The week ahead: Bulls ready to charge

Friday's big bounce shouldn't have been that surprising based on the charts, which tell us that the overall rally could run through the end of the year.

By MoneyShow.com Oct 21, 2011 5:55PM

By Tom Aspray, MoneyShow.com


Wall Street professionals and the media were fixated on two things last week: the trading range in the stock market averages, and the European summit over the weekend.


Very few are talking about the very bullish action of the market internals, which are painting a much more attractive picture.


Many investors were scared out of the market in August, which was not surprising. Professionals generally look at the fundamentals, and while there has been some improvement over the doom and gloom that prevailed last month, their outlook is cautious, if not bearish.


This chart of the Spyder Trust (SPY) and the NYSE Advance/Decline line is very revealing, at it shows a whole different story. The NYSE A/D is a cumulative total of advancing minus declining issues on the NYSE Exchange. Simply put, it gives an internal picture of the market’s health.


The NYSE A/D line has been declining since the July highs, but on October 11, it moved through its downtrend (line c). After a minor pullback last Monday, the A/D line has accelerated to the upside.

The SPY, on the other hand, is just trying to convincingly move above the upper boundaries of its recent trading range (line a).


The A/D line is clearly much stronger than prices. Historically, this means that prices will eventually catch up.


The A/D line is already very close to the July highs when the SPY was trading near $134. That is about 8% higher than the SPY is currently. As I noted last Wednesday, this action is similar to what occurred in the fall of 2010.


Over the years, there have been many other examples of this behavior, and though this doesn’t mean that we won’t still see sharp one- or two-day drops, it does indicate any declines will be well supported, with overall action bullish.


In looking at some of the sectors, I am also seeing some encouraging action—even in the beaten down financial. For example, Goldman Sachs (GS) reported a quarterly loss on Tuesday, leading to The Wall Street Journal’s headline “Pain Spreads to Biggest Banks.”


Later in the week, some of their editors were “flabbergasted” by the stock’s action, as GS held above Monday’s low at $94.65 and closed the week above $102.


Of course, many are waiting to see what type of rescue package comes out of the weekend meeting in Europe. If it is $1.3 trillion or more, stocks should surge Monday, as many are waiting for this news before they buy.


A lower number is likely to cause a sharp sell-off, which I think will be well supported. If it is supported, and stocks actually turn higher, the bulls could start to charge.


The economic news was generally better than expected, with the biggest surprise being some slightly encouraging data on the housing market. Technically, the homebuilders have completed short-term bottom formations, as volume suggests these stocks are being accumulated. (For specifics, see “Big Volume Is Bullish for Homebuilders.”)


We will get more information on housing this week, with the S&P Case-Shiller Housing Price Index on Tuesday and the new-home sales figures on Wednesday. Also out Tuesday are consumer confidence numbers.


On Wednesday, the market will also likely be watching the durable-goods report, which will be followed Thursday by the final readings on second-quarter GDP. Pending home sales and jobless claims are also scheduled for Thursday, with the personal income data finishing the week on Friday.


WHAT TO WATCH

Of course, there was plenty of movement in many of the other markets. Yields are well above the month’s lows, with the ten-Year Treasury yielding near 2.2%—well above the 1.72% level seen at the start of the month.


Gold was lower last week, and the Yen accelerated to the upside last Friday…so much for the carry trade.


S&P 500

The Spyder Trust (SPY) has held above support at $119 for the past eight days. Friday’s daily close above the August 31 high of $123.51 should signal upward acceleration.


The next key target is the 61.8% Fibonacci retracement resistance level at $125.82. There is further resistance standing in the $128 area and then at $130.


There is minor support at $121.50. If the SPY closed below $119, it would imply a drop to the $116 to $117 area.


Dow Industrials

The Spyder Diamonds Trust (DIA) closed well above the early-September high of $117.04 (line a) on Friday. The 61.8% retracement resistance level at $119.16. A close above it should signal a move to the $122 area.


The Dow Industrials A/D is acting stronger than prices, as is the on-balance volume (OBV). The OBV is well above the September highs, and shows a bullish divergence (line b) going back to the August lows.


DIA has first support now at $115, with more important levels around $112.83, which was last Tuesday’s low.


Nasdaq-100

The PowerShares QQQ Trust (QQQ), which has been the strongest sector, corrected the most last week as it tested the support in the $55.80 to $56 area. This was above the 38.2% retracement support at $55.16.


