The Week Ahead: Are These Key Markets Changing Direction?

05/08/2015 5:00 pm EST

Focus: MARKETS

Thomas Aspray

, Professional Trader & Analyst

While April’s sharp increase in non-farm payrolls has reversed the concerns from the previous month, MoneyShow's Tom Aspray goes further in depth technically, since one month’s data is not enough to convince most skeptical investors to get back into stocks.

It was a pretty ugly weak for the stock market until Friday’s job report which stimulated some very heavy buying on Friday’s open.  As I noted last week, the deterioration in the short-term technical outlook made the action early in the week important to the short-term trend.

The poor market internals on Monday’s rally increased the market’s vulnerability as I noted before Tuesday’s open in Was Monday a Rally Failure? This increased the short-term market risk while the weekly analysis showed no signs yet of a more significant market decline.

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April’s sharp increase in non-farm payrolls has reversed the concerns from the previous month as the unemployment rate dropped to 5.4%. It was also encouraging that hourly wages were up 2.2% from a year ago. Of course, one month’s data is not enough to convince most skeptical investors to get back into stocks.

The recent data indicates that many investors moved out of stocks in April as they apparently wanted to get a head start on the Sell in May crowd. As reported in a Yahoo article, “In April, US equity mutual funds and ETFs saw outflows of $35.8 billion, according to TrimTabs. That's the biggest move away from American stocks since October 2008.”

I have been making the case for several years that most investors are not in the stock market, which is contrary to the recent view of some that the stock market is in bubble territory. According to AAII, the bullish % last week dropped to 27.06% from 30.84% the prior week. It had hit a high on January 1 when 51.74% of the survey participants were bullish on stocks.

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Overseas markets rallied with the US markets on Friday as the German Dax was up 2.6% while the Stoxx Europe 600 gained over 2.7%. The Dax is still 5.5% below the April 10 high of 12,390 as it closed just barely above its 20-day EMA. There is next resistance at 12,080.

The daily RSI formed a negative divergence at the April highs, line a, which was consistent with a correction. Now the RSI needs to move strongly above this resistance to suggest that the correction is over. The RSI did move above its WMA last Friday.

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Crude oil spiked to a high last week of $63.62 (line 2) basis the July contract, but by early Friday afternoon it had dropped below the $60 level. The chart shows that the Dollar Index peaked on March 13 (line 1), and two days later, the July crude oil contract did turn higher.

The outlook for crude oil had been positive since February 3 (Crude Oil Money Flow Turns Positive) when the HPI turned positive.  The daily HPI failed to make a new high with prices last week, therefore forming a negative divergence. This does allow for a further correction in crude oil prices. The former breakout level for crude oil is in the $56-$57 area and this represents first good support.

The dollar index is now trying to stabilize and a close back above the $96 level would be a further sign that it is bottoming. There is stronger resistance for the dollar index in the $98.00 area.

A rebound in the dollar and a correction in the Euro/$ rate should take some of the recent pressure off the euro stock markets as it would help keep them competitive on exports. It should also take some pressure off the bond markets as prices have been falling sharply recently.

As I noted in Thursday’s Bond Rout Sends Fund Investors a Message, the sharp decline in prices and rise in yields has given some bond fund or ETF investors an unpleasant surprise.

NEXT PAGE: What to Watch

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Last week’s ISM Non-Manufacturing Index came in at a higher than expected 57.8, up from 56.5 in March. This was consistent with the data from the PMI Services Index. The chart of the ISM shows that it is still locked in a trading range, lines a and b, but it would take several consecutive lower readings and a break of support to turn the outlook negative.

This week there is the all-important Retail Sales on Wednesday along with Import and Export Prices. The PPI comes out Thursday with the Empire State Manufacturing Survey, Industrial Production, and Consumer Sentiment on Friday.

What to Watch

While the sellers took over the stock market with a vengeance last Tuesday, the sharp rally on the jobs data pushed most of the major averages into positive territory for the week. Though the gains on Friday were impressive, it was not enough to confirm that the correction is really over.

Another couple of consecutive positive days are needed to reverse the deterioration in the daily studies. The weekly technical outlook is still clearly positive and shows no signs yet of a serious correction.

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The 5-day MA of the S&P 500 stocks above their 50-day MA dropped to 46.73% on Thursday which is more than one standard deviation below the mean of 62.88%. It dropped below 44% in early 2014, line a.

The NYSE Composite dropped down to test its rising 20-week EMA last week, which is now at 10,972. The gains on Friday took it close to the prior week’s high at 11,248. The weekly starc+ band is at 11,584, which is just above the quarterly pivot resistance at 11,527.

If last week’s lows were violated, the quarterly pivot is at 10,828 with the trend line support, line a, at 10,378.

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The weekly NYSE Advance/Decline line dropped down to test its WMA but should turn higher when the final data is in as the A/D ratios were 4 to 1 positive on Friday. The WMA of the A/D line is still rising strongly with the long-term uptrend at line b.

The weekly OBV is still in a narrow range but closed last week back above its WMA.

