The Week Ahead: A Summer Swoon or a Buying Opportunity?

05/29/2015 5:00 pm EST

Focus: MARKETS

Thomas Aspray

, Professional Trader & Analyst

The failure of the market to continue higher at the end of the week suggests the correction may not be over, so MoneyShow's Tom Aspray takes to the charts to determine if a further correction could provide a good buying opportunity.

It was a disappointing week for the stock market as the severity of last Tuesday's sharp drop set the tone for the whole week. The market quickly became oversold, so Wednesday's strong rebound was not too surprising.  The failure of the market to continue higher at the end of the week suggests the correction is not over.

The new high in the Nasdaq Composite last week was met with skepticism not euphoria, which is not typical of an important top. There was a slight uptick in the bullish sentiment according to AAII but it is still near the lows for the past year. The CNN Fear & Greed Index is neutral at 46 but was in Greed territory just a month ago.  A year ago, the Index was in Fear territory.

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At the time, the Spyder Trust (SPY) had just broken through resistance, line a, which was the start of an impressive two month rally. The actual breakout occurred on May 27 as—unlike this year—investors were in the buy mode after the Memorial Day weekend. In fact, the SPY added 1.1% in the last four days of May 2014.

In 2014, the SPY gained over 4% from the May close to the peak on July 24. The S&P 500 A/D line confirmed the breakout in May as it moved well above resistance at line b. The A/D line had been in a solid uptrend, line c, since early in the year.  As the SPY made its high, the A/D line did form a clear negative divergence (line d) and subsequently broke its uptrend.

The Spyder Trust (SPY) broke out above its resistance this year on May 18 and made a series of slightly higher highs the week before Memorial Day. The A/D line also made a convincing new high with prices before Tuesday's sharp decline dropped it below support at line g. There was no divergence at the recent highs in the A/D line but a sharply lower close Friday could drop the A/D line below its recent lows and start a new downtrend.

This would be consistent with a further correction as those who did not sell in May finally dump their stocks. Given the already fairly high level of bearish sentiment, I think a further correction will be short lived and provide a good buying opportunity. Therefore, we could easily see a 4% summer rally from the correction lows.

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The dollar has had a good week, suggesting that its correction may indeed be over. It hit a multiple year high versus the yen and is still up well over 11% versus the euro, despite its recent correction. As the graph indicates, the bullish sentiment amongst futures traders was way too high in March and April as the dollar topped out.  Now the bullish sentiment is significantly lower, which will support a resumption of the dollar's rally.

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The daily technical studies of the dollar index futures do suggest that the worst of the selling is over. The index is still well below the downtrend in the 99.50 area, line a.  A close back above the 100 level is needed to confirm that the major uptrend has resumed. There is initial support in the 96 area and the 20-day EMA.

The OBV on the dollar index has broken its downtrend, line b, and moved well above its WMA which is now rising. The dollar should be well supported on a drop back to its WMA. Even more impressive is the bullish reading from the HPI, which was the focus of the recent trading lesson Profiting from Money Flow.

The breaking of the downtrend in the HPI suggested the dollar was bottoming in early May and it subsequently had one more drop to new lows.  A second bullish divergence was formed when it made its last low (line d) and this was confirmed on May 18. This was followed by a move in the HPI above the zero line on May 20, indicating that the money flow was now positive.

The economic news last week did not support the bullish case for stocks as the fundamentalists already think they are too expensive. Friday's weak report from the Chicago Purchasing Managers increased the concern over the lengthy contraction in manufacturing. The weak 1st quarter GDP report has many looking at the 2nd quarter GDP to decide whether it could justify owning stocks.
There were some bright spots as both the Consumer Confidence and the University of Michigan's Consumer Sentiment came in better than expected. There were two positive reports on housing as both the New Home Sales and Pending Home Sales were better than most economists expected.

NEXT PAGE: What to Watch

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Many are still fixated on the Fed and when rates will finally turn higher. Some still assume this has to be a negative for stocks, but it doesn't. The Fed is unlikely to do anything until the economic data gets much better.

