The Week Ahead: Will Stocks Survive Earning's Season?

04/10/2015 5:00 pm EST

Focus: MARKETS

Thomas Aspray

, Professional Trader & Analyst

Earnings season hits full stride next week and peaks on April 30, so MoneyShow's Tom Aspray takes a technical look to see if the current low level of bullishness is an encouraging sign that the stock market may have enough fuel to breakout to the upside.

The stock market grinded higher most of last week as the Spyder Trust (SPY) closed higher four out of five days. The lack of any sharply higher days has kept the bullish enthusiasm at relatively low levels. The higher weekly close has helped improve the weekly technical studies as I pointed out last week.

The earnings season hits full stride next week with 15 companies reporting next Tuesday and 46 on Wednesday. The season peaks on April 30 when 392 companies report. The continued lowering of earnings expectations may end up being a positive as very weak numbers may already be factored into some of the beaten down stocks.

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Alcoa, Inc. (AA) started off the earnings season by topping estimates but missing on revenues. The stock dropped 3% last Thursday but it had violated major support, line a, in early March, well ahead of its earnings. The volume was heavy but AA is, so far, holding above the recent low at $12.65.

This is in contrast to Walgreens Boots Alliance, Inc. (WBA) whose earnings were up over 21% from a year ago. The forecasts for the year were a bit lower than most expected, but the stock rose 5% and moved above the upper boundary of its trading range, line c.

The stock has had a strong rally in 2015 as it is up 22% YTD versus the 16% decline in Alcoa, Inc. (AA). In early trading Friday, WBA has given up some of its gains but is still well above the 20-day EMA at $86.69.

This may become the norm for the earnings season as those technically weak stocks that miss earnings are likely to drop and confirm their downtrends. Those with strong charts and relative performance analysis are more likely to just pullback to support if they miss or continue higher on positive earnings.

A recent WSJ headline caught my eye Friday ‘Major Correction’ Unlikely Considering Investor Appetite, Says Citi as the Citigroup equity analyst pointed to the fact that “Mom and pop are still watching the US stock market from the sidelines” and the high level of stock buybacks will make a 10% correction unlikely.

I have continued to make the case for public participation in the stock market, but contrary opinion has me wondering if this headline could eventually be negative for the markets.

Last week’s data from AAII revealed the sharp drop in the bullish percentage from 35.4% to 28.7% last Thursday. This low level of bullishness, especially with the major averages near all time highs, is an encouraging sign as it means the stock market may have enough fuel to breakout to the upside. (Why Building the Wall of Worry Is Bullish.)

Many are still debating when the Fed will start raising rates, but current analysis of the Fed Fund futures market now points to a September rate increase, though some are not expecting any movement until 2016. I think that continued technical analysis of the interest rate markets should alert us to a change in the trend of interest rates well in advance as it did at the end of May 2013.

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The declining yields are certainly a global phenomenon as the yield on the 10-year German Bunds dropped to further new lows last week. The scarcity of bonds that the ECB can buy pushed yields on the 8-year German bond into negative territory, meaning that purchasers will get back less than they paid. The chart of the Bund yield shows two well established downtrends (lines a and b) with no signs of a bottom.

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EuroZone stock markets remain on a tear as the Stoxx Europe 600 closed at 412.12 which is well above the 2000 high of 405.50. The chart shows that prices accelerated to the upside in late January when the ECB bond buying program was approved.

Some traders and analysts get nervous when a market breaks out of a major range as they are already worried because the Nasdaq Composite has not yet exceeded its 2000 high. In February’s The Week Ahead: Will Stocks Melt Up? I featured several historical charts of the S&P 500, which illustrated that breakouts of long-term trading ranges are generally quite bullish.

NEXT PAGE: What to Watch

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This week there is a full economic calendar with the Producer price index, Retail Sales, and Business Inventories out on Tuesday. This is followed by the Empire State Manufacturing Survey, Industrial Production, and the Housing Market Index on Wednesday.

I will be watching the Retail Sales data closely as it has been disappointing for the past three months. It has been inconsistent with the continued improvement in consumer confidence and consumer sentiment data over the past several months.

