Here is the Deal:
The action continues to follow the script laid
out last weekend as the market reacted positively to the PPI
report and strength going into options expiration on Friday.
With a healthy dose of consolidation on Thursday look for
another gap on Friday with the CPI setting the tone.
The Dow came very close to the 13,590-13,600
76% retracement level, which will target new highs. We can
allow for some pullback action on Friday, but ideally we will
see higher prices first. If 13,600 is taken out then any
pullback should hold at 13,520 or 13,480. In fact, I wouldn’t
be surprised to see a pullback to 13,480, but ideally for the
bulls, prices won’t move much lower than that.
Again we are looking for a gap open driven by
a reaction to the CPI numbers. The PPI reaction was kind of
lame, but it came on strong over the early hours. Since Friday
is expiration, we may see some odd behavior along similar lines
on Friday. But the balance of evidence points to higher prices.
Here’s why:
The Dow was down 3 points and then rallied 100
to its high of 13,581.61. It closed at 13,553.72 up 71.37, just
28 points off the days high. It was another good day for the
indices, but I think we should chalk up a measure of the
strength to expiration related activity.
Things that make you go hum….
While the Dow was strong, the BIX was down a bit. It
held above 400 and after a wild couple of days a rest isn’t a
big surprise. But for now despite a strong broad market, the
BIX remains below its down trend line and the 402 key
resistance point. A better reaction to the CPI and another dip
is long-term interest rates may be needed to get the BIX over
the hump.
Interest rates responded with a
collective yawn regarding the PPI numbers. It was a bit more
exciting than that, but at the end of the day rates were a
little higher on Thursday. In short, the PPI was not as good as
folks wanted it to be so the pressure is on for a good CPI
number.
The S&P 500 neared the 76% retracement
level and looks to continue higher: After a strong open the
SPX stalled out and consolidated for the balance of the day.
From a pattern stand point it looks like a fourth wave A B C
consolidation with another surge higher to come. Based on the
initial surge higher on Wednesday morning the SPX reached the
second Fibonacci extension line at 1526. That is just short of
the 76% retracement level at 1528. A noticeable move above 1528
targets new highs.
Now for a little bit of “what if’in.”
Even if Friday is a down day, provided it isn’t a big down /
reversal type day, from a pattern stand point the SPX needs to
hold 1508. Then the argument that the weekly trends will turn
up next week remains strong. That means the SPX has to take out
1526 at a minimum, and unless it is a very brief token
higher high, then there is a good chance 1528 gets taken out.
And, if the SPX stays above 1528 for any length of time, then
by the 76% guideline / rule, we can target new highs.
The Russell’s action leaves a bit to be
desired: The Russell took out 838 – 840, but couldn’t hold
it and it closed below the key 838. This is less than ideal,
but like the other indices, on the 10-minute chart it looks
like a high tight consolidation. The key is it must resolve to
the upside immediately, meaning Friday morning. If the Russell
clears 840 then 836 becomes the new support level. Sliding
below 832 is a warning signal and breaking 828 becomes an issue
for the bulls.
The NASD is acting a lot better than the
Russell, thank goodness. Same as the others, on a 10-min chart
it looks like a high tight consolidation that has about run its
course. For the near-term bullish case to hold, prices should
move higher right out of the box on Friday. Minor support is
tight at 2595 with a line of Fibonacci resistance at 2598,
about where the NASD closed. 2605 is the 76% retracement and on
a punch higher look for resistance at 2615. Of course, if it
gets to 2615 it will be well above the 76% line at 2605 and we
can target new highs.
The rest of the daily trends gave buy signals,
and all the 3-day trends can turn up on Friday.
Detailed Trend Report on Web &
CLX Count and Weekly Signal Counts &
NYSE & NASD 5-day up and down volume charts
Total breadth was only +1587. That is kind of
light for what looked like a pretty good day. It was +2550 at
the morning high and slid lower over the balance of the day.
This is a little less than ideal, but considering the interest
rate related action in conjunction with expiration, I will
chalk it up as an irritant, but not serious.
Total volume contracted after a couple of
busier days and it was solid to the upside. That always looks
good. The number of new 52-week lows on the NYSE contracted to
42 which is a nice improvement vs. Wednesday’s reading.
Internally, with a streak of strong action two
weeks ago, despite the current strength, the 10-day metrics are
not gaining a whole lot of ground. In other words, the strong
action is not sending the market back to an immediate
overbought condition on all metrics.
