Saturday, July 27, 2013

Market Update and Analysis:S+P,Tech, Finanicials, Utilities, Transports + next weeks important events and econ data...

In last week's update and analysis post we talked about the potential of short term upside of the coming in around the 1693 level on the S+P, with the chance of a test of 1700. That's exactly what happened as we opened the week moving slightly above the previous week's high before experiencing a short term correction.

On the chart above I have annotated the fact that the 1676 low ended up being an equal sized correction of 22 points as that of the previous. Judging by Friday's price action into the close I would say there is a decent probability that Friday's low ended the correction and we are now headed well above 1700. But with everything related to the stock market, nothing is 100% guaranteed. So I have annotated on the above chart 2 levels below that should offer good support for a move higher. Whether it comes off of Friday's low or one of the two support levels below, I expect the markets to move much higher over the coming months.

I will reference back to this long term chart above of the Dow Jones Industrial Average for potential longer term upside targets. That target area now stands between approximately 16,580.58 - 16,711.22.

One thing that concerns me a little for the short term, is how the cumulative Advance - Decline line struggles to make new highs with the S+P and the Dow. This picture could easily change next week if some strong demand were to come in. But for now it is at least worth noting.

Taking a look at the year to date performance of each of the sectors in the S+P, we can see not a whole lot of change here. Technology has dropped a couple of places lower in the last couple weeks off the back of Microsoft's very weak earnings report. I like to pay special attention to the charts of the top performing sectors, oftentimes I see a rotation out of the best sectors precede a correction in the overall market. So let's take a look at a few:

Health Care, the S+P's best performing sector year to date, continues it's strong up trend. Well above it's 2008 high and most recent swing high earlier this year.

Consumer Discretionary sector also remains in a strong uptrend setup.

Financials remain strong on a technical level. I see near term resistance around the $22 level on the XLF. We have an open weekly price gap, prior swing high as confluence. And $22 level would yield an equal sized bull market off the 2011 lows to the bull market that started during the 2009 low to 2011 highs. An area to watch for going forward.

I mentioned the tech sector before and here on the chart above (XLK) we can see some near term resistance at the 38% retrace level taken from the 2000 high to the 2000 high to 2002 low.

Taking a look at the transports using the above chart, we can see still trading well above it's 2008 and 2011 highs respectively. It's next measured move target comes in around $7276. It's also important to note that there is a potential inverted head and shoulders pattern which would have an upside target of around $9000. But I think it's probably best in the short term, to take one upside target at a time.

The final chart I want to take a quick look at the Utilities sector using the DJU. Utilites have gotten no love of late, and for good reasons. In a rising interest rate environment Utilities is probably not the sector you want to be overweight. But should it be completely left out of your portfolio?

The above chart shows a long term chart of the Dow Jones Utilities. I have annotated on the chart how both bear markets of 2008 and 2000 produced almost equal sized corrections. And that even though Utilities have underperformed this year, they still remain in a nice uptrend. If they can find the strength to take out it 2008 highs you have, in my opinion, a high probability of over time, hitting it's next upside target of around $680. Which is still about 35% away.

Let's conclude with a look at next week's important events and economic data. This past week was loaded with important earnings while this upcoming week is loaded major central bank events and economic data. Among the ones that deserve the most attention would be Wednesday's FOMC statement by the Federal Reserve. I don't expect anything new to come out of this statement, but I am sure short term trader's will find some "spin" to take a position on.

Thursday the European Central Bank will hold a press conference. And Friday, the Non-Farm Employment and Unemployment rate data will be released in the morning, before the bell.