The 50% support for QQQ is at $54.50, with chart support between $54 and $53.50. On early October 4, it held above the prior lows of $49.99 and $49.93 (line e).


The next resistance for QQQ stands at $59 to $59.90, with trend line resistance (line d) in the $60.50 to $61 area.


The Nasdaq-100 A/D broke out of its trading range more than two weeks ago, and continues to show positive signs. The OBV moved through its downtrend (line f), and is acting stronger than prices, as indicated by line g.


Russell 2000

The iShares Russell 2000 Index Fund (IWM) is stalled below resistance in the $71.30 area. More important resistance waits at $73.75 (line a). IWM needs a close above this level to complete the bottom formation.


The 50% resistance level is at $73.45, while the 61.8% resistance is significantly higher at $76.60.


The RS analysis indicates that small caps, as represented by the Russell 2000, have been underperforming the S&P since April. The RS is in a steep downtrend (line b), but before the end of the year this is likely to change as the January effect kicks in.


As shown on the chart, the RS analysis was much stronger last year. The daily OBV has completed a bottom formation by moving above resistance (line c). The weekly (not shown) is still negative.


There is first good support for IWM at $68 to $68.50, with stronger levels in the $65 to $65.50 area.


Sector Focus

The Dow Jones Transportation Index peaked in May, when the weekly OBV formed a negative divergence.


The Transports closed last Friday above the resistance at 4,780, which was the 50% retracement level. The next target is the 61.8% resistance, standing at 5,000.


The RS analysis has improved, as it has broken its downtrend (line d) and moved above its WMA. It is now testing the August-September highs (line e), and a convincing move above this level will indicate that the Transports have started to outperform the S&P 500.


The OBV is lagging, and needs to move above the resistance (line f).


I continue to like the retail stocks as well as technology, as they have the best relative performance as well as a positive seasonal bias.


All of the sectors that I liked earlier in the month have moved higher, but theSelect Sector SPDR Health Care (XLV) is lagging. The Select Sector SPDR Consumer Staples (XLP), Select Sector SPDR Technology (XLK), Select Sector SPDR Utilities (XLU), and Select Sector SPDR Consumer Discretionary (XLY) have broken out to the upside.


Two key sectors that topped in May, the Select Sector SPDR Energy (XLE) and the Select Sector SPDR Industrials (XLI) are starting to act much stronger, which is a positive sign.


Oil
Crude oil is still locked in a trading range, as the December contract closed near its highs at $89.80. A strong close above the September high of $90.96 would clearly break the downtrend, and suggest a move to the $94 to $96 area.


The daily OBV is also still below resistance (line b), so volume on the rally will be important to watch.


Precious Metals
The SPDR Gold Trust (GLD) was able to rebound on Friday, so it’s possible that we will see one more push to the upside before the corrective pattern is complete. There is still strong resistance at $165, with the 50% Fibonacci retracement level standing at $170.


I still expect a drop to the $1500 level in the December Comex gold futures before the correction from the summer’s highs is over.


The daily chart of the iShares Silver Trust (SLV) shows a bearish short-term flag formation with the upper boundaries in the $31.50 area. Even a move above this level would not turn the outlook positive.


The gap in the $32.61 to $34.51 area could be filled before the decline resumes. However, I am still looking for an eventual drop to the $25 to $26 area.


The Week Ahead
The correction I was looking for last week ended up being quite brief in the overall market, even though the technology sector did correct more on the back of weak earnings of Apple (AAPL).


I hope you used any weakness to buy as I recommended on October 13’s article, “Buy the Dip." Though the widely watched ETFs had a very shallow setback, many of the individual stocks pulled back to good retracement support, which provided a good risk-reward entry point.


If my analysis is correct, we should see a rally that could last until the end of the year. If this is the case, I will look for signs that it is time to get into either mid- or small-cap stocks, but it is too early to tell now.


Be sure to use stops, and don’t chase the market…there will always be another opportunity.

51Comments
Oct 22, 2011 11:26AM
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NOBLE socialist
Anyone foolish enough to solely depend on gvt to take care of them, probably deserves what they will get.

 I was fortunate enough to have saved money during my career and the benefit of my father starting a stock account when I was born - which I didn't even know about until his death - so I didn't draw on it and it grew considerably.  However there are many individuals who have not been able to save or have been hit with large bills and don't have means or portfolios to support them.  Its not that they love the government so much as they trust this country, and have been promised (as both you and I) that SS would be a safety net incase they needed it. Just because the government seems to be corrupt today, they - nor anyone else is exempt from paying into SS - and they have paid all of their working lives - and should not be demeaned when they expect what was promised.  Just because hindsight is 20-20 there is no reason to consider them foolish.  They trusted the government, which is suppose to be For The People and its not wrong to expect to get what you paid for (although today it seem to happen less and less) - it hasn't always been that way.


