The Week Ahead: Will Apple Follow Google?

10/19/2012 5:35 pm EST

Focus: STRATEGIES

Thomas Aspray

, Professional Trader & Analyst

The technical action is fairly weak right now, and a disappointment from the world's biggest stock could be a very bad sign for the markets in the short term. MoneyShow's Tom Aspray highlights the events and key levels to watch, and explains where he may see possible buying opportunities next week.

Stocks finished the week on a negative note, as Thursday’s early release of Google (GOOG) earnings and the anniversary of the 1987 crash weighed on traders. It gave investors another reason not to buy. The major averages were lower for the week, and are now negative for the month.

Precious metals dropped Friday, and have been correcting steadily from the early October highs. The high level of bullish sentiment last week made me nervous, but the technical action suggests we may get a good buying opportunity by the end of the month.

This Thursday, we get the latest earnings from Apple (AAPL). As you may recall, they disappointed the market last quarter, and the stock lost 5% even though earnings were up sharply from a year earlier.

At the time, Apple also lowered expectations for the fourth quarter. The stock made its low at $570 two days after the report, then hit a high last month of $705.07. This was not far below my target from late August, “in the $709 to $722 area.”

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Apple’s correction from the highs has been sharper than I anticipated, but it has not changed the positive intermediate–term view. The weekly chart shows that prices are already near the lower weekly Starc– band, which is at $605.40 this week.

The weekly relative performance analysis did confirm the recent highs (line a), and while it is below its WMA, it is well above the longer–term uptrend (line b). The OBV made significant new highs last month, and the March highs were clearly exceeded. The OBV is below its WMA, but above the recent lows and the uptrend (line c).

Therefore, if the earnings disappoint the market and AAPL drops further, it should be a buying opportunity. (For specifics, see Don't Give Up on Apple or Tech.)

The economic data has been improving overall for the past few weeks, and last week there were several encouraging reports. Both retail sales and industrial production were better than most analysts expected, while the leading indicators jumped an impressive 0.6% in September. It therefore is not warning of a new recession on the horizon, and their coincident index points toward ongoing economic growth.

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Housing starts beat estimates by over 100,000, and this chart confirms that they clearly have bottomed after completing a nice base in late 2011. Existing home sales were lower on Friday, as the increased demand has reduced the inventory. The chart of existing home sales does appears to have bottomed, as it has broken out of its base formation.

The rise in building permits also helped boost the LEI, and the Philadelphia Fed Survey had the first positive reading since April.

NEXT: Is China on the Path to a Hard Landing?

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China’s GDP was released last Thursday, and the growth rate of 7.4% represented the seventh declining quarter in a row. However, the data for September showed healthy increases in industrial production and retail sales. This may help allay some of the fears of a hard landing for their economy.

There are signs that China’s housing prices may finally be stabilizing, as they have bounced nicely from the lows seen early in the year. The extreme price highs in early 2010 coincided with a high in the Shanghai Composite of around 3,300 and that index recently tested the 2,000 level. An improvement in their economy would certainly be a positive for our economy and stock market.

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The Euro crisis seemed to stabilize in the middle of last week, but then on Friday the calm was shaken by comments from German Chancellor Merkel that the rescue fund should not be used to clean up banks' bad assets. This will make it much more difficult for Spain and Ireland.

This week, the FOMC starts its meeting on Tuesday, with their announcement following on Wednesday afternoon. Given the improvement in the economic data, the real surprise would be if the Fed’s outlook for the economy improved.

On Wednesday, we also get new home sales and a flash reading on the PMI Manufacturing Index. On Thursday, in addition to the jobless claims, we get the durable goods orders as well as the Pending Home Sales Index. Friday brings the preliminary reading on third–quarter GDP and the University of Michigan Consumer Sentiment Survey.

What to Watch
The market tone going into last week’s opening was negative. Stocks had dropped the prior week, closing weak on Friday, and the short–term momentum was negative. Last Friday, the market was even weaker, with the Dow dropping over 200 points and the Nasdaq Composite losing over 2%.

As discussed last Thursday, several of the major averages had broken out of their flag formation, which was confirmed by the NYSE A/D line. Though this action was bullish, it did allow for a pullback before the market could fuel an even stronger rally. With Friday’s steep drop, the action early this week will be even more important, as the major averages are already back to first good support.

A drop below the October 12 lows in the S&P 500 or NYSE Composite would certainly weaken the near–term outlook. Since the broad–based NYSE Advance/Decline line did confirm the recent highs, the intermediate trend is positive.

The bearish sentiment should increase with last Friday’s close, which should be supportive for prices. The percentage of bulls from AAII could drop below 25%, which is often recorded near important lows (not market tops).

NEXT: Stocks and Tom's Outlook

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S&P 500
The weekly chart of the Spyder Trust (SPY) shows that since it broke through resistance in September (line b), the weekly ranges have been quite tight. The low for the past six weeks is at $142.58, which is about one point above Friday’s close. The rising 20–week EMA is at $140.75.

The longer–term pattern remains positive, as it shows a pattern of higher highs and higher lows, and is well above the uptrend (line c). There is major support now in the $138 to $140 area, which it includes the highs from March. Prices are in the middle of their weekly Starc bands.

The weekly on–balance volume (OBV) is still holding above its WMA and the uptrend (line d). It did not form any divergences at the recent highs, which would be expected at a major top. In early 2011, the OBV did form a divergence (line 1), which was the start of a five–month decline.

