The S&P broke through the old June highs with some force yesterday on the back of some better-than-expected earnings from a broad group of technology, materials, and industrial companies. Whereas the rally off of the March lows was largely led by financials, this latest string of 8 out of 9 up days in the S&P (12 straight up days for the Nasdaq) has been much broader based. With tech bellwether Microsoft down 7% in the pre-market, maybe its time to pause and reflect to see how much further we can go.
The chart below shows that we have regained almost 50% of the drop over the past 12 months. With 50% being an important Fibonacci level, 989 on the S&P will be a key point to watch. A rally through that level will have to be respected and should drive further money from the sidelines and into equities. From that point the next Fibbo levels are 1066 and 1160, which would bring us very close to pre-Lehman levels. For that to happen we must start seeing a few things. First, many of the earnings beats have been due to extensive cost cutting by companies (read: job cuts). So while the bottom lines have bested rather grim analyst estimates, we have not yet seen the top line growth that would suggest the consumer is spending again. Microsoft’s top line miss is a case in point. Until companies start to ramp up production in anticipation of higher end user demand, new job creation will still be negligible at best - and new jobs is usually the last thing to happen in a recession.
So expect some churning, some backing and filling as we digest this sharp move up in equities over the past two weeks. Keep reading our Morning Call for signs that the overbought indicators have unwound and that a move higher is now possible. If anyone has any other predictions or thoughts, we’d love to hear them.
Last week we pointed out that the S&P 500 had a potential failed negative at the 200-day moving average. What appeared to most technicians as a head & shoulders pattern, never fully materialized and the S&P was able to bounce off of support and start to retest the prior highs.
The S&P had no resistance at the July 1 high of 932. Positive earnings last week from the likes of Intel, IBM, et al assured that 932 would be a paper wall. Now comes the tough part. The S&P is approaching some serious overhead supply in the 950 area with the June 11 high of 956 directly ahead. Another big week of earnings are in front of us with Apple (AAPL), Freeport-McMoRan (FCX), Coca-Cola (KO), and Caterpillar (CAT) likely to set the tone early in the week.
Right now the S&P stands around 950. Nice round number. There is sometimes resistance at round numbers. Goldman Sachs this morning raised their year-end target on the S&P from 940 to 1060. Will they be right or are they just talking their book? We will soon see but if the market can penetrate this 956 high and create some distance, then I don’t think the next nice round number of 1000 will be too far off in the future.
Last week we noted that the S&P 500 was forming a bearish head & shoulders pattern, one in which gave traders pause when thinking about new long positions. You can find that post and its accompanying annotated chart in the General Market section. Given Monday’s sharp rally and yesterday’s positive news on Intel, people are asking “where to now?”
The chart below shows several areas of resistance that will need to clear in order to declare the head & shoulders pattern a failed negative. Failed negatives do happen, and they can be powerful when confirmed as it only further empowers bullish sentiment. The first line of resistance is the 50-day moving average (purple line below) which is currently at 912. Looking at where S&P futures are trading this morning in reaction to last night’s Intel earnings report, we are looking at gapping open pretty close to 912. If the S&P can close above that level, the next stop is this short term, downtrend the S&P has been in after making consecutive lower highs. That trend line, annotated below, is right around 920. A nice close above 920 starts to break this short term down trend the market has been in and so that level is to be watched very closely. Until then, be careful with new long positions as this market has whipsawed many traders with action that can be best described as a ball bouncing downhill. So long as the slope is down, the long side will be fighting the tape most days so await confirmation that the ball is now bouncing uphill so the tape can be on your side. If you’re short, then the short term trend is still your friend and aggressive traders can short these resistance points with tight stops should they be breached.
A lot of our subscribers have been asking us, where does the S&P go from here? Good question since the nearly 40% rally witnessed over the past few months has started to show some signs of fatigue. The chart below is of the S&P 500 and I’ve annotated it with some buzzwords used in the technical analysis community that I thought I would explain.