And that is why I gave a thumbs-down on your post.

Oct 21, 2011 9:00PM
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Not hard if you think about it. Brokers want stock to hit 12,000   then  ride it all the way down.

 

Can you say Scumbags?

Oct 21, 2011 8:55PM
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Where was this see-all/know-all 1200 points ago on the Dow?
Oct 21, 2011 9:21PM
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The bulls aren't going anywhere. By Tuesday they'll be down 200.

Oct 21, 2011 10:57PM
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If it goes up to 12,00 sell , and sideline for a few months.  We are going to see a 9,000 dow. Come on BOOMERS you 've already been screwed once, this is not your game anymore, the short day traders rule this mess.
Oct 22, 2011 4:59AM
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yes its a scam , the bulls  are trying to sucker the people again , as for the falling to 200 points by tuesday no way its going to fall that short its going down 500 to 600 points ,  its the holiday season yeah right no one has any money to buy stocks , over seas that mess is not really clear up , all we have is somes say so has any seen the books of the banks  an companys  i say no they are juggling the numbers again  even citi bank was juggling the numbers try to hide a few things so the stock would go up but was caught , so its going to be a bad holiday season an wall market was rolling back benfits , so  lies an more lies , everyone i know is staying away from the market  they do not want to lose 20 years of savings again in one day an a week , we the people have worked to hard for the money  an have been made fools of once  an lost 50,000 dollars in a week  in 401 ks an retirement savings an  jobs  an homes an most inportant our familys  because of the market .
Oct 22, 2011 2:33PM
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Noble.....Didn't give you any kind of thumbs...Just wastes my time.

 

Really have trouble with you "not understanding" the concept, that many of US have paid into the Soc. Sec. Sys. for as much as 40 years....Yes; I feel I have it coming, I feel that I deserve it and I and my spouse shoulde be able to "collect or partake" until the day we die.

 

If it means our Government sends 1-2 less rockets to the moon or fail to start a couple more Wars, outside of our Country..........The​n so be it !!......As long as WE get OURS.

So what if we are paid more then we paid in.....Many die without collecting a penny !!

Oct 22, 2011 7:05PM
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The title is laughable at best, and the bears aren't quite done yet.  Nothing in Europe has changed, nothing in the US has really changed, and as to Congress they remain as divided as ever.  One day's surge in a market that fluctuates substantially from day to day; says nothing about any long term turn around for te markets.  It's just more of the same, so the real question is what day will the market head in the other direction?
Oct 22, 2011 5:41AM
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Bulls are ready to charge, they will either run or become juicy steaks. You want fries with yours? Smile
Oct 22, 2011 4:08PM
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Due to inflation, the one dollar I was taxed for Social Security in 1972 (when I entered the work force) would buy what costs $5.43 today (Consumer Price Index).

The 3.6% increase in benefits for SS recipients is the first increase they have had in 3 years and obliviously everything else has increased in costs.

The whole idea of tax reduction is ludicrous.  You can't spend more than you take in or the country wouldn't be in the predicament it is in today.  I don't want to pay more taxes, but if I want more benefits, I have to.

A particular quote I like:

A government big enough to give you everything you want, is big enough to take away everything you have. 
Thomas Jefferson

Oct 21, 2011 10:07PM
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The Bulls of Wall Street only run down hill and get out of breath by the next day.
Oct 22, 2011 6:04PM
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THE STOCK MARKET VORTEX


As money has poured into the stock market, the sheer volume of it has pushed stock prices up. As stock prices have soared, others have joined in the stampede to "get in" on the "easy money," creating an upwardly spiraling vortex which, as it grows in size and strength, sucks in ever greater amounts of money which in turn pushes stocks that much higher reaching eventually into the absurd.

What kind of absurdity? - take, for example, the stock of one company with annual revenues of only $14-million which was recently bid up to the point where $52-billion had been dumped into it - and not just by wild-eyed crazies, but by "reputable" mutual fund managers of some of the most well-known mutual funds in the country. And this was an American company doing business in the American market where reporting procedures are considered to be quite strict in comparison to stocks offered on foreign exchanges - for instance, in Latin America and the so-called Pacific Rim - where more and more American investment money is being dumped. God only knows the absurdities that have been reached in those overheated exchanges.

