Saturday, July 13, 2013

Market Update: Resilience Continues to Amaze!

Last week we talked about how this week's price action would likely be pivotal to the short term trend. We would either break out to the upside of the price channel or continue the sell off into one more lower low. Well we got our answer this week as the market continues to show it's strength and resilience.

The chart above (S+P 500 daily chart) shows what I presume to be the current technical setup. I find that often times when price really takes off well above a previous swing high, it is better to look at retracement levels starting from that swing high left behind to the last swing high, instead of the traditional low to high setup. And that is exactly what I have done in the chart above. I've also noted how the last two major rallies off the November 2012 low have equaled between 190-200 points, that would now give us somewhere in the vicinity of 1750 as a potential measured move target above. Support below, as I see it, now stands in the 1630 and 1600 area going forward.

I want to reiterate how futile it is to attempt to pick a top in this market environment. What I am attempting to do is locate potential high probability targets for longs and an area to be cautious going forward. It's not recommended as an area to reverse 100% short with as much leverage as possible.

So staying with that theme of spotting potential upside targets and "caution areas" let's take a look at a pattern in the Dow Jones Industrial Average that I have been keeping an eye on. This chart above is the monthly chart of the Dow Jones Industrial Average going all the way back to the 1990's. I have highlighted each bull market high and the interesting pattern I see here is how this major average has been making new bull market highs of almost identical amounts above it's previous bull market high.
The difference between the 1998 and 2000 bull market high was about 2400 points and the difference between the 2000 and 2007 bull market high was again approximately 2400 points. So I have taken the liberty of adding that amount to the 2007 bull market high to come up with a potential area to watch out for. There is also some added confluence with that trend line above that connects the previous two bull market highs.
Now let's talk about "time cycles" for a minute and see if we can come up with some more potential confluence. The last major bull market lasted approximately 5 years (2002-2007), although the bull market that began in 2009 began after a deeper sell off than the 2002-2007 bull market, it's 5 year anniversary comes March of 2014. One other thing of note would be the difference between the last two bull market highs (2000-2007) comes in around 7 years. So adding that amount of time to the last bull market high in 2007 would also give us the year 2014.
Now if you have followed my analysis before you know how I like to look for patterns and I am especially fond of studying the technical structure of our last long term trading range between the years 1966-1982. The chart above shows that trading range in the S+P 500 and how it played out.
Again I have annotated the bull market highs and the length that each new bull market high exceeded the last, as well as the time cycles in between. Notice the similar patterns displayed above to the one we currently find ourselves in. It will be interesting to see if this current pattern plays out like it did in the past and I think it is something we should be cautious about for the near future.

Next we take a look at the cumulative advance-decline line. We can see some divergence here now, as the SP 500 (top) is making new closing highs the NYAD (bottom) is not confirming. This will be interesting to watch as we approach and possibly take out the previous high on an intra-day basis. This indicator may very well be telling us that it doesn't have enough short term strength on first attempt to push right through. In that case I believe a drop into support below would be necessary before proceeding higher.

Now we take a quick look at the sector performance since the May 22nd correction began to the swing low in June. The relative strength continues to be seen in the Cyclical, Technology, Health Care, Financials and Industrial sectors.
Lastly I've decided to add a new section where I display a list of 20 stock picks. The approach is rather simple, I take a top down approach and look at the sectors displaying the most relative strength. Then I attempt to screen for names in those sectors that display growth potential, a good balance sheet, and not trading at a premium from a price-earnings perspective.