Textbook Breakout, Will It Confirm? – Weekly Market Outlook

While most everyone knows last week was a good one for the market, it may not be clear just how eventful it really was.  The S&P 500’s (SPX) (SPY) 2.0% gain last week carried the index to record highs and a record high close.

On the surface it’s technically bullish, so we’ll take the clue at face value.  We’ll also point out, however, most of the recent surges like last week’s ended up turning tail pretty quickly.  We’ll still need to keep things on a short leash until this breakout effort is confirmed as the real deal.  That could take a few days to play out.

We’ll look at the pros and cons of last week’s breakout move in a moment. Let’s first run down last week’s and this week’s key economic data.

Economic Data

We get a decent dose of economic numbers last week, but the only item of real interest was January’s retail sales.  Though they fell 0.8% overall and were off 0.9% when taking automobiles out of the equation, don’t misread the number though – low oil prices and correspondingly low gasoline prices had an impact on the total.  Retail spending on all other fronts was healthy.

Economic Calendar

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Source:  Briefing.com

This week is going to be a little busier, and with a lot more important data in the lineup.

The party starts on Wednesday when we hear January’s building permits and housing starts.  Both continue to trend higher, even if not as rapidly as things were in 2011 and 2012.

We’ll also get last month’s industrial production levels and capacity utilization rates  on Wednesday.  Both of these trends have also been broadly improving – we’ve pointed out many times in the past that these economic indicators have tended to have a correlation with the broad stock market.

Finally, also on Wednesday the FOMC will release the minutes from its most recent minutes.  There’s little risk of a rate hike anytime soon.  Of interest will be the language the Fed uses to describe how much of a hurry Janet Yellen and her cohorts are to push rates upward.

Stock Market Index Analysis

It took some time and effort to do it, but the S&P 500 finally pushed its way out of the 1992/2064 trading range, and even cleared the December peak near 2093 thanks to last week’s advance.  This is, by definition anyway, a textbook breakout, underscored by a fully-bullish MACD indicator.

S&P 500 & VIX – Daily Chart

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ChartS created with TradeStation

It’s certainly not the ideal breakout, however, given the entire situation and context.

For starters, we already know the market has been more prone to reverse course than follow-through since December.  Granted, on the surface this one looks like the healthiest breakout moves we’ve seen since mid-December, but it’s not without its weak points (aside from the fact that stocks my simply still be in an up-and-down mode).  The most glaring of those weak points is the lack of volume that we saw materialize with the breakout move. It should have been stronger. It wasn’t even average — it was below average.  If this rally is to last, it needs to participants on the way up rather than lose them.

A lack of bullish volume isn’t necessarily an omen of a looming implosion, though.  It’s still possible this all ends bullishly.  From here it’s just largely a question of what happens when the market faces a its first bearish pushback.  The nice part (for the bulls) is, we have a pretty good idea of what to look for as evidence that the breakout really is taking hold.

First and foremost, we’d like to see a Percent R confirmation, which is simply a case where the Percent R indicator moves downward for at least one day without moving below the 80 level.  The next daily upswing from the Percent R line (again, provided it starts above 80 at the time) on the same day the S&P 500 thrusts itself to a higher high will be confirmation that the market is truly on the move.  We’ve used variations of this technique with the Percent R indicator (using the BigTrends smoothed method on it) for individual stocks and the market many times in the past — it is very useful for determining strong trends.

If we should get that clue, odds are we’ll also have the needed increase in volume.  If for some reason we get the Percent R confirmation and volume is still tepid, we’ll still assume the trend is bullish.  We will, however, want to keep a close eye and a short leash on things.

On the flipside, should the S&P 500 break under the 2045 area where the 20-day moving average line and the 50-day moving average line have converged, that’s likely to be a good sign of an even bigger pullback… most likely back to the floor around 1992, for starters.

Just bear in mind it’s possible we could not see either the bullish confirmation or the bearish signal for a while, and instead just get back into a listless, sideways mode.  That’s why more patience than usual may be necessary here, to let the chips fall where they may.

For what it’s worth, the NASDAQ (COMP)(QQQ) and the Russell 2000 (RUT) (IWM) also broke out similarly last week.  Though they’re technically overbought and ripe for a little profit-taking, they also both suggest this is a legitimate breakout in the grand scheme of things.  The DJIA ETF (DIA) nearly hit a new intra-day high, but not quite.

Zooming out to a weekly chart of the S&P 500 doesn’t tell us anything new about last week’s and the previous week’s reversal effort, but we can get some more perspective on where it’s all likely going by studying this timeframe.  Odds are good we’re headed back to the upper edge of a very long-term trend line (red) currently at 2150.

S&P 500 & VIX – Weekly Chart

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It’s also in this timeframe we can see how strong the pullback in the CBOE Volatility Index (VIX) (VXX) has been over the past two weeks.  Given the sheer velocity of the current move, this may not be a trend we want to try and fight. until we’ve clearly have the bearish signs discussed above.




Chart of the Week: Crude Oil is Still Chipping Away

Last week we took a look at crude oil (USO), explaining how it was toying with the idea of reversing its long downtrend and putting an uptrend in motion.  We got more evidence of such this week.  Thanks to Friday’s advance of about $1.50 per barrel, crude oil prices are back above their 50-day moving average line (red) for the first time since early July.

Crude Oil Futures Chart

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While this is a fantastic sign for oil, it will be an even stronger sign when-and-if crude can clear its more recent ceiling around $54.70. Beyond that, there’s not a lot left to hold it back for a while.

What really bullish about this chart, however, is the amount of bullish volume we’ve seen materialize over the past two and a half weeks. There are plenty of very vocalized oil bears on the landscape, but this chart says more bulls than bears — a lot more, in fact — are putting their money where their mouth is. That’s a clue worth noting.
Trade Well, Price Headley  BigTrends.com