The TRIN-5 readings are low so we know the
rally is having an impact. But with the CQI still well below 1,
odds remain favorable that the bulk of the selling is behind
us.
I spent some time studying the CQI with
immediately available data. Most extreme readings, meaning
those between 1 and 0.6, marked important lows. There are a few
readings below 0.6 and that’s when it gets complicated. In 1987
it reached 0.11. October 87 was a low, but it was a rough
couple of weeks. The only really bad signal was given in August
1990, when Iraq invaded Kuwait. The CQI reached 0.4 and the
market bounced, but it continued lower for another two months
before really bottoming. So of about 40 signals over the past
20 years, there is only one major failure, due to the outbreak
of war.
The Rare Buy signals remain on track. Again, I
suggest using stops to protect near-term gains. These are
technically 7 trading day signals, but many of them have come
near important lows and or were followed by much higher prices
in the week’s ahead. In short, set protective stops, but as
long as the trade is working, give it some room.
While the CPI data wasn’t perfect, the market
still managed to rally while the bond market churned after an
important reversal. Friday’s CPI data is likely to have a
similar impact, but with a nearly complete five wave pattern, I
am thinking the indices may stall out on Friday similar to what
happened Thursday. Provided we see another healthy step higher
on Friday the stage will be set for a mild pullback early next
week and then a push higher to turn the weekly trends back up.
Depending on the levels reached, we should be able to confirm
and target new all time highs.
Jim Patterson
Most Obvious chart resistance levels:
(Underline = 76% retracement)
Dow
13,526, 13,590,
13690, 13,750 – 13,800, 14,350
SPX
1512-1514, 1522, 1528,
1532, 1542, 1551 (ATH) 1562
NASD
2565, 2585, 2592, 2605,
2625, 2645-55, 2710-2730
NDX
1890, 1900, 1916, 1926,
1937, 1957, 1972
NYSE
9886, 9983, 10,000, 10,024, 10,160
RUT-2K
826, 834, 838, 842,
848, 854, 867
Most obvious Chart Support levels:
Dow
13,620, 13,520,
13,480, 13,380, 13,280, 13,220, 13,131,
13,050
SPX
1528, 1522, 1514,
1502, 1498, 1491, 1475, 1436, 1397, 1373, 1362, 1340
NASD
2606, 2595, 2565,
2558, 2548, 2525, 2480, 2455, 2425, 2400, 2385, 2335, 2316
NDX
1925, 1918,
1903, 1895, 1875,
1855, 1840, 1822, 1808, 1795, 1775
NYSE
10,020, 9960, 9920, 9800, 9760, 9690,
9620, 9510, 9400, 9350, 9280
RUT-2K
850, 844-846, 838,
828-830, 820, 808- 810,
803, 790, 760
Here’s where we are now:
NASD 100 Index (NDX) Trading System,
trade the QQQQ:
The NDX continued higher reaching its 76%
retracement level, 1928. the NDX is expected to make new highs,
but a little more strength on the other indices will help
confirm this expectation. Support is now 1920 with an
expectation to run on up to new highs above 1940.
S&P 500 (SPX) Trading
We went long the SSO on Wednesday 6/13 on the
back of the Rare Buy signals with an entry price of 94.42.
The SSO closed at 97.25
As long as we don’t see a dramatic change in
character, the stage is set for still higher prices to come,
even if Friday is a somewhat flat day.
PDA rec Long 5/14 @ 33.12, stop 32, target 38,
closed at 35.48
UNCA rec Long 5/22 @ 16.98, stop 14, target 20, closed at 17.42
DK rec long 5/31 @ 23.85, stop 22.25, closed at 24.20
BBD rec long 5/31 @ 25.39, stop 23, closed at 24.79
New Long, CHINA @ 8.56, stop 8.01, closed at
8.56
We bought AAPL July 110 Puts @ $6.60 on 5/16
**
PRS Open Actives making noise:
CHINA made a strong move
through $8.25 on Thursday. This breaks a near-term down trend
setting the stage for much higher prices. If it is going to
work then CHINA should just keep on moving higher. Stalling
significantly around 8.50 is less than ideal action.
ICE Continues higher and is
just off its recent highs. ICE closed up 7 points to 154 on
strong volume. It looks like it is breakout out to the upside.
Jim Patterson
Editor
Tactical Trading Outlook
|
