The Week Ahead: How Far Can the Bull Run?

04/29/2011 4:56 pm EST

Focus: MARKETS

Thomas Aspray

, Professional Trader & Analyst

UPDATE (May 2, 11am): With the wonderful news overnight that US forces killed Osama bin Laden, markets are reacting positively. After an earlier pullback in oil futures, crude is also once again moving higher.

Will the euphoria last? I would not be surprised to see a one- or two-day pullback this week, as some of the short-term Accumulation/Distribution indicators are now at overbought levels. The bottom line for now: Be sure you check the stops on your existing positions, and only move to buy new stocks where the risk can be controlled well.—Tom Aspray

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The markets seemed to breathe a sigh of relief after Ben Bernanke's widely anticipated press conference.

His comments seemed to calm the inflation fears for now—and surprisingly, a preliminary survey from the University of Michigan showed that expectations are for a 2.9% CPI for the next five years. Over the next year, a jump in inflation is expected.

The silver market dominated the news last week, as many are trying to pick a top. Though silver is likely to see a 10% to 20% decline in the next few months, trying to pick a top in any commodity market—as most experienced traders will tell you—is very hazardous to your economic health. Exemplifying this, those who sold gold were squeezed Friday, as it closed up $32 per ounce.

This week's gain in the stock market reinforced the positive intermediate term as the NYSE Composite A/D line made further new highs. However, in my view the bullish camp is starting to get a bit crowded. As I discussed Friday, there are also some early warning signs appearing that suggest a more defensive strategy is warranted as the market moves higher.

Earnings reports were the focus last week, and this week should be no different. Many of the energy companies, such as Chesapeake Energy (CHK), Marathon Oil (MRO), Suncor Energy (SU), Murphy Oil (MUR), Williams (WMB), and El Paso (EP) all report this week. Drug giant Pfizer (PFE), Clorox (CLX), and semiconductor manufacturer NetLogic (NETL) are also reporting.

Jobs will be on everyone's minds this week, starting with the ADP Employment Report on Wednesday. On Thursday we get jobless claims, and then the monthly employment situation report follows Friday. Other data includes the ISM Manufacturing Index on Monday and factory orders on Tuesday.

The Euro continued to move higher, after breaking though major resistance a few weeks ago, and it helped boost many of the European stock markets. But only the German Dax was able to make new highs for the year, while London's FTSE-100 and the French CAC Index climbed but remained below their February peaks.

WHAT TO WATCH

S&P 500
The Spyder Trust (SPY) is getting close to the 127.2% retracement resistance at $137.50, but it may have trouble surpassing the resistance in the $139 to $140 area on the first attempt. The longer-term target is still $143 to $145.

SPY has first good support now at $134.70 to $135.30, with stronger levels at $132.50.

Dow Industrials
The close last week in the Diamonds Trust (DIA) above the previous highs at $124.35 was a very positive sign, as the next targets at $128 have been reached.

The next key barrier on the upside is in the $129 to $130 area (Dow 13,000). If this level is surpassed, watch the May 2008 highs at $131.

There is initial support for DIA is at $125.50 to $126.50, and then at $124.70. It would take a break below $120.65 to turn the chart negative.

chart
Click to Enlarge

Dow Transportations
The Dow Transportation Index had been lagging, but caught up in a hurry last week, gaining over 4.2% for the week to surpass the May 2008 highs at 5,536. The weekly chart shows a powerful breakout of the trading range (lines a and b). This action projects a move to the 5,900 to 6,000 area.

The OBV has been leading prices higher, and made further new highs last week. It is in a strong uptrend (line c). Strength in the railroads has given the Transports a boost as they benefit from higher energy prices.

Nasdaq-100
The PowerShares QQQ Trust (QQQ) has moved slightly above the February highs, but made little upside progress late in the week. This suggests QQQ may need a pullback to the support at $58.30 to $58.70 before it can challenge the targets in the $60 area.

The Nasdaq-100 A/D line, unlike the A/D line on the Nasdaq Composite, has moved above the February highs by a significant margin (line d). This is a clear positive for the intermediate term outlook.

Good support for the A/D line now at the April highs (line e) with more important levels at the April lows (line f).

NEXT: Sector Focus and Commodities

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Sector Focus

  • All of the major sectors except technology and the financials have failed to surpass the February highs. I continue to favor the more defensive Consumer Staples Select Sector SPDR (XLP) and Health Care Select Sector SPDR (XLV) for new stock selections. Look for stocks in these sectors that have either just bounced from good support, or have just cleared multi-year resistance, as this should allow the risk to be better controlled.
  • The Energy Select Spyder (XLE) closed strongly Friday, and has cleared the strong resistance at $79.90 to $80.37. This suggests earnings for energy companies this week may beat expectations. The next targets wait in the $82.50 to $83 area.
  • The Financial Select Spyder (XLF) has just rallied to test the declining 50-day MA in the $16.50 area, and still needs to move above the resistance at $16.75 to stabilize the outlook. The technical outlook has improved slightly, and a resurgence in the financials would clearly give the overall market a boost. Key support sits in the $16 to $16.20 area.

chart
Click to Enlarge

Oil
The June contract was up just more than $1 for the week. The next upside target is in the $115 to $115.50 area, with trend line resistance (line a) in the $117.50 to $118 area.

The OBV is still in a clear uptrend (line c) and as long as it holds, the uptrend in prices will remain intact. Initial support for the June contract now sits at $110.50, and it would take two daily closes under $106 (line b) to turn the outlook negative.

Gold
The SPDR Gold Trust (GLD) and gold futures had another strong week, as GLD gained almost $5 for the week. It has reached the target from the weekly trading range at $150 to $152. First support lies at $148.50, with more important levels at $145.50 to $146.50.

The June gold contract has also reached its target of $1,550 with its powerful gain Friday. The next resistance is the psychological barrier at $1,600. There's minor support at $1,525, and then additional levels in the $1,492 to $1,500 range.

Silver
The iShares Silver Trust (SLV) hit a high Thursday of $48.35, and had record volume last week. A move above $50 is clearly in the cards, especially with so many calling for a top. The key support level everyone is now watching is at last week's lows of $43.55 to $44.76.

US Dollar
The dollar was punished all week, closing lower each day. The weekly chart shows the violation of support in the dollar index at 75.50 four weeks ago. The 2008 lows of 71 to 71.50 look like the next downside targets. First resistance sits at 74 and then 74.50.

Large companies that derive a large amount of their revenue from overseas markets should continue to do well. Here are some examples you can read.

The OBV turned negative in June 2010 when it violated support at line e, as it began a pattern of lower highs that is still intact (line f). The OBV broke further support in April (line g) signaling the recent decline.

The Week Ahead
For the past several weeks, I have been looking for stocks to move higher, and that is still the favored outlook for next week. As we continue to move higher, the market may become more vulnerable to a sharp shakeout.

Unless there is further deterioration in the market internals, the market is likely to continue higher as we head into May. However if you are just getting into the stock market , this is not the time to jump in with both feet.

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