Every time I sit down to write next week’s column, I take a look at my analysis from the week before, and what I concluded. I’ve been a professional technical analyst for almost 30 years, so I’ve had my share of mistakes and missed opportunities.
So when the E-mini S&P futures were down almost 30 points in the first hour Monday, last week's headline—"The Week Ahead: Stocks to Rally Despite the Short Week"—seemed to be dead wrong.
The markets teach us all painful lessons. Two that I learned early were:
- When the market does what you don't expect, take another look at the evidence, and
- Have risk management in place, so when you’re wrong you can limit the damage.
So I looked at the evidence again. By early Tuesday morning, the data that led me to expect higher prices had not changed significantly after Monday's plunge. Therefore, I concluded that the market panic had, in fact, created a buying opportunity.
And with all of the major averages closing higher for the week, the technical readings indicate that the US and many foreign markets can still move significantly higher as we head into May.
This is in stark contrast to the recent New York Times/CBS News poll in which 80% of respondents had a negative view of the economy. Or look at yesterday's AAII sentiment numbers, which showed a drop in the number of bulls to 32% (from 42% the previous week).
It is exactly this level of skepticism that is needed for sharply higher stock prices.
This week, there will be a flood of economic news. Housing starts off the week, with new home sales figures Monday and the S&P Case-Shiller Housing Price Index on Tuesday. Also on Tuesday, we’ll get the latest readings on consumer confidence.
Wednesday will bring the latest numbers on durable-goods orders, and later in the day the Federal Open Market Committee meeting, after which Ben Bernanke will have his unprecedented press briefing.
Thursday brings the GDP readings for the first quarter, as well as jobless claims and pending home sales. If the markets are not exhausted by then, we have the personal income, Chicago PMI and consumer sentiment reports coming our way Friday.
Despite debt problems hanging over the Eurozone, several of the European country ETFs, notably Germany (EWG), Belgium (EWK) and Austria (EWO) have all made new highs for the year.
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WHAT TO WATCH
S&P 500
The Spyder Trust (SPY) dropped to a low of $129.51 on Monday, but closed the week above the key level at $133. I expect the triangle formation (lines a and b) to be completed this week.
The 127.2% retracement resistance is at $137.50, while the triangle formation has targets in the $143 to $145 area. The gap at $131.35 to $132.70 is the initial zone of support.
The NYSE A/D line has turned up sharply from its EMA and is very close to making another new high. April's new high was a positive sign for the stock market.
Dow Industrials
The Diamonds Trust (DIA) held just above the support at $120.50, and then closed the week above the previous highs at $124.35. Once above $125.50, there are further targets at $128 and then the May 2008 high of $131. The first good support now rests at $122.20 to $123.40.
Nasdaq-100
The PowerShares QQQ Trust (QQQ) dropped sharply Monday, then reversed to the upside, closing above the downtrend at $57.30. The tech sector now looks ready to lead the market higher—as I discussed Friday.
iShares MSCI Emerging Market Index (EEM)
The strength of the iShares MSCI Emerging Market Index (EEM) probably was the biggest surprise after the tech sector, as many market participants are concerned that inflation will derail the emerging-market economies.
The chart above shows that EEM retested the breakout level (line c), dropping to a low of $47.56 on Monday, but then closed the week at $50.17. The on-balance-volume (OBV) broke through resistance (line d) on March 22 and continues to look strong.
The next upside targets for EEM are $52.50 and then $54.
NEXT: Sector Focus, Commodities, and Conclusions
|pagebreak|Sector Focus
- The Consumer Staples Select Sector SPDR (XLP), Health Care Select Sector SPDR (XLV), and Consumer Discretionary Select Spyder (XLY) all moved above their April highs last week. The first two are still my favorite defensive sectors as we head into the more difficult summer months. (I wrote a detailed look at some of the consumer-staples stocks I like on Thursday.)
- The Energy Select Spyder (XLE) also appears to have completed is correction, as XLE held above support in the $75 area, and closed above first resistance. The next strong resistance is $79.90 to $80.37.
- The weak relative action of the Financial Select Spyder (XLF) is a still a concern, as it is trying to hold support at $15.80. It is over 5% below its February high and needs to move above the resistance at $16.75 to turn around. If XLF fails to rally with the rest of the market, watch out on the next correction.
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Oil
It looks like Goldman Sachs' short-term "sell signal" was really a reason to buy, as the April 12 low of $105.98 held last week, and crude closed well above $112 per barrel.
The next upside target is in the $115 to $115.50 area, with additional target between $118 and $120.
While concern is rising over high gas prices, the trend in crude oil still looks strong technically. Volume has also expanded sharply over the past two weeks, as the OBV is rising sharply.
Obama's decision to investigate the oil market for illegal manipulation could dampen the rally, but this just looks like typical bull-market action that may forecast increased global demand—some overseas economies may be stronger than most analysts think.
It would still 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 gold futures were strong all week, as June gold closed above $1,500.
GLD reached my next upside target at $146.80, and the next level to watch is $148. The completion of the trading range has targets at $150 to $152, with support now between $142 and $144.
The June gold contract has targets at $1,520, and the chart formation allows for a move to the $1,550 area. Initial support now sits at $1,480, and then $1,450.
The Market Vectors Gold Miners ETF (GDX) is still lagging the action in gold, and needs a needs a close above $64.15 to signal an upside breakout.
Silver
The silver market has gotten even more attention than gold and while the daily chart of the July Silver futures does look a bit scary the technical picture shows no signs yet of a top.
One way to analyze the health of a rally in a commodity market is to look at the open interest—the number of contracts outstanding. The open interest (in red) is rising sharply, which indicates that new positions are being established as prices move higher.
This is bullish. If the open interest were declining, it would indicate that higher prices were being driven by short covering. The OBV has also been very strong.
The all-time high of $49.95 could be reached soon at the current rate.
US Dollar
Though some are looking for a bounce in the dollar, it accelerated to the downside last week—and the cautionary note from S&P about US debt did not help matters.
While the market is oversold, the technical readings show no signs of even a short-term bottom. I still like the large multinationals that will benefit from a weak dollar.
The Week Ahead
The stock market could digest some of the recent gains early in the week. Disappointing economic news could even cause a brief correction...but it should be a buying opportunity, especially in the tech sector. Stocks are likely to again finish the week on a strong note.
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