NEXT PAGE: Stocks

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S&P 500
The Spyder Trust (SPY) gapped sharply higher last Friday but still stayed below last Monday’s doji high of $212.02. The daily trend line resistance, line a, is now in the $213 area with the daily starc+ band at $214.13.

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The 20-day EMA is now at $210.02 with more important support at last week’s low of $206.76. A daily close below this level would also violate the support at line b. There is additional chart support at $206 with the quarterly pivot at $204.90.

The S&P 500 A/D line made a new spike high last Monday and looks ready to close above its WMA on Friday. The uptrend from the March lows, line c, is now more important support.

The daily OBV is still in its well established downtrend.

Dow Industrials
The SPDR Dow Industrials (DIA) gapped above the April highs on Friday as DIA has been lagging for some time. There is next resistance at $182.24 and the all time high, line e. The daily starc+ band is at $183.71 as the monthly pivot resistance was exceeded Friday.

The 20-day EMA is trying to turn up and is now at $179.68. There is now an important band of support in the $176.46-$177 area.

The daily Dow Industrials A/D line made a slightly higher high at the start of the month but then dropped sharply. It will turn up with Friday’s action but is still well below its WMA.

The daily OBV has also turned up but is well below the long-term resistance at line g.

Nasdaq 100
The PowerShares QQQ Trust (QQQ) also gapped to the upside on Friday but still closed well below Monday’s high at $109.41. The daily starc+ band stands at $110.96 with the late April high at $111.16.

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The daily Nasdaq 100 A/D  has turned up from support at line c, but may not make it back above its WMA on Friday. It needs to move above the early May high to indicate that the correction is over.

The OBV dropped below support (line e) last week, which is a sign of weakness. The OBV is still below its declining WMA.

The 20-day EMA is at $108.08 with more important support from last Tuesday’s low at $106.

Russell 2000
The iShares Russell 2000 (IWM) bounced up to test its declining 20-day EMA on Friday. There is more important resistance and the daily starc+ band at $125.11. The close last Friday was just above the quarterly pivot at $121.39.

The low last week was $120.24, and if this level is broken, the quarterly pivot support is at $116.83.

The daily Russell 2000 A/D closed below its uptrend, line g, on April 30. It has tried to turn higher but is still well below its declining WMA. A day of sharply negative A/D numbers early this week will turn the outlook even more negative.

The daily OBV also broke its uptrend, line h, at the end of April. The OBV is close to moving back above this level, so a further rally will improve the outlook. The WMA of the OBV is flat.

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

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Sector Focus
The iShares Dow Jones Transportation (IYT) looks ready to close for the second week below the quarterly pivot at $158.47. The pivot was tested on Friday’s open but it then closed weak. There is additional resistance at $160.29, which was the April high. A move above this level is needed to improve the technical outlook.

The weekly OBV is just edging back above its WMA but the RS line is still below its WMA. The daily studies are mixed and show no signs yet of a new uptrend.

Only the Select Sector Utilities (XLU) and the iShares Dow Jones Transportation (IYT) are negative for the year as they are down 6.7% and 4.2% respectively. The Select Sector Industrials (XLI) was higher last week but is now flat for the year.

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The Select Sector Financials (XLF) had a good week and it is now up 0.1% for the year.

The Select Sector Health Care (XLV) is still the top performer for the year as it is up 7.4% while the Select Sector Consumer Discretionary (XLY) is now up 6.1%.

The Sector Select Technology (XLK) is doing better now than the Sector Energy (XLE) which was lower last week. If crude pulls back, the energy stocks could complete their weekly bottom formations and this could set up a good buying opportunity.

The defensive Select Sector Consumer Staples (XLP) was higher last week and is still locked in its narrow range. It was one of the featured ETFs from last week.

Precious Metals
Both the SPDR Gold Trust (GLD) and Market Vectors Gold Miners (GDX) were a bit higher last week but neither looks impressive technically. A drop below the early May lows could trigger another wave of selling.

The Week Ahead
The market sentiment shifted on Friday with the very strong close but it is too early to tell whether the short-term trend has changed. A pullback in crude and a rally in the dollar should be supportive for the stock market. The action in both markets early this week could confirm that these two markets have turned.

The fund flow data I discussed earlier continues to indicate that investor participation is low as it has been for most of this bull market. It would be very unusual for a bull market to end without more public participation. Certainly there are no signs of investor euphoria.

Between now and the end of the year, I think stock traders will be rewarded, and when rates do move higher, those who have bond funds or ETFs are likely to suffer up significant capital losses.

As per last weeks article Was Monday a Rally Failure? (whose recommendations were Tweeted before the opening on Tuesday, May 5), we took some profits in the IWM, SPY, and QQQ as well as raised our stops. This did not mean a change in my long-term outlook, but felt it was prudent time for traders to take some profits.

For those in the process of establishing a dollar cost averaging position—as I recommended three weeks ago—stick with your plan. There are no signs of a bear market or a recession so I continue to think that stocks are the best bets.

I will be on vacation next week so the next regular Week Ahead column will be published on May 22.

Don't forget to read Tom's latest Trading Lesson, Are Social Media Stocks Dead or Just Resting?

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