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I have annotated the excellent chart from Doug Short of Advisors Perspective to show how the Control Purchases data series that “excludes Motor Vehicles & Parts, Gasoline, Building Materials as well as Food Services & Drinking Places,” has technically warned of the past two recessions.

The uptrend from the 1996 lows, line a, was broken at the end of 2000, which was several months ahead of the official start of the recession. A similar warning was given in 2006 as the four year uptrend, line b, was violated in 2006, which was over a year ahead of the start of the recession. There is less of a clear pattern now as the spike low in early 2014 was a weather-related aberration.

On Thursday, in addition to the jobless claims, we get Housing Starts and the Philadelphia Fed Business Outlook Survey. Last week’s jobless claim data was stronger than one would have thought, given the very weak March unemployment report. On Friday, we get the Consumer Price Index, the mid-month reading on Consumer Sentiment from the University of Michigan, as well as the Leading Economic Indicators.

What to Watch

The strength of the overseas markets helped stabilize the US markets after the long weekend as stocks continued to grind higher as the week progressed. A couple of hours before the close it looks as though the S&P will close the week with a 1.5% gain.

The second consecutive higher close has been enough to turn some of the lagging weekly studies positive, but the volume has still been lackluster. Neither the weekly or daily A/D lines show formations that warn of a more significant market correction.

According to option expert Larry McMillan, “the equity-only put-call ratios have turned bullish.” This is consistent with the drop in bullish sentiment from the AAII survey I mentioned earlier.

Still, it is likely to take a strong close at new all time highs before the stock market pays attention, especially as we enter an earnings season that has most investors nervous. As I noted last week, it does appear that some of the market leading sectors, like healthcare, have completed their corrections.

There were several ETFs that closed a week ago below their quarterly pivots but many will close this week back above these levels. I would suggest you print out the quarterly pivot tables as a reference for the second quarter. (Quarterly Pivot Table)

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As of last Thursday, the 5-day MA of the % of S&P 500 stocks above their 50-day WMA was at 59.3%. It has maintained its pattern of higher lows and is still below the mean at 63.2%. The overbought level is in the 80% area so it is well below overbought levels.

The NYSE Composite’s strong close last week leaves it less than 0.5% below the breakout level at line a. A strong close above this level should signal a move to the weekly starc+ band at 11,459, which is about 3% below last Friday’s close. The quarterly projected pivot resistance is a bit higher at 11,527.

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The 20-week EMA is at 10,889 with the quarterly pivot at 10,828.  The weekly support, line b, is now in the 10,700 area.

The weekly NYSE Advance/Decline made another new high last week as it continues to lead prices higher. The A/D line is well above its rising WMA and the support at line a. The weekly OBV has now moved back above its WMA but is still well below the previous two highs.

NEXT PAGE: Stocks

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S&P 500
The Spyder Trust (SPY) spent most of the week testing its 20-day EMA before Friday’s strong close. The key resistance is now at $211.20, line a, with the daily starc+ band at $212.02.

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The width of the trading range—that goes back to the March lows—has upside targets in the $218-$219 area, with the quarterly projected pivot resistance at $219.22.

The S&P 500 A/D line shows a bullish zig-zag formation (see arrow) and is very close to the all time highs from March 20. It would now take a drop below the March lows to turn the A/D line negative.

The volume has continued to stay low as the daily OBV has just moved above its WMA but is still well below its downtrend, line c. The weekly OBV (not shown) does look better as it has moved back above its WMA but is still below resistance.

The 20-day EMA is now at $207.68 with the quarterly pivot at $204.90.

Dow Industrials
The SPDR Dow Industrials (DIA) is still lagging the SPY as it has formed slightly lower highs, line d. A strong close above the $180 level would be an upside breakout with the daily starc+ band at $182.46. The quarterly projected pivot resistance is at $189.13.

The daily Dow Industrials A/D line closed on Friday just barely below its downtrend, line e, so it could breakout this week. The weekly A/D line has closed back above its WMA.

Last week, I took a look at the most oversold stocks in the Dow Industrials to see whether any were close to bottoming.

The daily OBV continues to lag the price action as it has just moved barely above its WMA. The weekly OBV, on the other hand, has moved above the March highs, which is positive.

There is minor support now at $178 with the quarterly pivot at $176.58.