As the dollar gets stronger, more overseas flows are likely to move into our bond market. The charts now suggest that the recent rebound in rates may be over. The rally in 10-Year T-Note yields appears to have stalled between the 38.2% and 50% resistance from the early 2014 high. This is typical of a rally within a downtrend and a drop below 1.930%, line a, will confirm a drop towards the early 2015 lows.

This view is consistent with the technical outlook for the Proshares Ultra Short 20+ Year Treasury (TBT) as it has formed a flag, lines b and c, on its recent rebound.  A weekly low close doji sell signal was generated on Friday suggesting a drop back to the $44 area or lower. The one positive is the potential bottoming action in the OBV. I will, therefore, be watching for signs of a bottom if the OBV does test its rising WMA.

This week will start off with more data on manufacturing including the PMI and ISM Manufacturing indexes. We also will have the Personal Income and Outlays as well as Construction Spending. The Factory Orders on Tuesday will be followed Wednesday by the ADP Employment Report and the ISM Non-Manufacturing Index. The monthly jobs report is out on Friday, but it alone is unlikely to push the Fed into action before September.

What to Watch

As I commented last week "stronger A/D numbers are needed in this holiday shortened week to signal upward acceleration," but it did not happen. Last Friday was another tough day in what has been a crazy year for the stock market.

Those picking stocks or sectors have done well, but those invested in the major indices have not.

The heavy selling early Friday has been met with pretty good buying as the S&P futures were down 20 points early, but with just an hour before the close, are down 11 points. In fact, the June futures came very close to their pivot for June before they rebounded.

A lower close today will raise the potential for a further correction that could take the averages back towards the May lows. There are no signs yet of a more significant correction, but we could lose 2-3% from Friday's close.

Though the Spyder Trust (SPY) could close down 0.26% or more on the day, the market leading healthcare and biotech were higher on the day. The multiple time frame analysis for Apple, Inc. (AAPL) is still positive and the tech sector has become a market leader (What's Next for Tech and Apple?) as the M&S activity has not hurt.

The technical studies for the major averages are mixed and the short-term A/D analysis could deteriorate once Friday's final numbers are in or if we get more selling early this week.

The 5-day MA of the S&P 500 stocks above their 50-day MA has dropped back to 57%, which is below the mean of 62.24%. For the Nasdaq 100, the reading is down to 58% from 60.4% last week, but the uptrend is still intact.

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The NYSE Composite formed a doji a week ago and will trigger a weekly low close doji sell signal this week. The decline last week came close to the 20-week EMA at 11,020 with the monthly pivot support for June at 10,942. The weekly support and the quarterly pivot are in the 10,828 area. The weekly starc- band is a bit lower at 10,781.

The weekly NYSE Advance/Decline line formed a slight negative divergence at the recent highs (see arrow) but is still well above its WMA and support at line b. The WMA is also still rising and does not show a pattern consistent with a more severe correction.

The weekly OBV has reversed sharply and is now back to support, line c, and its WMA. The daily OBV (not shown) continues to look weak.

NEXT PAGE: Stocks

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S&P 500
The Spyder Trust (SPY) dropped down to test the June pivot at $210.71, where the buyers came back in the market. There is monthly pivot support and chart support, line a, in the $207-$207.38 area. The quarterly pivot is at $204.90. The SPY needs a close back above the $213.60 level to reassert the uptrend.

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As I noted earlier, the S&P 500 A/D line dropped sharply last week after making a new high on May 18. It looks ready to close under its WMA and a decline below last week's lows will be a short-term negative.

The daily OBV is still range bound and is acting weaker than prices as it has failed to overcome the resistance at line c.

Dow Industrials
If you want to take the most negative outlook for the SPDR Dow Industrials (DIA), you can draw a rising wedge on the weekly chart, lines d and e. This formation has key support at $178.53 and the rising 20-week EMA. The pivot support for June is at $176.88 with the weekly starc- band at $173.47.

The weekly Dow Industrials A/D line did not make a new high with prices a week ago but is still above its flattening WMA. There is more important support at the March lows.

The weekly OBV tested its long-term resistance at line g, before it turned lower. The daily OBV (not shown) has dropped well below its WMA.

