Saturday, August 3, 2013

Market Update: S+P/DOW, Gold, US Dollar, Internals and Sector Performance...

This week we saw continued upside momentum in the major averages as the both the Dow and the S+P 500 made new all time highs. As we broke out of the last trading range we can then compute a logical upside target going forward. The two charts above give us potential upside targets using most recent market patterns. The top is of the S+P and it shows a projected upside target of around 1770 with 1740 coming in as a potential resistance point as well.

The bottom chart is of the Dow, similar setup and it points to an upside target coming in around the 16,125-16,150 range. Taking us ever more closer to our long term upside target in the Dow (chart below).


Taking a look at the market internals in the chart above, we see a continued divergence in the advance - decline line versus price action in the S+P 500. Now it certainly is not unprecedented to see such a divergence, but in order for this market to continue it's advance higher (which I fully believe it will) we would need to see a break out in the number of advancers to coincide with this recent price action, and relatively soon. We will continue to pay attention to this going forward.

Another important indicator I like to look at is the number of stocks in the S+P 500 trading above their 50 day moving averages. It tends to do a pretty good job of spotting exhaustion points on both the upside and the downside. I've highlighted the key ranges I like to look for. When we get readings of 450 and above that generally gives me "cause for pause" when long. And on the flipside a reading of 150 and below usually gives me "cause for pause" on the short side. Currently our reading is 411 so we are nearing overbought territory, but still have room to the upside.
This week I wanted to touch on Gold a little bit. Our last POST on Gold did a good job of pointing out some near term resistance. That resistance has indeed come to fruition, so now let's talk about where we go from here.
The chart above on GLD shows us support in the $125 level which matches the size of the last correction and fills the open gap below. The next support level below around $122 or the top of the first trading range box, would in my opinion be critical for any further upside in GLD. As long as we can hold those support levels I do not see any reason that GLD then can march up to the $138 - $140 price target. A failure at support would signal to me that we have a very good chance of revisiting the top of the 2008 inverted head and shoulders pattern around $1000 level on the spot Gold.
Next let's take a look at the US Dollar, in the chart above using UUP, an etf that tracks the US Dollar spot futures contracts. As you can clearly see that the Dollar remains in a downtrend going back to 2008 on this chart and even further than that. It's been relatively range bound for the last year or so which could be a potential sign of a base building pattern for a strong move upwards. However we still have the trend line above and the $23.34 level (midpoint) shown as the white horizontal level above, as resistance. For support below, we have $21.50 - $21.75. Until we see a clean rejection of prices out of this range it remains a tough trade at current levels.
Sector performance year to date remains relatively unchanged.