The Week Ahead: Stocks to Rally Despite the Short Week

04/15/2011 4:40 pm EST

Focus: MARKETS

Thomas Aspray

, Professional Trader & Analyst

All of the concerns that hung over the market going into last week were exacerbated by earnings disappointments in many of the key sectors (Google (GOOG), Infosys (INFY), and Bank of America (BAC), to name three).

Even though the major averages closed lower for the week, they were also well off their lows. This should set the stage for a resumption of the rally next week.

Globally, the focus was on inflation last week. It was higher than expected in China, India, and in the Eurozone. This increases the move towards higher global interest rates.

The downgrade of Ireland's debt and restructuring in Greece also hung over the markets, though Europe held up surprisingly well.

Emerging markets overall declined less than those in the United States—and while the iShares MSCI Emerging Market Index (EEM) pulled back 3.7% from its recent highs, some of the emerging-market country ETFs held up much better. This is clearly a positive sign, and they will continue to be helped by a weaker dollar.
 
The economic data in the week ahead is focused on the housing market, with housing starts data on Tuesday and existing home sales Wednesday. Passover begins Tuesday and the markets are closed on Good Friday, so trading volume is likely to be very light.

The sentiment picture for the stock market is clearly mixed. While 55% of newsletter advisors were reported to be bullish, AAII data shows that only 42% of individual investors are bullish, while 31% are bearish. Put/call ratios and the VIX analysis, according to option expert Larry McMillan, are also still positive, and did not deteriorate much as the market was correcting.

WHAT TO WATCH

chart
Click to Enlarge

S&P 500
The Spyder Trust (SPY), after failing to move above the February highs at $134.69, corrected to stronger support in the $130 area on Thursday before rallying into the close. Further gains Friday and positive Advance/Decline numbers caused the S&P 500 Advance/Decline line to turn higher.

The Advance/Decline lines on the NYSE Composite and other major averages recently made new highs, which is positive for the intermediate term trend. The McClellan oscillator (a short term A/D measure) dropped to its most oversold level since last May and has turned up.

A close in the SPY above $133 would be a strong sign that the correction is over. The next upside targets for SPY are in the $138 area.

Dow Industrials
The Diamonds Trust (DIA) were also able to hold above the stronger support in the $120.50 to $121 area. Once above the previous highs at $124.35, the next targets are in the $125.50 area, with resistance at $128 to $131.

Nasdaq-100
The PowerShares QQQ Trust (QQQQ) will be an important ETF to watch as the overall market turns higher, because the tech sector has lagged the rest of the market. QQQQ declined to the support zone at $56.40 to $55.80 but turned higher Friday.

A daily close above $57.30 followed by a break of the downtrend (line a) will suggest that the tech sector is ready to catch up. This does look likely as the A/D line on the Nasdaq 100 has turned up sharply and shows a bullish zig-zag pattern.

NEXT: Sector Focus

|pagebreak|

Sector Focus

  • Two sectors were standout performers as the overall market corrected. Both the Consumer Staples Select Sector SPDR (XLP) and Health Care Select Sector SPDR (XLV) have outperformed the S&P 500 in April. These are the two areas I would focus on when looking for new stocks to buy, especially in the biotech area.
  • The Energy Select Spyder (XLE) corrected down to good support, and as I note below in relation to crude oil, I do not think that oil has topped out.
  • The Dow Transportation Average held support at 5,200 and closed on the highs for the week. So far, higher energy costs are not slowing the transportation stocks down as they continue to show a strong relative strength and have a positive seasonal bias.

chart
Click to Enlarge

Oil
The setback in crude of $8 per barrel on the June contract certainly took some of the weak longs out of the market. The selling accelerated Tuesday after Goldman Sachs issued a short-term "sell signal."

My colleague Igor Greenwald shares an interesting perspective on this in his article "Buying Goldman's Commodity Sale." I am not convinced of Goldman's true intent and wonder whether they were actually buying Tuesday morning.

On the chart, you will notice that crude oil barely came down far enough to test the breakout level (line b) before turning higher. The chart pattern still looks positive with upper trend line resistance, line a, now in the $115 to $115.50 area.

It would now take two daily closes under $106 in the June contract to suggest that crude oil had topped out.

Gold
The SPDR Gold Trust (GLD) and the June gold futures had a classical retest of the breakout levels from early April before moving sharply higher at the end of the week. For GLD, the support zone at $140 to $141 (line d) is now an important level to watch.

For GLD, the next upside targets are at $146.80 and then $148, while June gold has targets at $1,502 and $1,520.

I continue to expect the gold miners to catch up with the metal on this rally, but the Market Vectors Gold Miners ETF (GDX) needs to first close above $64.15 to give the all-clear signal.

The Week Ahead
Though most are not expecting much to happen in the week ahead, with only four days of trading and little in the way of -fundamental data, I think they could be surprised. The technical resiliency of the market is impressive, and I expect the S&P 500 (and SPY) to catch up with the Dow Industrials and the Russell 2000.

More Top Headlines:

Related Articles on MARKETS

Keyword Image
The Best Buys in Cybersecurity
12/08/2017 5:00 am EST

After weeks of sifting through hundreds of cybersecurity stocks on the market, I finally narrowed my...