Nasdaq 100
The PowerShares QQQ Trust (QQQ) came close to its 20-day EMA at $109.48 on Friday. The pivot for June is at $109.06 with the monthly pivot support at $107.03. The trading channel on the daily chart, lines a and b, is still intact. On the daily chart, a LCD sell signal was triggered on Friday with the close below Thursday's doji low.

The daily Nasdaq 100 A/D rallied from support, line d, last week. It turned lower Friday and may drop below the recent lows when the final numbers are in for the day. There is next strong support at the May lows.

The daily OBV looks ready to close back below its WMA and was much weaker than prices on the last rally.

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Russell 2000
The iShares Russell 2000 (IWM) may close just above its 20-day EMA as it dropped to the June pivot at $123.28 in early trading. The daily starc- band is at $121.60 with the monthly pivot support at $121.10. There is now more important chart support in the $120 area, line e.

There is first meaningful resistance at $125-$125.46 with the monthly pivot resistance at $126.26.

The daily Russell 2000 A/D—after rallying back to its former uptrend, line f—has turned sharply lower. It has now made lower lows, line g, and its WMA is also declining. A drop below the May 5 low in the A/D line would be more negative.

The daily OBV is also now getting close to more important support at line h. A violation of this support and the late April lows will signal an increase in selling pressure.

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

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Sector Focus
The iShares Dow Jones Transportation (IYT) continued to get pummeled last week, though the airlines did try to stabilize in Friday's session. The IYT is now down 9% for the year, almost the exact opposite of the gain in the Select Sector Health Care (XLV).

The weekly and daily studies are negative with the monthly studies also now much weaker. The Dow Transports was down 4% for the month.

The Select Sector Utilities (XLU) has dropped a bit further and has now lost 5.8% for the year. After a brief bounce into positive territory, the Select Sector Industrials (XLI) is back in the red as it is down 1.4% for the year.

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The Select Sector Financials (XLF) is also back into negative territory for the year as it is down 0.6%. The weekly studies are still positive for XLF so it remains a favorite sector for stock picking.

The Select Sector Health Care (XLV) held up well last week as it is still up 9.6% for the year. The Select Sector Consumer Discretionary (XLY) gave up some of its gains, now only up 5.8%.

The Sector Select Technology (XLK) has held up well as it is now showing a solid 5% gain while the Sector Energy (XLE) is now down 1.0%.

The defensive Select Sector Consumer Staples (XLP) is now only barely higher as it is up just 0.7%.

Crude Oil
The crude oil futures were up $2.50 a barrel Friday and gained over 4% for the month. Today the daily futures triggered a high close doji buy signal. The daily studies have turned, so it is possible that the pullback is already over.

Precious Metals
Both the SPDR Gold Trust (GLD) and Market Vectors Gold Miners (GDX) were lower for the week and still look negative basis the daily technical studies.

There is some divergence in GLD, but the GDX—as I noted in More Trouble for the Gold Miners?—continues to look the most vulnerable.

The Week Ahead
This week's action will not increase the public's interest in buying stocks. The rebalancing in the small-cap indices late Friday added some more selling pressure late in the day. The major averages still managed to close above the day's lows but below the rebound highs.

On the downside, the Spyder Trust (SPY) could drop back to the $207-$207.60 area, which would be roughly a 2% drop from current levels. I would expect to see a good rally this summer, but stocks can sometimes be choppy during the summer months.

There are clearly no signs of a bear market or a recession (keep your eye on the LEI), and with yields likely to decline again, stocks are the best bet for capital appreciation. For new investors, only put an amount in the stock market where a 10% drop will not scare you into selling. Take a longer-term outlook until there are warning signs of a bear market or a recession.

Those who initiated a dollar cost averaging position in an ETF or fund, I would finish the plan. For those who are considering stock investment, you could consider initiating a dollar cost averaging plan when the market is down sharply.

This will be my last article for MoneyShow and I would like to thank my readers who have followed me over the years. I have enjoyed working with the staff at MoneyShow.com over the past eight years and wish them the best in the future. However, to keep up with my views and see more great charts during the day, you can follow me on either Twitter or StockTwits.

Don't forget to read Tom's latest Trading Lesson, Profiting from Money Flow.

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