I believe that it is important to point out to all my readers, especially those who are not already members of S.O.M.E. (as members are already well-aware of my trading strategy!), that the more volatile the market becomes, whether it trades up or down, is more beneficial to us, as the returns on our options increase dramatically, as observed throughout June and July, so far.
I must say I am a great supporter of the bulls, but will play-along with the bears to extract as much value from our options plays, as possible. I am a great believer in things moving forward and improving as time progresses but I also know that we have to play-the-game to extend our profits. The only catch in this type of market is “knowing” or realizing in which direction it will take, and it seems that we have been able to fulfill this decision in most cases, to gain our profitability.
Key Events This Week
This Week’s Economic Reports
There are only a few major economic indicators available this week, which are:-
This Week’s Major Earnings Reports
Note:-All earnings dates listed below are tentative and subject to change.
• Frontier Communications Corp. (FTR), Sysco Corp. (SYY), Warner Chilcott Plc (WCRX ), Clean Energy Fuels Corp. (CLNE), Clear Channel Outdoor Holdings Inc. (CCO), Convergys Corp. (CVG), Eagle Bulk Shipping Inc. (EGLE), LSK Solar Co. Ltd. (LDK), priceline.com Incorporated (PCLN), Silver Wheaton Corp. (SLW) and The Warnaco Group Inc. (WRC).
• Ebix Inc. (EBIX), Fossil Inc. (FOSL), hhgregg Inc. (HGG), JA Solar Holdings Co. Ltd. (JASO), K12 Inc. (LRN), Solarfun Power Holdings Co. Ltd. (SOLF), Tyco International Ltd. (TYC), Starwood Property Trust Inc. (STWD), and URS Corp. (URS)
• Maidenform Brands Inc. (MFB), Macy's Inc. (M), Polo Ralph Lauren Corp. (RL), Sara Lee Corp. (SLE), and Cisco Systems Inc. (CSCO)
• Kohl's Corp. (KSS), Tim Hortons Inc. (THI), NVIDIA Corp (NVDA), SunPower Corporation (SPWRA) and The Walt Disney Company (DIS)
• Agilent Technologies Inc. (A), D.R. Horton Inc. (DHI), J.C. Penney Company Inc. (JCP) and Wendy's Arby's Group Inc. (WEN).
Outlook for This Week
Stocks may take a breather after the past week's drama, as investors assess the new political dynamic in Washington and the effects of the Fed's latest effort to pump up the economy.
The weaker dollar will also be a focus as President Obama travels to the G-20 meeting in Korea Thursday and Friday. There is a light economic calendar, and trade and weekly jobless claims are highlights, after the surprise gain in October employment. A number of Fed officials will be out speaking, including Fed Chairman Ben Bernanke, who was to address a Fed conference in Georgia Saturday. General Motors, Cisco, and Disney are among the major companies reporting earnings.
Recap of Past Week
The S&P 500 (SPX) in the past week jumped 3.6 percent to 1225, and the Dow (DJIA) jumped 2.9 percent to 11,444, a level last seen before the failure of Lehman Brothers in September, 2008.
The Nasdaq (COMP) was also up 2.9 percent to 2578. The dollar index was down 0.9 percent, and the greenback fell 0.8 percent against the euro to $1.4034.
Commodities were winners, with oil up 6.7 percent to a two-year high of $86.85 per barrel. Gold jumped nearly 3 percent to a new high, just under $1400 an ounce, and silver was up 8.9 percent.
"I think the dollar rallies selectively next week," said Boris Schlossberg of GFT Forex. "The dollar probably remains relatively weak against the high beta currencies, like the Australian dollar and the Canadian dollar, but the euro should probably continue to remain weak against the dollar on sovereign debt concerns."
The Fed's announcement Wednesday of a $600 billion quantitative easing package was the main catalyst for markets, but risk assets were also helped by the mid-term election which swept a Republican majority into the House of Representatives.
"We're going to focus on Washington, and hopefully it's going to be constructive," said Jefferies managing director Art Hogan. "The Administration already showed a little bit of flexibility in saying an extension of all the tax cuts is not off the table, and it seems like they want to make a deal if they can extend unemployment benefits as well."