The long purple line is the 200-day simple moving average. That’s basically a rolling average of the last price of the S&P 500 over the past 200 days and often represents a long term trend line. You will notice that it was sloped sharply down - which is no surprise given what has happened in the market over the past year - but has started showing some signs of leveling off. That is a key point when trying to look at the longer term trend. If you are bullish, you want to see this moving average level off or start to slope upward. Back on June 1, the S&P finally was able to get back above this 200-day moving average. Technical analysts consider that a very bullish occurrence. But when that happens, the bears say “enough is enough” and start to try and push the market lower. This starts the test phase. The 200-day moving average had been a resistance point for a while and once you cross above and stay above, that resistance then is tested to see if it can now become support. I’ve highlight the first time sellers came into the market and tested it back on June 22nd. You will notice that the S&P passed the test and was able to hold and rally for a few days. As is often the case, once is never enough and we are just now testing that average for the second time. Bears will want to push the market back under that moving average and try and keep it there. The longer the S&P stays below that moving average, the more susceptible it is to further selling pressure.
This second test created another set of issues for the bulls. After the first test, the S&P reached a top of just under 932. That is less than the top made on June 11th of 956. That “lower high” is often a sign that the trend is moving lower. You will notice that on the way up, the S&P kept making high highs and higher lows, thus maintaining that upward trend. So this first lower high and lower low is a sign that things may be changing. Also, you may have heard of the technical pattern called “Head & Shoulders”. It’s called a Head & Shoulders pattern because it is shaped like a person’s head and their two shoulders. I thought it would be worthwhile to illustrate a recent example of this. I have labeled the left shoulder, the subsequent head formation, and now this most recent right shoulder which is trying to form. This is considered a bearish technical pattern and can signal a reversal in the market. The neckline which I have highlighted is a key level to watch as a break below there would complete that right shoulder and give the bears further ammunition.
So, here we are. The battle at the 200-day. After such an impressive 3-month rally, the bears are taking a stand. We’re seeing some bearish technical signs beginning to percolate and the bulls are going to do their best to hold this market up starting today by spinning Alcoa’s quarterly loss as a positive sign that things are turning for the better. The next few days and earnings reports will be critical. Will the market shift from “things are not getting worse” to “things are looking good”? The bulls hope so, as that is the only time when companies will start ramping up production and start hiring again.
I will close by noting that SmarTrend called a Downtrend for the S&P 500 two days ago at 890. After being in an Uptrend for 116 days. Once of the longest Uptrends in quite some time. Is it time for that retracement many have been waiting for? Or is this rally not over yet and we’re just doomed for sideways action for some time (trend trader’s worst enemy)? What do you think?
With the S&P now off 5% from its high of 956 on June 11, the question on everyone’s mind is whether or not the rally is over. From the March 6 low, the S&P gained 44% in a relatively short amount of time and now market pros and technicians are tripping over themselves to suggest how deep this next corrective phase will be.
Mary Ann Bartels, a technical analyst at BofA/Merrill Lynch, thinks the downside will be about 7-10% from current levels. She cites failure to break above the Jan 2009 high of 944 (on a closing basis) and failure to break above the May 2009 down trendline as reasons for concern from a technical standpoint. She also points out that the 90% down day on June 15th also suggests that some “backing and filling” may be necessary before the market can move to new highs. Bartels also said that recent leading sectors such as consumer discretionary, energy, materials, and technology are showing some signs of fatigue and may correct further in coming weeks. Bartels sees a break below 875 would point to a test of secondary support at the 810-850 level.
NYSE floor trader and frequent CNBC commentator Art Cashin sees the next few days as critical as Monday’s big down day “moves the momentum to the bears.” Cashin said “The market will probably go [down] about 15% just to fool everybody. You get in about the 10% level and people say ‘oh my god the market’s going down’, so you need about 15% down to make everyone feel bad.” You can see a video of Art’s comments here: http://www.cnbc.com/id/31504070/site/14081545
With so many voices trying to talk the market down, will they be proven right or will it just be another contrary indicator?
