and Italian bond auctions were received. Of course, there are quite a few more auctions in the coming months...and there are signs that investors are moving out of euro fixed-income markets, which helps to explain the declining yields of US Treasuries.

Many of the emerging stock markets have rebounded nicely early this year, but the majority have still not completed their bottom formation. It will be important that some of these markets are able to break out to the upside in the next month or so.

Copper prices have moved higher, and are now in a strong seasonal period. Significantly higher prices would be a positive sign for the economy.
 
Last week’s economic reports were mixed, though the week ended with better-than-expected preliminary numbers on consumer sentiment. There is a heavy slate of earnings reports this week, including many of the large Dow stocks, most of the big banks, and tech giants like Google (GOOG), Microsoft (MSFT), and EBay (EBAY). This is likely to provide quite a test for the stock market.

With the US markets closed Monday but overseas markets open, we could see some wild action in the stock index futures. The first report Tuesday is the Empire State Manufacturing Survey, followed Wednesday by the Producer Price Index, Industrial Production, and the Housing Market Index.

On Thursday the pace picks up, with consumer prices, housing starts, jobless claims, and the Philadelphia Fed Survey. There is more data on housing Friday, as we get the report on existing home sales.

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Tickers Mentioned: XHB, KBE, GLD, SLV, GOOG