With the Fed supporting markets through quantitative easing, rates could remain low for quite some time. That, in turn, should help stimulate borrowing and make riskier assets more attractive. It could take data of a momentous nature -- something that suggests the economy is not responding to the Fed's plan to buy $600 billion in Treasuries -- to cause anything more than a minor slip-up in the market.
"What the Fed is doing is a consistent increase in money supply. Consistency will be much more important to the psyche of investors than big spikes," said Edward Hemmelgarn, chief investment officer of Shaker Investments in Cleveland.
The White House Thursday said President Obama was open to discussing an extension of the Bush tax cuts for all taxpayers. The Obama Administration has opposed extending the tax cuts for the wealthiest Americans. It also supported allowing the capital gains tax to be capped at 20 percent, up from 15 percent, and elimination of the 15 percent dividend tax rate. That would put the dividend tax rate at 39.6 percent for the wealthiest tax payers, if the tax cuts expire.
Improving economic data was also a big focus in the past week but it didn't seem to have much impact on stocks. Friday's surprise report of 151,000 new jobs in October drove the dollar higher, but stocks barely budged. Earlier in the week, ISM manufacturing and services data was also better than expected, showing a renewal of economic activity in the third quarter.
"You have to step back and say how much of this have we factored in," said Hogan. "We spent the months of September and October thinking about all these things. I think it's okay to look at good (employment) news, and say 'this is a much better piece of data' and step back and say 'where do we go from here.'"
The Week Ahead
U.S. Trust Chief Market Strategist Joseph Quinlan said the mid-term election may have cleared the way for more improvement in the economy. The overtures by President Obama toward business and the potential that he moves more toward the center could encourage companies to spend and hire. He also said quantitative easing (QE2) and the retention of the Bush tax cuts could take GDP from 2 to 3 percent next year.
"There's a clear sense the economy is accelerating into the New Year," said Quinlan, adding that should help the stock market. "I think all the pieces are in place to grind higher. We were at (a target of) 1250 (on the S&P) all year. That was a tough sell back in August. We did believe the pieces would come together," he said.
Paul LaRosa, Maxim Group chief market technician, said stocks could be setting up for a shallow sell off, which would be a buying opportunity. The S&P 500, the Dow, and the Nasdaq all closed above their April resistance, but the Russell 2000 has not confirmed the move.
"I wouldn't be surprised if we don't see the Russell 2000 close above 746 in the next week or so. You could have a mild sell off, and you could buy the dips.. We are seeing stuff to buy but it's getting extended now. Many charts are getting extended but it would be right to enter on a pull back," he said. LaRosa said a good level to step in again if there is a pullback would be at 1175 on the S&P 500.
The coming week should be relatively tame.
There's no election! There's no Federal Reserve meeting! There's no jobs report!
But the week ahead will not lack for action. While there are few economic reports, there are important earnings to consider, especially from Cisco Systems (CSCO), Walt Disney (DIS), Macy's (M), Kohl's (KSS) and NVIDIA (NVDA). The week ahead will be based around earnings and revenue growth.
Earnings have grown far faster than revenue in the last two years, because companies have preferred to cut costs and hold the line on adding jobs.
So, 74% of companies in the S&P 500 have beaten earnings estimates, according to Thomson Reuters. Only 60% have beaten revenue estimates.
So far, S&P 500 companies have seen profits grow 31%, but revenue is up just 8%.
Expectations for this Week
Year-End Rally – Sideline Cash
Traders and investors braced for a "sell the news" reaction in the stock market, but much to their surprise, the news -- Republicans gained control of the House and the Fed announced $600 billion in Treasury purchases (QE2) -- sparked a major rally in U.S. indexes last week. In fact, the S&P 500 Index (SPX) pushed above potential resistance from its 80-month moving average for the first time since September 2008. Moreover, the index closed the week above its April 2010 high of 1,219.80. Skepticism still prevails, particularly as it relates to Fed policy and the impact it will have on the economy. Technicians continue to preach caution, with worries about the high percentage of stocks trading above their 50-day moving average, thin volume, low realized volatility and a steep CBOE Market Volatility Index futures curve, although our research suggests the futures curve has a sketchy track record in predicting declines.
