S&P 500 CONFIRMS KEY SUPPORT LEVEL -- $NDX FORMS BIG CONTINUATION PATTERN -- LARGE AND MID CAPS LEAD NEW HIGHS -- DEFENSIVE SECTORS LEAD RANKINGS -- XLU, XLP AND XLV HIT NEW HIGHS -- OFFENSIVE SECTORS SURGE OFF SUPPORT -- UPS SHOWS CHALLENGE OF EARNINGS
S&P 500 SURGES TO CONFIRM KEY SUPPORT LEVEL... Link for today's video. Stocks bounced this week with broad strength that reinforced support areas for several key indices. Chart 1 shows the S&P 500 breaking above the 2000 area in November and successfully testing this breakout zone over the last two months. The index did dip below this area in mid December, but a sharp pullback after a 14.3% advance is perfectly normal. Overall, the index hit new highs in November and December, and the sideways price action over the last three months looks like a consolidation within an uptrend. This week's strong bounce off the 2000 area is positive and increases the odds that the consolidation is ending and the bigger uptrend is resuming. According to the Standard & Poor's website (spindices.com), the S&P 500 captures around 80% of the total available stock market capitalization. This leaves the other 20% for small-caps, mid-caps and micro-caps.
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Chart 1
Chart 2 shows the S&P MidCap 400 with a large inverse head-and-shoulders pattern from July to December. Even though the index fell back after the December breakout, it held above the mid December low and surged off the 1400 area again this week. 1400 is the line in the sand for this uptrend.
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Chart 2
Chart 3 shows the S&P Small-Cap 600 with three 52-week highs in 2014 and a long-term uptrend. I am labeling the October plunge-recovery as an Ebola-induced overshoot and ignoring it. Without this "V" reversal below 630, the index would show a clear uptrend with a series of rising peaks and rising troughs. The internal trend line, November-January lows and a buffer mark long-term support in the 650-660 area. I have learned not to mark support levels too tight when dealing with volatile indices that have hundreds of moving parts (stocks).
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Chart 3
NASDAQ 100 FORMS BIG CONTINUATION PATTERN... Chart 4 shows the Nasdaq 100 within a clear uptrend over the past year. After breaking above its September high and hitting new highs in November, the index corrected with a large falling wedge. Notice how broken resistance turned support and held from mid December to mid January. This week's surge off support increases the chances of a wedge breakout and continuation higher.
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Chart 4
LARGE-CAPS AND MID-CAPS LEAD NEW HIGH EXPANSION... New highs are expanding again as S&P 500 HiLo% ($SPXHLP), S&P 400 HiLo% ($MIDHLP) and Nasdaq 100 HiLo% ($NDXHLP) hit their highest levels of the year. Note that this indicator group has been bullish since the second half of October when the majority moved above +5%. The December dip pushed High-Low Percent for the S&P 500 and S&P MidCap 400 below -5%, but High-Low Percent for the S&P Small-Cap 600 and Nasdaq 100 held above -5% to prevent a bearish signal. All four are now back above +5%. I would not turn bearish on the overall market unless three of these four move below -5%.
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Chart 5
DEFENSIVE SECTORS STILL LEAD BREADTH RANKINGS... Chart 6 shows High-Low Percent for the S&P 500 and the nine sectors. The sectors are ranked by the 20-day EMA of High-Low Percent and there are a several good takeaways as usual. First, the defensive sectors are at the top of the rankings (utilities, healthcare and staples). Second, The finance sector is in the fourth spot because REITs are strong and account for almost all of its new highs. Third, High-Low Percent for the consumer discretionary sector had a very weak bounce. Fourth, High-Low Percent for the industrials sector surged to its highest level of the year (14.06%). And finally, High-Low Percent for the Technology SPDR (XLK) is lagging overall and in eighth place.
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Chart 6
XLU, XLP AND XLV HIT NEW HIGHS... The three defensive sectors also have the strongest price charts because all three hit new highs this week. That is not necessarily a bad thing for the broader market. Consider this. According to the Standard & Poor's website (spindices.com), Consumer staples (9.8%), healthcare (14.2%) and utilities (3.2%) account for 27.2% of S&P 500. Even though these three sectors are considered defensive, they account for over a quarter of the S&P 500 and they are hitting new highs. Chart 7 shows the Utilities SPDR (XLU) successfully testing its breakout in early January and surging to a new high this week. Chart 8 shows the Consumer Staples SPDR (XLP) surging from mid October to late November and then embarking on a zigzag higher. Chart 9 shows the HealthCare SPDR (XLV) hitting a new high with a move above 71 this week.
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Chart 7
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Chart 8
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Chart 9
OFFENSIVE SECTORS SURGE OFF SUPPORT... Even though the three defensive sectors are leading, the four offensive sectors are not exactly slacking. In fact, three of the four offensive sectors held their mid December lows and surged off support zones this week. These bounces further validate these support zones and keep the long-term uptrends alive. Chart 10 shows the Consumer Discretionary SPDR (XLY) breaking out in November and testing this breakout zone with bounces in mid December and mid January. This week's surge affirms support in the 68-69 area. Chart 11 shows the Technology SPDR (XLK) surging off support in the 40 area. Chart 12 shows the Industrials SPDR (XLI) surging off the 54-55 support zone.
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Chart 10
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Chart 11
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Chart 12
The finance sector is the fourth offensive sector. Chart 13 shows the Finance SPDR (XLF) breaking below the support zone last week with a gap down. This break down did not last long as the ETF firmed and then surged back above the support break.
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Chart 13
UPS SHOWS CHALLENGE OF EARNINGS SEASON... I highlighted UPS with a bullish triangle formation on Tuesday and the stock broke out on Wednesday-Thursday. In fact, the stock hit a new high on Thursday and the price relative (UPS:$SPX ratio) was nearing its mid December high. And then earnings hit on Friday. As UPS shows, new positions and existing positions carry added risk during earnings season. There are two things to note here. First, a portfolio should be well diversified to insulate against adverse price moves. A portfolio with 20 holdings will weather an adverse move much better than a portfolio with 10 holdings. Second, a position can hedged by buying puts before an announcement.
Looking at the chart now, the gap is clearly negative, but not all down gaps result in lower prices (see ESRX in late April 2014). Those holding long positions must analyze the chart and choose a level to cry uncle (get out). Overall, there is potential for a support zone in the 102-104 area because the stock is trading in the 50-62% retracement zone (and oversold). A break below this zone would suggest a continuation after the gap and we could then see a test of the August-October lows.
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Chart 14
CHARTS WITH ANNOTATIONS AND NOTES (RCD, RTM, PSCT, IGN, XSD, PPA, MOO, GDX)...
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