Saturday, July 6, 2013

Market Update: Analysis for week of July 8th...

This week we saw some range bound trading early on that ended with a strong rally on Friday in response to the Non Farm Payroll or employment report that came out in the morning. Both the Dow, S+P 500 and the Nasdaq all came away with gains of around 1.0% on the day. Looking forward, this next week sets up to be a key week for the short term direction of this market.

This chart above is the daily chart of the S+P 500. With Friday's rally it puts us right at the upper trend line resistance of the price channel. A little above that is also a broken up trend line which should now become resistance. My view remains the same, I still believe any further upside will be limited to these resistance points and produce a swing high below the 1654 swing high highlighted on the chart above. The next big move would then be a drop to the vicinity of the 1530 area also highlighted on this chart above. Also bear in mind our key turn date is the week of July 22nd, which I have explained in a previous post.

What would it take for me to abandon this thesis? A move above the 1654 high would in my opinion shift the odds in favor of the bulls and most likely mean the correction ended at the 1560 low. At which point any further weakness would most likely end above 1600 and begin the process of rallying to new bull market highs around 1750 or so.

Taking a look now at the 60 minute chart of the S+P 500 to gain a little clearer picture of these resistance levels above. You can also see where the previous drop really took off, leaving very little if any retest. This also leads me to believe this week's move may very well be more of a "back and fill"  into the next short setup as opposed to a new short term bull market. These two resistance levels above and ultimately 1654 will be the final judge.
Taking a look "under the hood" at the New York Stock Exchange advance versus decline line we can see a nice rally but ultimately falls short of making a new higher high so far. This indicator plots the daily difference between how many stocks are advancing on the NYSE minus the stocks that are declining. And it's reading are set to a cumulative setting to show trends. I like this indicator as a supplement because it tends to do a good job of identifying trends. We noted a few weeks ago how this indicator was falling sharply and thus in turn boded poorly for short term stock price performance. Which is exactly what happened.
Our last chart takes a look at the sector performance relative to the S+P 500 since the May 22nd top. It's always a good idea for a starting point, to get an idea of what sectors are outperforming the broader market especially on corrections. At that point you could choose to overweight those sectors by either picking individual names that also have good relative strength, dividend yield, strong balance sheet and any other fundamental approach one feels most comfortable with. Or simply buy the SPDR etf or low cost index fund that tracks those particular sectors. So we see from this chart above that as of Friday's close the top performing sectors remain the Consumer Cyclicals, Financials, Industrials and Technology. We also find the weakest sectors to be the Utilities, Materials and Consumer Staples.
So in conclusion, we should still be expecting some more downside in the broader markets over the next couple of weeks. I expect the ultimate swing low to come in around the 1520-1530 vicinity for reasons I have mentioned in previous posts. Once this swing low is put in place a move to new bull market highs will proceed. I fully expect to see the Dow trading around the 16,500 level by next year. Once we get close to achieving that upside target I will explain in more detail how I arrived at that particular price level and what we can expect after it is attained.