Bulls Fight Back – Trading the Choppy Market on Both Sides
Last week started out on Monday with heavy selling but ended the week with some fairly good net gains. The S&P 500 reached a low of 1358 but closed at 1403 for a 1.8% gain. The DJIA finished with a 1.5% gain at 13,228 and the COMP had a gain of 2.29% to close at 3,069. It was a week full of market moving news and big earnings’ beats.
The primary reason for the strong recovery was due to blowout earnings by AAPL, and a few others like AMZN and EXPE. So despite the lower than expected US GDP growth of 2.2% vs. the 2.6% forecast, a weak Europe, and a Spanish credit rating downgrade, investors were buying the better signs of a real US recovery and stronger consumer buying. In fact, as MR discussed before earning’s season started, the extremely low expectations and recent lowered estimates opened up the possibility of many company beats. Over 75% of the S&P 500 companies have beaten their estimates so far.
In addition, the home builders’ numbers were decent which propelled the Home Construction Index ETF (ITB) back near its 2 year high with a gain of over 9%. A recovering home market will continue to play a pivotal role in consumer sentiment and consumer buying going forward.
At this point, the three major US markets have recaptured their critical 50 SMAs as well as their most important breakout levels from the last 60 days. COMP at 3,069 (>3,000); S&P 500 at 1,403 (> 1,375); and DJIA at 13,228 (>13,000). Technically speaking, the move on Thursday back above the 20 SMAs for all 3 markets, the hold of those levels on Friday, and the move for the S&P 500 above 1,400 triggered a short term buy signal. However, the very strong 4.5 day reversal up from late Monday has the short term indicators in an overbought state.
Getting a reliable forecast for the markets at this juncture is challenging and the cross-currents and conflicting signals are numerous. The bulls recovered from a near knockout blow on Monday. Even in the face of a big miss on GDP, poor jobs numbers, a Spanish credit downgrade by 2 notches, and continuing selloffs in many European banks, the US market buyers are hanging tough.
There are bullish forecasters that would use the recent buying in the face of bad US GDP reports and European worries as a bullish sign we are going higher. There are also bearish forecasters for May that use the past 2 years and the “Sell in May and Go Away” mantra as a strong argument (including MR). But ultimately, as we have written about many times, our momentum trading and investing system is first and foremost based on the ACTUAL PRICE ACTION. We try not to let previous history and biases overpower the market calls but to use it only as a guide.
The markets moved back up enough to be at the top of a HOLD recommendation level and on the verge of a BUY recommendation. The large bearish Head and Shoulders pattern has still not been fully negated and the markets are overbought at these levels so it is hard to be a bull convert just yet.
The bottom line is that the markets have been chopping up and down for the past 45 days and have gained 0% since March 15th where the S&P 500 also closed at 1,403. Unfortunately for investors, this chop will probably continue. But for traders, you can take advantage of it.
The price staying above the 1,400 level is really the key for us to believe there is a real chance the S&P 500 will try to retest its previous 2012 intraday high of 1,422. But it will be a challenge to move up early in the week after moving up a full 45 points from the low of Monday.
MR is still recommending a hold for investors and very selective buys and shorts for traders to start the week. But at this point, a high retest or breakout attempt at 1422 can’t be ruled out.
Playing Both Sides of the Market
For the power stock picks tonight, MR is selecting 6 longs and 4 shorts until more market trend clarity is established.
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