Here is the preview of the coming week on the S&P500 from Traverse City, Michigan.
The S&P500 slipped lower in four of the five trading days this past week, dropping 1.33%. The S&P500 has moved lower in 8 of the past ten trading days.
The index slipped more deeply this week, falling to the 13 EMA Tuesday then a little below it Wednesday. It found support at the previous resistance and rebounded fairly strongly Thursday back above the 13 EMA before finishing the session at about the 13 EMA. This rebound was also near the lower trend line of the uptrend channel. Friday failed to extend the burst higher, losing about half of Thursday’s gains.
The result is the S&P500 is beginning to form a wedge pattern against the 13 EMA, and it seems likely this wedge will break one way or the other in the week ahead. The current bias is higher, however this bias does not allows tell the direction of the break. Stocks have become nearly fully oversold and the S&P500 initially rebounded at a double support, so it seems likely this break could be higher.
Major Market Indexes
The major stock market indexes: the DJIA, S&P500, NASDAQ, NYSA and Russell 2000 continued to show bullish tendencies.
The indexes broke lower from the very flat pattern they had been trading in. Most of the indexes bounced higher at previous resistance that turned into support on Thursday. The exception was the Russell 2000, which fell slightly lower than this support before rebounding back above it.
The rebound was also at or near the lower trend line of the uptrend channel on most of the indexes, although the DJIA turned higher quite a bit above its lower trend line. The drop near the established lower trend line looks to have broken the steeper uptrend that the indexes were beginning to develop earlier.
Like the S&P500, many of the indexes are beginning to form wedge patterns; all are biased higher, most rebounded at or near double supports and are nearly fully oversold. It seems fairly likely the indexes will break these wedges higher.
US Treasuries also look to have hit resistance, and it seems likely they could sell off in the week ahead. Selloffs in treasuries usually produce an inflow into stocks.
This week’s pullback took all of the indexes into or near fully oversold levels as it did with many stocks. It looks probable that this round of profit taking has finished and it seems fairly likely the indexes could rebound in the week ahead.
Overall the index charts continue to appear bullish. It seems likely the indexes will continue to trend higher in the weeks ahead.
S&P500 Constituent Charts
The constituent charts continue to look extremely bullish. Quite a few of the constituents that have been in strong uptrends continued to push higher even into the larger pullback we seen this past week.
Many of the constituents that did slip lower have reached and bounced higher off the lower trend line of their uptrend channels or other support levels, while others are very near these trend lines.
Several constituents broke higher through resistance levels in the past week and some took very large spikes higher through these resistances. Some of these stocks moved to new 52 week highs in these breakout moves.
Several stocks that were in downtrends have broken through the upper trend line in their downtrend channels. Most of these stocks have not yet established uptrends, but are showing rounding patterns that make it look likely they could begin to move higher again.
There were some stocks that broke through the lower trend line in their current uptrends in the fall this past week. Some of these stocks will likely recover and continue to move higher, but some will likely begin to trend lower. Again, it is necessary in a long sustained rally for stocks to maintain this staggering pattern between runs higher and drops.
Many of the constituents are becoming fully oversold, and many have begun to rebound off of support levels or lower trend lines. Even stocks that are in downtrends look like they are at levels that they could rebound to the upper trend line in these downtrends from.
Overall the constituent charts continue to look very bullish. Most of the constituents are oversold and at levels they look likely to rebound from. It seems likely the constituent stocks could move higher in the week ahead.
Overall it seems likely the constituents could continue to trend higher in the weeks ahead.
The + 90 day and -2% L indicator (precautionary) indicators are currently active. The current pullback on the S&P500 began just shy of the lower ranges of both the 1515.96 and 1520.27 drop resistances. See a more detailed description of the indicators I have developed through my research here.
The -2% H indicator (precautionary) did not provide a correct indication in the past week, and this indicator dropped to a low state with Thursday’s close. This indicator will remain active during the time the index is within or near the influence of the drop resistances, however it seems possible this indicator could expire without incidence.
The +2% L indicator (precautionary) did not provide a correct indication in the past week and became inactive with Thursday’s close.
It continues to seem unlikely daily moves will reach volatile levels as most of the indications continue to point towards low volatility.
It seems possible the indexes might retest previous highs soon.
The +90 day indicator that became active on Aug 20, 2012 has performed as follows to this point in the format: highest close / lowest close / last close.