For now, bulls are in control, and there is a plethora of sideline cash from those who moved to the sidelines, anticipating a "sell the news" reaction to last week's events. Now, fund investors and under-invested long/short hedge funds stand ready to buy pullbacks, perhaps feeling the urge to play "catch up" as the year-end clock is only weeks away. Moreover, after 26 consecutive weeks now of outflows from domestic equity funds, one has to wonder if the retail investor will finally get bold enough to support the advance?
It appears many have missed out on the advance, as the majority of the SPX's move, from 1,125 in mid-September to the present 1,225, occurred over only about seven trading days, those un-shaded in the graph below. Emotions of feeling "left out" could lay the foundation for a year-end rally.
Short covering related to expiring index and exchange-traded fund (ETF) put positions, which act as portfolio protection, could also work in favor of the bulls. With expiration of these options only two weeks away and a few major calendar events behind us, this short covering could be an additional market driver in the weeks ahead. As mentioned last week, the iShares Russell 2000 Index (RUT) experienced a major buildup of put open interest in the last few weeks, as a cautious tone hovered over the market. The strikes with heavy put open interest could also work against the bulls, if unforeseen negative news hits the market; as such strikes tend to act like magnets when sellers predominate. At present, however, the open interest configurations on major indexes and ETFs are bullish.
The CBOE Market Volatility Index (VIX)
Working in favor of the bears is the "VIX Premium" indicator, which compares the level of the CBOE Market Volatility Index (VIX) to actual 20-day SPX historical volatility. Last week, the VIX traded at more than a 140% premium to the SPX's 20-day realized volatility. The difference in the two has since narrowed, but since early 2009, when the difference narrows from extreme levels, a market pullback soon followed. One difference from the past is that the VIX premium most recently exploded higher during a two-week trading range, whereas previously, it exploded higher during a rally.
As always, be open to the fact that "anything can happen anytime." Therefore, continue to emphasize your long exposure, and keep your portfolio protection in place.
The CBOE Volatility Index, a measure of market anxiety, has slipped below 19 and the late-week action suggests a market getting ready for more gains -- not a sell-off.
"Some of the alternatives to stocks (bonds, cash, etc.) now look much less attractive, which should push money in the direction of stocks," said Bill Luby, a private investor in San Francisco, who writes the VIX and More blog. This will result in "reducing some of the downside risk for owning stocks, and also putting downward pressure on the VIX."
Call volume in the Financial Select Sector ETF SPDR fund (XLF.P) surged, as option traders exchanged about 618,000 contracts in the XLF on Friday, led by the trading of 480,000 call options. The overall options volume was three times greater than its average daily turnover, according to options analytics firm Trade Alert.
Momentum -- Correction
The Fed's intentions make the search for yield even more intense, which could bolster financial stocks in coming days.
Financials climbed solidly higher on Friday, with the KBW Bank index .BKX up 2.2 percent, on talk the Fed may allow stronger banks to increase dividends. They could continue to climb as they have underperformed the rally since September.
A correction might still occur, though. A number of indicators suggest the market is in position to consolidate.
The 14-day relative strength index is at 88.5. A reading above 70 usually indicates an overbought condition. However, some analysts say the indicator for an overbought market expands in a bull market. So this level may not necessarily be a bearish indicator.
Bespoke Investment Group noted the rally has put the major indexes and sectors into "extreme overbought territory" in the near-term, with the S&P 500 and six sectors at or near two standard deviations above their 50-day moving averages.
"Some sort of correction may be in order at some point from after the events of this week, and the 'feel good' holiday seasonality period looming a few weeks away," said Robert Zavell, derivatives analyst at Jones Trading. "Is it possible we will be up every day from now through New Year's? I thought not every day, but you never know."
The S&P 500 faces strong resistance at around 1,228, a key retracement of the benchmark's slide from its historic high in 2007 to the 12-year low in March 2009.
