Last week we mentioned that daily stochastics are recycling, and this process is continuing and should end this week. These may be down enough to see some advance at the end of the week. On last Thursday’s call, we indicated that we believed that the Treasury Department is silently rooting for the yield curve to, shall we say, become less flat. Our reason for this is our big concern for next year is the banks.
While many market pundits are looking at the Head and Shoulders breakout areas as support that cannot be broken, we actually think some weakness as the stochastics come down is possible. Everyone is looking at 342 on SPY, 280 or so on QQQ, and 73 on IJR as “must hold” supports, but we can see some probing lower as part of this consolidation.
This week looks like the market should advance, but we realize the chance of surprise is alive and well. One thing most people have overlooked is that there is relatively strong performance out of XLI and XLB over the last few weeks.
Both SPY and QQQ are starting to break out of “Head and Shoulders” bottoming patterns, by closing above 344 and 282 respectively. UGA has support from around 18 to 16, and resistance is 22 or so, now being tested. If this is exceeded a test of the gap at 24 is likely.
The key point here is that the technical indicators continue to improve, and we saw some potentially large changes on Friday – changes that, if they continue, would suggest that real rotation into Value and Dividend plays is continuing, and may accelerate. It looks as if longer rates are ready to see some rally over the next few weeks. We continue with our UUP forecast that it will move back to the top end of the range, at 27 to 27.50 from here.
In terms of price indicators, we continue to see a daily stochastic recycle on SPY , QQQ, and IJR. A move above 336 or so on SPY would tend to suggest further upside, and QQQ above 276 would tend to confirm this recycle.
Breadth tools are set up for a rally, the daily stochastics on QQQ have recycled, and are close on SPY. If PSCE approaches long-term support over the next few weeks, we would buy it, and try that trade again.
The market internals are still quite strong. With these sorts of indicators, we have to be positive, and look to buy this decline. The trading and the pattern of DBB suggest higher prices and also suggest the economy is improving.
This is options expiration week and one of four quadruple witches so an up and down week would not be a surprise. The most important thing about this week’s trading is the steady march through resistance by IYT.
The put/call ratio increased to 1.00 on Friday, but this is still not a “panicky” enough number. We would not be surprised to see some more up and down choppiness this week. While XLF is weak, the banks are weaker – look for stronger sectors in financials.
The key point here is that the advance decline line can diverge for months, if not years, before you have a major bear. This process may be starting, but it has not gone on long enough to be a concern.
While we continue to expect that the 367 to 372 range to be tested in the next few months, traders should become a little bit cautious over the next few weeks. We would be concerned if SPY falls below 325.
Our belief now is that IJR has been resting in a consolidation and will embark on strong performance as the economy moves out of recession. UUP could rally to 26 from here, even if the trend turns down after – which would be a surprise. We think this could move back up to the top of the trading range around 27 to 28.