SHANGHAI COMPOSITE IGNORES NEWS AND BOUNCES OFF SUPPORT -- GERMAN AND FRENCH INDICES SURGE TO NEW HIGHS -- NON-FARM PAYROLLS EXTEND POSITIVE STREAK -- JOBLESS CLAIMS ARE TRENDING IN THE RIGHT DIRECTION -- ISM MANUFACTURING INDEX FLIRTS WITH 50

SHANGHAI COMPOSITE IGNORES NEWS AND BOUNCES OFF SUPPORT... Link for todays video. Recent news out of China has been less than positive, but the market appears to be ignoring this negative news. Reports last week showed a slow down in the manufacturing sector and todays release of the PMI showed a slow down in the services sector. Even so, the PMI was above 50 and still favored expansion. Chart 1 shows the Shanghai Composite ($SSEC) shrugging off recent news as it firmed in the 50-61.80% retracement zone in April and bounced above 2225 the last few days. Also notice that broken resistance and the 200-day moving average mark support in this area. The index remains just short of a breakout and follow through above 2250 is needed to fully reverse the three month downtrend. A breakout would be especially bullish because it would signal a continuation of the December-January surge. Chart 2 shows the Xinhua/China 25 ETF (FXI) breaking out in late April and broken resistance turning first support in the 36.50 area.

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Chart 1

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Chart 2

GERMAN AND FRENCH INDICES SURGE TO NEW HIGHS... The German DAX Index ($DAX) and the French CAC Index ($CAC) broke out to new highs over the last few days and this could provide a positive backdrop for US stocks. Strength in European stocks stems from recent hints that the Eurozone will focus more on growth and less on austerity. Chart 3 shows the $CAC holding support in the 3600 area, breaking flag resistance with a surge above 3750 and moving above 3900 on Friday. The index is trading around 3907 on Monday and largely unchanged. Even though the index is short-term overbought after a 300 point move, the breakout and new high are bullish. Chart 4 the $DAX breaking below the February low, but quickly recovering and breaking above 7800 in late April. The rally extended with the index hitting a new 52-week high on Friday. This is bullish for Germany and Europe, and is positive for the US stock market.

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Chart 3

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Chart 4

NON-FARM PAYROLLS EXTEND POSITIVE STREAK... As Chip noted in ChartWatchers this weekend, StockCharts.com added several economic datasets to our database. Last week was about as big of a week as it gets for economic reports. There were dozens of reports covering everything from employment to services to manufacturing. Even though economic indicators often lag the market, chartists can use these indicators to analyze the economic picture and see if it supports the current trend in stocks. I am not looking for degrees of strength or weakness in the economic indicators. Instead, I am simply looking at general conditions to determine if the economic cup is half full (expansion) or half empty (contraction). A half full cup supports a long-term uptrend in stocks, while a half empty cup supports a long-term downtrend. Lets take a look at some of the more notable reports.

Chart 5 shows Non-farm Payrolls ($$EMPLOY), which is the granddaddy of all employment reports. This monthly indicator bottomed in the first quarter of 2010 and moved steadily higher the last 30 months. Employment data often lags the economy though. Notice how the S&P 500 peaked several months before non-farm payrolls turned down and broke below the 6-month moving average. The index also turned up well before non-farm payroll growth turned positive. Despite this lag, the indicator is valuable for the long-term trend. The economic outlook turns negative when the 3-month rate-of-change turns negative and positive when this indicator turns positive. Notice that the 3-month rate-of-change has been positive since October 2010. The month-to-month gains main seem small for such a large economy, but an increase in non-farm payroll is clearly better than a decrease. This means the cup is half full.

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Chart 5

Charting Note: This indicator was pushed forward one month. Why? Non-farm payrolls for April are reported in early May and I wanted to align the data release with the current price of the S&P 500. Chartists can set a moving average ahead by adding a comma and the number of desired periods. I have three moving averages on this chart. First, the main symbol ($$EMPLOY) is invisible. Second, the first moving average (1,1) is simply the 1 period moving average set ahead one period. The second moving average is displayed as dots to highlight each individual reading. The third moving average is the six month moving average, which is also set ahead one period.

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Chart 6

JOBLESS CLAIMS ARE TRENDING IN THE RIGHT DIRECTION... Jobless Claims ($$UNEMPCIN) is more timely than non-farm payrolls and better for analysis. Chart 7 shows weekly jobless claims as dots, as a 4-week moving average and as a 52-week moving average. The data series is quite volatile so its makes sense to smooth it with a 4-week moving average. There is nothing but downtrend here as the moving average fell below 350,000 last week and actual claims fell to their lowest level in five years. The indicator is bullish for stocks as long as the 4-week moving average is falling and below the 52-week moving average. Adding a little buffer, I would say that an upturn and break above 375,000 in the 4-week moving average would be bearish for stocks and bullish for Treasuries.

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Chart 7

ISM MANUFACTURING INDEX FLIRTS WITH 50... Chart 8 shows the ISM Manufacturing Composite flirting with 50 after a decline the last two months. This indicator favors economic expansion when above 50 and contraction when below 50. Even though last week 50.7 reading is not that strong, it does not signal economic contraction because the indicator is still above 50. While stocks ignored the NAPM decline from May 2011 to December 2012, the 10-year Treasury Yield ($TNX) did not as it fell rather sharply. This means Treasury bonds rose during that timeframe. Chart 9 shows the New Orders portion of the ISM Manufacturing Composite. Notice how this indicator plunged below 50 at the start of 2008 to provide a warning. This indicator remains well above 50 for now and still positive. Note that the ISM charts were created with a user-defined index, which is a feature available to Extra and Pro members.

Chart 8

Chart 9

ISM SERVICES INDEX SHOWS MORE STRENGTH THAN MANUFACTURING... Services play a big role in the US economy and chartists can measure this segment with the ISM Services Composite Index. As with the other ISM indices, anything above 50 favors economic expansion and anything below 50 suggests economic contraction. Chart 10 shows the ISM Services Composite moving above 50 in early 2010 and remaining above 50 the last 3+ years. Notice that the ISM Manufacturing Composite was 50.7 in April and the ISM Services Composite was 53. This shows that the services side of the economy is stronger than the manufacturing side. Chart 11 shows the ISM Services Business Activity Index (NMFBAI) moving above 50 in the second half of 2009 and remaining above 50 since then. This indicator supports the long-term uptrend in the S&P 500 as long as it holds above 50.

Chart 10

Chart 11