If you're bullish based on last week's Nasdaq Composite Index, that would certainly
be understandable. The index picked up 67 points, or just under 5%. That's not bad
considering the recent rough market. As a result of that increase, we're now seeing a
few bullish signals that weren't present only a few days ago.
First, we're now well ahead of our 10-day and 20-day exponential moving average
lines. Second, we got a bullish MACD crossover. As both of these are indications of
momentum, it's fair to say that this upward move may have a little life left in it.
In fact, we're looking for a few more bullish days in the very near future. But how
much life is left in this rally? That's the key question.
The reality is, as we've mentioned in recent Mid-Week Updates and Weekly Market
Outlooks, is that we're in a trading range market. In a choppy 'reversal-oriented'
market such as this, momentum indicators are less effective. In fact, the recent
times that MACD lines looked the strongest actually occurred as a rally exhausted
itself, and the market pulled back.
Instead, we're giving more attention to indicators that are designed to spot
reversals, such as stochastics. As the chart below indicates, stochastics has done
pretty well at signaling reversals in recent weeks, so we'll continue to rely on that
tool until we have a reason to do otherwise.
And what is the stochastics oscillator saying? It's actually saying the same thing -
we're not technically on the 'overbought' region yet. At the current rate, we'll
cross that 80+ 'overbought' threshold in a matter of days. In other words,
stochastics agrees that there's a little more room for upside movement in the coming
week before investors start to sell again. Once the stochastic lines get into that
overbought region, become concerned.
The other key issue we're facing now is what we referred to as a 'resistance zone' in
Wednesday's Mid-Week Update (see chart). The current bull run really hasn't been
challenged yet; it will be next week. We're expecting the Nasdaq Composite to
actually enter into the zone, meaning we expect to see trades above 1430. Once in the
zone though, look for plenty of turbulence.
It's no coincidence that the stochastic lines will probably cross 80 and venture into
overbought levels at roughly the same time the index crosses into the thick part of
resistance. After getting knocked around those levels for the last few bullish April
spurts, we're looking for a pullback unless the index can close above 1465.
Resistance is at 1430 and 1450. Support is at 1390 and 1360.
Daily Chart of the Nasdaq Composite
S&P 500 COMMENTARY
The forecast for the S&P 500 chart is essentially the same as that of the Nasdaq
Composite - a few more strong days in the near future, and after that, plenty of
reason for concern. Like the Nasdaq, there are signs of upward momentum that can
certainly compel one to be bullish. Instead of MACD, we'll use a directional movement
index (or DMI) chart to illustrate the good and bad points of using a momentum
indicator in a momentum-less market.
Simply put, when the DMIplus line (in blue) is above the DMIminus line (in red),
that's bullish. After all, to create that situation, you have to make higher highs
and higher lows. Of course, the opposite situation would be bearish. As the current
DMI chart indicates, especially given the fact that the ADX line sis rising, we're in
a strengthening upward trend. That's part of the reason so many people are certain
that we're going nowhere but up from here.
But take a closer look at DMI lines. Most bullish crossovers have been short-lived.
And indeed, just as DMIplus lines approached very high levels, the market topped and
pulled back shortly after. For the same reason as the Nasdaq, we'll apply a
stochastics chart to the S&P 500. The analysis again indicates that we're still
headed for a little more upside before becoming overbought.
And like the Nasdaq Composite, we expect to enter the stochastic overbought area just
about the time that the S&P 500 enters its own resistance zone. Once there, expect a
few turbulent days. If we fail to ultimately move above 940, we're expecting a market
reversal to the downside.
Support is at 875, with the first resistance point at 910.
Daily Chart of the S&P 500 ($INX)
Bottom Line:
A few good earnings reports can go a long way. We've seen a pretty strong market that
has a little momentum behind it, so don't be surprised if the next few days are
similarly strong.
Past that, though, we have a lot of concern about the forces that will be working
against the market. First, late-spring through early-fall is the worst 6-month period
for stocks. The other concern is the lack of worry on the part of investors. Take a
look at the chart below.
Dow Jones Industrial Average with CBOE Volatility Index (VIX) - Weekly
With VIX readings coming in at relatively low levels, these high expectations that
investors have can't possibly be met. As these investors realize that the markets
will fall short of expectations, a sell-off begins. This is the pattern that is
painfully evident in the graph. We encourage you to equip yourself with methods to
take advantage of this bearishness, rather than suffer from it.
Have a Great Trading Week Ahead!
Price Headley, CFA, President
With, James Brumley, Research Analyst
Se não receio o erro é porque estou sempre pronto a corrigi-lo
There's no bull side and no bear side. JUST THE RIGHT SIDE!
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