Saturday, October 26, 2013

Despite weak jobs growth, another new high for S+P 500 on slow trading week (Amazon earnings)...

The major market averages saw a gap up on Monday which sellers took advantage of before the release of the delayed jobs/unemployment report for September was released on Tuesday. The number of jobs created turned out to be 148k, lower than the 182k forecast estimates. This kicked off a sell off of about 18 points in the S+P 500 as depicted in the chart above. That is about the same size as the last biggest drop in the S+P since the swing low was formed on October 9th.

That reaction was met by buyers possibly assuming that weak jobs report equals continued quantitative easing at least until March 2014. The S+P 500 closed the week at an all time high off of a relatively quiet week compared to the previous few.

The next upside target in the S+P 500 comes in at 1778.56 as depicted in the chart above. This would match the size of the rally off the 2009 lows into the 2011 high that occurred before the 19% drop in the S+P and 21% drop in the Dow occurred after a US debt rating downgrade and Eurozone instability sent stocks down in a hurry.

I do believe we will trade higher than 1778, as the Dow gives us a much more reliable upside target that is still a ways off. If ones time horizon is short term then the chart above shows the potential unfavorable risk/reward of establishing new positions here and now.

Looking at the Dow, we can see it is still trading below it's July high as the S+P 500 is making new all time highs each day. This is a potential divergence seen at a conclusion of a bull market, however these divergences can take time to play itself out.

This chart above of the Dow shows our maximum upside target coming in around 16,500 - 16,700. It is still a ways off but I simply can not see a way that we can get much higher than that without a good 20-30% correction. That is not doom and gloom, that is simply historical patterns. I am very bullish for the long term and believe ten years from now these current prices will seem like a bargain!

The advance - decline line continues in it's strong breakout above the May and July highs. This also bodes well for higher stocks prices in the near term.

Taking a look at sector performance relative to the S+P 500 since the October 9th low.

Also take a look at performance by market cap since the October 9th low. Not bad at all.

A quick look on the earnings front, we talked about Netflix (NFLX) during the week, the other notable was (AMZN). The stock closed up Friday by almost ten percent as revenues continue to accelerate and margins improve.

A technical overview shows a stock in a solid uptrend but has taken off a bit too much to chase at this point. The chart above shows two separate 30% corrections in the stock as a measuring stick of a future break in trend. It's incredibly hard and arguably fruitless to put solid resistance levels on an individual stock with stellar performance and trading at all time highs.

However one potential target spot and area to "keep an eye on" may be the $378 level. At which point it would match the size of the rally off the 2008 lows to the last major swing high before the biggest correction took place.

So in conclusion, as a trader there are still opportunities on both the long and short side of the market. However as an investor or longer term swing trader I see only two areas of significant interest when it comes to establishing new positions.

I am interested in the Dow 16,500 area and possibly 16,000, if I wanted to front run just in case, as areas I would get short into. I would target the QE 3 announcement high in the S+P 500 at 1474 with a max downside target of 1363 which is the 2011 high before the biggest correction in this current bull market took place.

On the long side I would be interested in buying both S+P 500 downside targets mentioned (1474,1363) and I would target much higher prices above 2000 on the S+P 500 over time. Generally I would stick with the higher beta plays like small caps and technology.

Otherwise all I see that you can do here is trade around important levels.