The Week Ahead: Brace for a Setback

03/25/2011 4:59 pm EST

Focus: MARKETS

Thomas Aspray

, Professional Trader & Analyst

Though we did not get a clear resolution of either the nuclear crisis in Japan or the turmoil in Libya, investors did not seem to care—stocks moved higher, with the Dow up 3.05% to close out its best week since last summer.

References to a "Teflon market" and proximity to strong resistance at 1,320 for the S&P 500, 12,170 for the Dow, and 2,345 on the Nasdaq-100 make a setback likely in the week ahead.

However, the ability of most of the major indexes to close back above their 50-day moving averages does suggest that we made a rare panic low on March 16. The NYSE Advance/Decline line reflects a strong rally, as market internals were solid last week, and are leading prices higher.

The week ahead is a big one for economic news—pending home-sales figures come out on Monday, and consumer confidence numbers follow on Tuesday. It is possible that either of these numbers will coincide with a pullback in the stock market. Also keep an eye on the ADP Employment report Wednesday for an early look inside Friday's widely watched job report.

On the global front, the wild cards continue to be the ongoing developments in both Japan and Libya, as well as the Euro debt crisis, where there could be further repercussions from Portugal's rejection of the austerity plan.

WHAT TO WATCH

S&P 500
The pullback in the S&P 500 on Tuesday and early Wednesday of last week was milder than expected. The rally’s volume so far has not been impressive.

Next resistance for the SPDR Trust (SPY) is at $132, with initial support now at $129.80 to $130.40. The $128.30 level should hold on a deeper pullback.

Dow Industrials
The Diamonds Trust (DIA) has reached resistance going back to the highs made on March 3 at $122.66, with the February highs at $123.64. Initial support is now at $120.50, with $119 a stronger level.

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Sector Focus
The two most promising areas of the market currently are transportation and technology stocks.

As I noted in an article this week, the Dow Transportation Average is entering a strong seasonal period that lasts through May. The chart of the Transportation average shows that on Friday it was able—unlike the other major averages—to move above the highs made in early March.

Support on a pullback in the Dow Transports is at 5,075 to 5,120, with the next upside target at 5,300.

One area that has been out of favor, at least prior to Thursday's strong earnings outlook for Oracle (ORCL), is technology. One well-known analyst recently proclaimed that US technology was dead and he was selling it short.

The chart of the PowerShares QQQ Trust (QQQQ), which tracks the Nasdaq-100, shows that it has rallied 6% from the March 16th lows and has reached strong resistance in the $57.50 area. On a pullback, QQQQ should find good support in the $55.50 to $56 area.

Financials
The action of the Financial Select SPDR (XLF) is still holding the market back, as the news on Bank of America (BAC) and Citigroup (C) was negative. Both still look weak technically and have underperformed on the recent rally. [See Jim Jubak’s latest comment on Citigroup and its reverse stock split—Editor.]

Look for a breakout either above or below the $15.90-to-$16.60 range in XLF for clues on the financial sector.

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Oil
The rally in May crude oil seems to be running out of steam. While we did get two closes above the $105 level for the May contract, a close above $106.50 is still needed to give higher targets.

Volume has declined as prices have moved higher, in contrast to the expanding volume during the late February to early March rally.

A close below $102.74 would weaken the trend—and could result from a lessening of tensions in the Middle East and North Africa.

Gold
Though the gold futures and the SPDR Gold Trust (GLD) did make all-time highs last week, they turned lower late in the week, and GLD failed to get two consecutive closes above $140.65. Action by CME Group on Thursday to increase margin requirements on silver is also a potential negative, as in the past it has stalled more than one rally in the commodity markets.

Therefore, despite the bullish long-term analysis, I would look for gold to remain range-bound, as long as GLD does not close above this week's highs or below the support at $135.19.

Interest Rates
The yield on ten-year Treasuries has rallied sharply from the recent lows of 3.14%, and is now back to 3.4%. The longer-term trend towards higher yields is therefore still intact. It would require that yields decline below 3.02% to alter this trend.

CONCLUSIONS
I would look for a pullback in the global equity markets in the week ahead, before they can move above the early March highs. Clearly, the market's strength last week makes it more likely that the February highs will be surpassed in the next month or so.

A further rally in equities and any additional selling in the gold market may cause a further shift of assets into the equity market.

There has also been some improvement in overseas markets, most notably in Brazil.

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