Still Looking for the Upside Follow Through

Quiet start to the week as the major indexes hold gains from last week, but do nothing to change the view. The upside trend remains in play and there is a division between the negative sentiment looking for a correction or pullback, and the positive view looking for the next leg higher to continue off the Friday break through resistance. Time will tell which is right, but for the current view… the upside remains in play.

The technical view of the market is shown in the chart below of the S&P 500 index. The chart starts on December 28th with the pivot off the low following the fiscal cliff scare in the broad index. As you can see the bold white line (S&P 500 Index) the trend continues to be gradually higher. We have referred to this in past updates as melting higher. Regardless, the trend is to the upside and short term that is what we honor.

Scatter1228

The leadership over the last couple of weeks has remained consistent with Energy (top white) leading the way higher. One thing we have noted along with the move in energy is the defensive sectors are the core of the leadership. Healthcare, Consumer Staples and Utilities have been key components on the move higher. However, last week, technology ( light blue line at the bottom) started a gradual push to the upside with an attempted break through resistance. XLK, SPDR Technology ETF did break above the $29.80 level as a key move. That level held on Monday as the climb off the low from Apple has help. The Semiconductors have provided upside as well in recent trading. The previous leaders of Networking and Software are trading sideways currently and any upside moves would add to the momentum.

The Current Drivers:

  1. As discussed yesterday currency is in the headlines relative devaluation in the yen, dollar and euro. Is there or will there be a currency war? There was news out Monday of an agreement between the G-7 countries to allow for market determined ranges in currency to help the current global environment. Time will tell, but I am not counting on any follow through.
  2. The impact of the currency talk Monday was for gold to drop $15.60 to close at $1652 just above support. A break below $1635 would get interesting for the metal going forward. Silver fell 1.4% as well on Monday.
  3. Europe is still on the tip of investors tongues as well relative to disrupting the current uptrend. IEV, iShares Europe 350 Index ETF is attempting to hold above the $40 level. A break below $39.60 would open the door to even bigger downside risk.
  4. The major indexes breaking resistance and working towards the 2007 highs on the S&P 500 index. The NASDAQ has already cleared a new high and the Dow is approaching it’s 2007 highs currently. Thus, the momentum is still showing to the upside with concerns primarily on the speculation side.

What are we watching today?

  1. Follow through in technology (XLK) and the NASDAQ 100 index (QQQ). Both cleared resistance and a move higher should result near term.
  2. Chinese markets have been selling lower on disappointing data. Will they follow through on the downside? How much risk is there in a potential short play on the country ?
  3. Facebook downgraded? The stock has been moving lower following earnings. Short term selling is in play.
  4. Futures are heading lower? Will the sellers gain the upper hand today? The buyers have been willing to step on each move lower. Important to see how the sentiment plays out today.

The key everyday is to remain discipline, manage each position as if it were your only position, and remain focused on your goals not the noise of the market.