The S&P 500 A/D line (not shown) did move above its previous highs last week, but then reversed on Friday. A drop below the last two lows would negate last week’s positive action.

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Dow Industrials
The SPDR Diamond Trust (DIA) broke out its weekly rising wedge last month (line e), but has made little progress so far. Though I am not that negative on the market, the rising wedge chart formation can result in nasty declines. They are often completed when the bullish sentiment is very high.

There is good support now in the $130 to $131.50 area, and then at $129.65. The uptrend is currently around $128.40, so a weekly close below this level would be negative.

The weekly relative performance or RS analysis had tried to improve, but has now turned down from its WMA. A drop below the September lows would be a negative sign for the large–cap stocks.

The OBV closed below its rising WMA, but is still above its uptrend. A sharp drop below the uptrend would be an indication of weakness.

Russell 2000
The iShares Russell 2000 Index (IWM) was down over 2% Friday, dropping below the prior week’s lows after a good rally during the middle of the week. The next good support is in the $80 area, which also corresponds to the uptrend.

As I noted last week, a decisive close below $80 would suggest that the strength in early September was not a change in trend for the small caps. There is additional support in the $78 area.

The Russell 2000 A/D line (not shown) tested its WMA last week, but has since reversed sharply and dropped below the previous lows. It is still above the uptrend from the summer lows.

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This yearly performance chart of the four index–tracking ETFs that I normally follow shows that the PowerShares QQQ Trust (QQQ) has given up almost a third of the gains that it had in September. It is still the strongest performer, but is getting closer to the SPY.

The SPDR Diamond Trust (DIA) has been the weakest, but this data does not include dividends, which would put it above the IWM. It does demonstrate that the large–cap dividend stocks have been out of favor since the June lows.

Nasdaq–100
The PowerShares QQQ Trust (QQQ) dropped to significant new correction lows on Friday, and closed just above the 50% Fibonacci support at $65.30. A drop below this level will signal a decline to the all–important 61.8% support at $64.05.

The weekly OBV (not shown) is still holding above its WMA, and did confirm the highs last month. The Nasdaq–100 A/D line (not shown), on the other hand, has been lagging badly, and is getting close to its longer–term uptrend.

NEXT: Sector Focus, Commodities, and Tom's Outlook

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Sector Focus
The iShares Dow Jones Transportation (IYT) rallied early last week, but gave up the gains by the end of the week, closing a bit lower.

Transports are still badly lagging the Dow Industrials, and the warning from early September now seems to be more important. The longer a divergence continues, the more validity it tends to have.

Friday was a tough one for all the sectors, as the Select Sector SPDR Technology (XLK), Select Sector SPDR Consumer Staples (XLY), Select Sector SPDR Materials (XLB), and Select Sector SPDR Health Care (XLV) all had close to 2% declines.

Even the normally defensive Select Sector SPDR Consumer Staples (XLY) and Select Sector SPDR Utilities (XLU) were down almost 1%.

The extent of any follow–through selling in the Select Sector SPDR Materials (XLB) will be especially important, as its relative performance analysis that I discussed last week had just turned positive.

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Sector selection plays an important part in your investment success, and this is demonstrated by the yearly performance chart (excluding dividends) of these three Fidelity funds that are part of my 401k plan.

The Fidelity Select Biotechnology Fund (FBIOX) has been the star performer, especially when compared to the Fidelity Select Energy (FSESX). As of earlier in the week, FBIOX was up 42.5% including dividends.

If at the start of the year, you had put 20% in FBIOX and the rest in a cash equivalent or money market, you would have still had a decent return of 8.5% with very little of your 401k at risk. If the rest was in a bond fund, then the return would have been closer to 12%.

In last week’s Trading Lesson, Learn to Drive Your Own 401k, I outlined a series of steps that I think can drastically improve your 401k returns. It will only take you about an hour each weekend.

Crude Oil
The December crude–oil contract was flat for most of the week, but then dropped over $2 per barrel on Friday to close on the week’s lows. It is still $3 above the key 61.8% support level at $87.40, but the chart has turned more negative.

Precious Metals
The SPDR Gold Trust (GLD), iShares Gold Trust (IAU), iShares Silver Trust (SLV), and Global X Silver Miners (SIL) all were all hit last week. This was consistent with the daily sell signals but as I discussed in detail last Friday, the current decline should be a buying opportunity.

The Week Ahead
Last week’s action was the most negative we have seen in some time, as most of the major averages closed near the day's lows. This will likely trigger more selling in Asian markets early Monday, which may make for a wild opening that day in the US markets.

To turn the short–term outlook around, we need to see a higher close this week. Otherwise, the risk of a sharper decline in the other sectors will increase.

They could catch up with the tech sector. If Apple’s earnings do disappoint, it could trigger a selling climax. On the other hand, a strong close in Apple this week could easily stabilize the tech sector.

Even though the energy and materials sectors gave up some of their gains on Friday, the charts still indicate that they have completed their corrections. The drug sector also still looks pretty good, as it has a seasonal tendency to bottom at the end of the month.

I will be updating the stops in the Charts in Play Portfolio on Monday. Be sure you take a look at all your positions and have a plan in place, including stops, for each position.

Don't forget to read Tom's latest Trading Lesson, Learn to Drive Your Own 401k.

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