The stock market is today nothing more than a mammoth Ponzi pyramid, and like all such pyramids, greater and greater amounts of money have to be found to feed into it in order to prevent its collapse. And the money that is being fed into it are the diverted wages of American workers, the pension and retirement funds of our senior citizens, trust funds, and the "savings" of ordinary Americans who have been persuaded to divert their savings from their bank accounts to mutual funds and 401k accounts.

One would think, of course, that the "game" can't go on forever; that eventually the funds that are required to feed into the pyramid will dry up. And that is beginning to happen insofar as the nation's pension and trust funds are concerned. [The only thing that hasn't been thrown into the maw is the nation's social security funds - and now there's talk of doing that.]

But so long as the wages and salaries of America's workers can continue to be squeezed there will be money available to feed into the vortex; so long as work can be shifted from high-paying U.S. jobs to low-paying jobs in Mexico, Indonesia, the Philippines, China, etc., the amount of money thus saved can be fed into the exchanges, thus preventing the collapse of the pyramid. If all else fails, of course, U.S. taxpayer funds can be fed into the pyramid to prevent its collapse - as is being done even now in Korea, Indonesia and Thailand (almost $100-billion in the last four months alone).

But there is a price to be paid - the pauperizing of ordinary people not only in the United States, but throughout the world.

Oct 22, 2011 12:42AM
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ya, ya , ya...Fibonacci, hunnn? and if everything else fails, you can still turn chicken feathers into gold using some sound alchemy principles... 
Oct 22, 2011 5:55PM
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TOO BAD THE GREAT DEPRESSION WILL CONTINUE FOR SEVERAL MORE YEARS
Oct 22, 2011 5:36PM
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I would hardly blame Obama, for solvent/insolvent Soc.Sec.....That's just your scapegopat.

 

We have been hearing this same song and dance for over 30 years now.....

Call it the dog and pony or smoke and mirrors.....Anything​ you want??

 

Is it a scheme?? Hell yes, it is.....But our Government has squandered, what was, as Noble or Joe stated a safety net to help people get through until the end of their lives.

Was it funded by workers for many years to pay out to retirees.......Yes it was.

Was it going to pay out to retirees for 30 years until 90s something....No probably not?

The system was more or less based on Life Spans and we all know that has changed dramatically over the 20-30 years.

Have we lost workers and high paying jobs and much of our manufacturing base the last 20 years??....Yup we sure have.

 

With all the combinations of the bad news...It's no wonder we are having trouble funding SS.

And it seems that the Well of Soc.Sec. has been dipped from too many times? THX GOV.

If it had been left alone only to  pay to the people, that paid in; And was given a low compounding interest rate......I would almost bet, there would be plenty of money in the system.

 

Even with our 3.5-3.6% raise, somewhere between 33-50% will be taken back for Medicare..Yeah, NICE SYSTEM.

Oct 22, 2011 6:38PM
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This guy can't read a chart. Back in July the A/D line shot up too. Then the market crashed. Looks overbought to me.
Oct 22, 2011 9:48AM
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It seems as if everyone has lost faith in this capitalistic society and are jealous of those who seize opportunities.  It is like a lottery ticket?  Kind of.  You just have to buy when your odds are the best.  So many people think things should just come to them.  Work hard and make wise investments.  I am not counting of social security to be there when I retire.  That's why I am building nest egg now.  And no, I do not need an IPhone 4s. 
Oct 22, 2011 7:51AM
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Would you real put your hard earned money in Wall Street after being cheated out of it over and over again?
Oct 22, 2011 1:38AM
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Thinking lessee, let me count how many times Tom here used the words "trading volume" in this article .... what is this, where's waldo?  well, while we look ...

 

query me this Tom: if the world's largest economy (eurozone) pulls $1.3 trillion out of a banking system for reserves, and that system is being steadily downgraded, the stress tests a sham, and even the "strongest" (dexia) at risk of nationalization and/or vaporization when derivitives are considered - just where will the credit come from to avoid an extremely nasty recession that will ripple throughout the global economies?  just like after getting a massage from a nun, your chances for a happy ending are about nil.

 

keep spinning though, keep spinning .... faster hamsters, faster ......   

Oct 22, 2011 5:38AM
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Technicals... worthless stuff! If it goes to 12,000 look for 12,200, but if it falls to 11,900, run to the hills !!! lol
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