Nasdaq 100
The PowerShares QQQ Trust (QQQ) dropped down to test the quarterly pivot at $104.63 last Monday but then spent the rest of the week moving higher. It held well above the monthly projected support at $103.50.

The key resistance at $109.20, line a, is just about 1.4% above last Friday’s close. The weekly starc+ band is at $113.33 with the quarterly projected pivot resistance at $114.67.

The daily Nasdaq 100 A/D has moved back above its WMA and shows a longer-term pattern of higher highs, line b.  The daily OBV has edged back above its WMA but is still below the long-term resistance at line d.

The 20-day EMA is at $106.47 with the quarterly pivot at $104.63.

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Russell 2000
The iShares Russell 2000 (IWM) continued to edge higher last week, though the other major averages did better as the IWM had staged a major upside breakout in March. The daily starc+ band is now at $127.77 with the upper boundary of the trading channel, line e, now in the $130 area. The quarterly pivot resistance is at $133.48.

There is short-term support at $124 with additional in the $122.90 area. The quarterly pivot is at $121.39.

The daily Russell 2000 A/D made another new high last week, but did lose some upside momentum late in the week as it pulled back to its WMA .There is more important support at line g.

The daily OBV is above its WMA but is still below the March 20 high. The OBV has initial support at late March lows with more important at line h. The weekly OBV (not shown) made another new high last week and is well above its rising WMA.

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

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Sector Focus
The iShares Dow Jones Transportation (IYT) rebounded nicely last week but still closed the week below the new quarterly pivot at $158.47. The quarterly projected pivot support at $151.97 was tested last Monday with the low at $152.06.

The weekly technical studies have turned back up with the OBV above its WMA while the RS line is not. The daily studies are slightly positive and more work needs to be done before one can be certain that its correction is over.

The sector ETFs rebounded nicely last week as only two closed the week below their quarterly pivots. As I mentioned last week and have discussed in earlier articles on pivot analysis, the start of a new quarter is often a tricky period. Those who waited for two consecutive weekly closes below the pivot did not get whipsawed.

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Only the Select Sector Utilities (XLU), the Sector Select SPDR Financial (XLF), and the iShares Dow Jones Transportation (IYT) are lower for the year.

The Select Sector Health Care (XLV) continues to lead as it is up 8.1% for the year, followed by the 6.3% gain in the Select Sector Consumer Discretionary (XLY).

The Sector Select Technology (XLK) did rebound and is now up 1.7% for the year, while the Sector Energy (XLE) is now also positive for the year, up 1.2%.

The Select Sector Consumer Staples (XLP) is up 1.3% for the year.

Crude Oil

Despite the gloom and doom forecast by many, the positive close in crude oil last week indicates that Crude May Turn in the 2nd Quarter. The weekly chart shows that we are now closer to the declining 20-week EMA. There is next resistance in the $54-$55 area with the long-term downtrend and the retracement resistance in the $63 area.

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The weekly OBV is back above its WMA but does not yet show a completed bottom formation. The HPI shows a weekly positive divergence (see arrow) but is still below the zero line, while the daily HPI indicates positive money flow.

Precious Metals

The SPDR Gold Trust (GLD) closed the week a bit lower while the Market Vectors Gold Miners (GDX) did close higher. Both look ready to move higher over the near term but there is no convincing evidence yet that a bottom is in place.

The Week Ahead
The financial media seems to be ignoring the overall market action on Friday as they concentrate on General Electric (GE) and the $50 billion buyback of its stocks. Most are not expecting anything great out of the market in the next few months which is a positive sign.

The strong action of both the weekly and daily A/D lines  this week confirms that the stock market’s major trend is positive. We may be seeing a gradual rotation back into the larger-cap stocks as the small-caps stalled a bit last week.

Though I still think this is still more of a stock pickers market, the risk in individual stocks is higher in earnings season. For those with a lower risk tolerance, a sector ETF is probably the best bet and we are still holding longs in the Spyder Trust (SPY), PowerShares QQQ Trust (QQQ), and iShares Russell 2000 (IWM) from lower levels.

I will continue to look for new entries in some of the specialized ETFs and continue to like the Vanguard Total World Stock Index Fund (VT) that I discussed last time.

Don't forget to read Tom's latest Trading Lesson, Accurately Analyzing RSI Divergences.

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