+3.36% / -1.32% / +1.59%
This indicator weakened only slightly during the previous week, but began to strengthen again with Thursday’s rebound.
The index is near the lower levels of the drop resistances at 1515.96 and 1520.27. It doesn’t seem likely these resistances will provide a significant pullback.
Earnings continue to do well, I published earnings updates for September in the past week. These three reports show the constituents broke the quarterly and trailing twelve months earnings records as was expected, but it also shows that earnings estimates are beginning to rise again, with the exception of the current quarter. The current quartly earnings often falls somewhat just prior to the reporting season.
The increases are not huge, but they have broken the trend in lower earnings projections we have seen for several months. A large number of the constituent’s earnings projections also remain unchanged this month. This would seem to indicate that the analysts are becoming more comfortable with the current forecasts.
Although the third quarter’s earnings are expected to be slightly lower than the second quarter, based on the past performance of actual earnings that are almost always reported higher than the projections, the current projections leave these earnings well within range of beating the second quarter. Currently the fourth quarter’s projections are quite a lot higher than the second quarter earnings, so it seems fairly likely the next two quarters could provide new quarterly earnings records.
I watched a recent piece on CNBC where the guest commentator noted a 10% decrease in profits would be seen due to the European contraction and devaluation of the Euro. Many of the things that I am seeing are in contradiction to this analysis.
I noted in the comments of Part 2 of September’s earning updates information supplied by Standard and Poors that shows this degree of earnings degradation is unlikely, most notably that only 8.7% of sales the 252 constituents (over half of the 500 largest publically traded US companies) that reported this information to S&P comes from Europe, but also that decreases seen in Europe to this point have been nearly offset with increases elsewhere.
As noted in earlier articles many of the constituents have made adjustments to reduce earnings losses due to currency exchange rates, including moving production from the Euro Zone back to the US. I’ve also noted that Euro Zone companies are also moving production to the US to offset earnings losses due to a weakening Euro.
Many of the companies in Europe are showing large sales and earnings increases despite the European slowdown too, with most of these increases seen abroad, but some are still doing well with domestic sales.
This same decrease in European sales and increase in overall sales is seen in many of the stocks I track outside the S&P500. Many of these companies had also made adjustments including production relocation to reduce losses due to a slipping Euro.
I don’t doubt that the Euro will see further weakening, even with the “sterilization” of assets (printing no new currency to finance governments’ debts) that the European Central Bank plans to use to offset any loans to these countries. As I’ve noted in past articles the world has seen large decreases in savings due to extended periods of low interest rates, and liquidity problems have surfaced due to these low savings levels.
The shift in assets the ECB plans to undertake will probably increase these liquidity problems, and reduce amounts available for loans to consumers and businesses. These liquidity problems will in turn probably pressure the Euro lower. So even though the ECB will not be printing money, it probably will not keep the Euro’s value from slipping further.
The increased destabilization within the Euro Zone due to domestic uprisings will probably also cause investors to shed Euros. Unless changes are made to austerity measures, these uprisings are likely to continue, and intensify.
Although some might see losses due to a weakening Euro, overall a strengthening in the US dollar is very good for the US economy, and US stocks.
Many of these sources of information were used in this article.
Have a great day trading,
Disclosure: I am currently about 93% invested long in stocks in my trading accounts. I am also short 20 year US Treasuries. The change in my investment level was due to the purchase of five issues with the cost of these purchases partially offset by dividend payments, with Friday’s dividend payouts reducing my overall investment level from earlier in the week. I continue to plan to offset sales with purchases relatively quickly, and also plan to try to maintain near my current investment level for the time being. I will receive dividend payments from 18 issues in the coming week and 6 in the following week. If I make no additional investment changes during this timeframe these cash payments will lower my investment level due to rounding.
Disclaimer: What I provide in the Stock Market Preview is my perception of the current conditions and what I think is the most probable outcome based on the current conditions, the data I have collected and the extensive research I have done into this data along with other variables. It is intended to provoke thought of the possible market direction in my readers, not foretell the future. I do not claim to know what the market will do. If the market performs as I expect, it only means I am applying the market history to the current conditions correctly. My perception of the data is not always correct.
This article is intended to provoke thought about investment possibilities. Acting on the information provided is at your own risk. You are urged to do your own research, and where appropriate, seek professional investment advice before acting on any information contained in these articles.