Strong Stock Market Uptrend Continues...Testing the 70 Week MA on the S&P 500

By: Jack_Steiman

Solid advance off our March lows continued this week, but the market did hesitate some late week at our important 1026 70 MA on the S&P 500 (see our 1st chart below) and 2-year downtrendline on the Nasdaq which finally cleared late.  While we did close a few points over 2015, the close at SPX 1026 means the 70 week moving average hasn't been broken by the bulls just yet. That's the big one. If we can get the SPX well above 1026 and the Nasdaq well above 2015 then we can say with more certainty that things look even more positive for the bulls. I know it feels that way and you all know I am bullish but being bullish doesn't mean being inappropriate. You just don't go out and buy bigger because we're so close.

You have to respect these key levels of resistance and not get too far ahead of things simply because we want to. Believe me folks, i would love to get super aggressive.  Why not!  However, we have all learned bad lessons anticipating an event that has yet to come to fruition. Do I think it will? Yes!! You know that by now. Could we pull back first? You bet we can. Could we just smash on through on Monday? Sure, but let's see it first before we go putting in more of our hard earned dollars. We are not yet overbought on the daily charts but we are on the short term time frame charts and this too has to be respected. We all know that we can stay overbought for a very long time but when the short term charts get too overbought, it doesn't take as much time to sell as the daily charts usually do. We could sell some early Monday only to blast right back up. Some selling may get some people thinking we won't make it after all. So many possibilities. Bottom line, don't play too heavily in front of such massive resistance until the coast is undeniably clear. Have some longs exposure out for sure. You want exposure but you don't want too much at this type of resistance until we see the clean break up and out.

The US dollar continues to fall while the commodity world is coming alive more and more these days. Good action in those stocks and they are clearly leading the market higher. Technology, financial and other sectors are participating, but you'll have a hard time finding better stocks than those commodity plays.  The Oil Services ETF (NYSE: OIH) broke out this week, and one specific oil play we like (in our model portfolio) is Canadian Natural Resources (NYSE: CNQ).  You always should be diversified to some degree and thus you don't want all your plays in one sector, no matter how hot that sector is. The financials continue to ride the bullish wave as well, represented by the Financial Select Sector SPDR (NYSE: XLF), but they did a little pulling back late in the day. Got a bit overbought on the 60 minute time frame charts. Nothing bad and no red flags. However, had they continued at overbought, the SPX would have made the breakout today. Good, solid action in most sectors which is a necessary component to an overall healthy market, but commodity and financial stocks are really leading the way here recently.

One thing I would suggest to all of you out there is to keep a scoreboard of all stocks once they have reported their earnings to the world. You will find that if you stick with the ones that performed best at their very latest report are the ones that are far out performing the ones that did not. The ones that got hit on their reports are coming back but are lagging the good performing earning stocks badly. It doesn't matter what sector you go to. Just keep an eye on this phenomena in the future. You may find it really helps you with your own trading performance. The best way to play overall is to play the leading sectors in the market and then find the leading earners within that sector.

Sentiment Analysis:
 
There was one red flag today that I have my eye on. It's thus far only a one day event but the put/call readings today were basically just below the super complacent level of 0.60 all day. Thirteen readings just about all below this magical level. Not a good sign when we think of sentiment. However, thus far it's only a one day event and thus could be nothing from nothing. If this were to continue while at the same time we're breaking out, it would become a major red flag for the market short term. Not the best way to make a major resistance level breakout. You want some fear. If not, at the very least, you don't want major complacency and I will be watching out for this if and when we finally do cleanly break above SPX 1026. Just the other day, when we sold off, we had super fear level well over 1.0. As high as the 1.20's but that lasted only one day. I'm hoping and thinking this will be the case here as well.

Sector Watch:

Due in part to a sagging US dollar and late week strength in the Shanghai (see our 50 MA weekly hammer that formed in our 6th chart below) the commodities led the advance this week.  As mentioned the OIH, seen in our 4th chart below, broke out of a 3 month base on Friday with crude printing new 9-month closing highs.  Many other groups participated such as the defense sector seen in our 5th chart below along with techs, financials, and retailers to a somewhat lesser degree.  The transports also put in a solid late week advance.  We continue to maintain our focus on the better looking sectors per our alerts.  Continue to keep a watchful eye on the shanghai in the week ahead per global market clues.

The Week Ahead:

The week ahead will be the most interesting and important week for bulls and bears alike in quite some time. Historically, the 70 week moving average has stopped many cyclical bull market rallies within a larger secular bear market still in play. It ALWAYS feels bullish at the 70 week moving average and then we get hit out of nowhere. I don't think that's the case here but you have to be on alert for the possibility that this could also be the case here. Respect the market folks. In addition, we no longer have relevant earnings reports to play off of and I find that more bullish as the market has clearly acted favorably on this past earnings season just concluding. There are still some out there of course but the brunt of the important ones are now historic fact. We will play this market based on whatever it tells us to do not argue with it in terms of how can a breakout happen in this economic environment? If it does break out it does and we will respond accordingly. Please recognize that things look good but we are not through yet. Go slow and easy please

Peace

Jack

Have a Great Weekend!

Peace
Jack Steiman

Jack Steiman is author of SwingTradeOnline.com ( www.swingtradeonline.com ). Former columnist for TheStreet.com, Jack is renowned for calling major shifts in the market, including the market bottom in mid-2002 and the market top in October 2007.

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