The first attempt at piercing that level in April failed and preceded a decline that took the S&P to its 2010 low in early July.
"It's the second test of a very important number so what the market does here is pretty critical," said Richard Ross, global technical strategist at Auerbach Grayson in New York.
"The difference from last time is that we had a pretty sizable correction from that April high, so we have a much stronger base now," he said.
Another factor that may add fuel to the breakout is performance chasing, with investors who may be latecomers to the rally jumping into winning stocks with the hope they will continue to gain in an effort to enhance their portfolio performance.
"You are seeing momentum investing -- managers just moving into stocks that have been doing well," said Tim Ghriskey, chief investment officer of Solaris Asset Management in Bedford Hills, New York.
The Treasury auctions $72 billion in 3-year notes, 10-year notes and 30-year bonds Monday through Wednesday. There is a light economic calendar, and the highlight is on Wednesday when weekly jobless claims are reported. The report is expected early because the bond market is closed on Thursday for Veteran's Day.
"Yes we have supply coming but we have a big buyer," said CRT Capital chief Treasury strategist David Ader. He said the Fed's announcement that it would concentrate in the center of the curve is already affecting the market and resulted in the 7-year outperforming on Friday.
The Fed intends to buy $600 billion in Treasurys by the end of the first half of 2011. The so-called quantitative easing is intended to push lending rates lower and reflate asset prices.
"We have a buyback of just over $6 billion to be done Monday and then the (Fed) announcement Wednesday of buybacks that will be for the next month of $105 billion," said Ader.
Other data expected this coming week includes the NFIB small business survey on Tuesday. There is also wholesale trade that day. On Wednesday, besides claims, there are reports on international trade, import prices and the federal budget. There is no data on Thursday. Consumer sentiment is reported Friday.
The U.S. trade deficit for September, to be released Wednesday, likely changed little from a month earlier, according to a poll of economists by Briefing.com. The deficit widened to $46.3 billion in August as import demand remained strong despite a weaker dollar.
The most important will be Wednesday's report on oil inventories and Thursday's report on initial jobless claims.
Events of Importance
G-20 Meeting and the Dollar
President Obama faces a potentially surly crowd when he arrives in Korea this week. G-20 members, such as China, Germany and Brazil, have been vocal about their dislike of quantitative easing and its impact on the declining dollar. Countries, like Thailand, South Korea and Turkey, threaten capital controls to stem the flood of too much money flowing too quickly into their economies.
"No one's going to the G-20 with the right mood set, with the dollar declining like it is," said Quinlan. The G-20 has been the key global leadership body, tackling the aftermath of the financial crisis. It was viewed as a a forum that would reflect the new world order by including the emerging world.
If the dollar continues to decline, "it'll be a tough mood" and regardless of what is said at G-20, member countries may continue to implement capital controls and move towards protectionism, Quinlan said. He pointed to the Canadian government's refusal to allow Australian BHP Billiton (BHP) to buy Potash (POT) as a sign of "natural resource protectionism" that could spread.
Robert Sinche, head of global foreign exchange strategy at RBS, said G-20 may make progress on bank reform, but not much else.
"I think there will be movement in other areas but global divergence doesn't bring global convergence of policy, and inflation pressures are rising in Asia and deflation risks are alive in the G-4. When you get that kind of divergence, it's going to be hard to find common ground in terms of macro policies," he said.
Quinlan said Obama also clearly heads to G-20 as a weakened leader, after the big Republican win, but he could make points if he brings a trade agreement to the table. "If the U.S. and Korea complete a free trade agreement before President Obama arrives in Seoul, that would be a positive. That would be a good thing that the U.S. is moving forward. We're trying to get this done before he arrives through back channels. If it gets done, it's a big positive," he said.
Another problem that is unlikely to find resolution is China's resistance to a more flexible currency policy. "As the dollar weakens and the peg holds, the Chinese currency gets weaker. A lot of these countries like, Korea, Taiwan, Indonesia, it puts them between a rock and hard place. When the dollar weakens so does the renminbi. So not only are those parties there facing a weaker dollar, they're also losing their competitiveness to the Chinese," Quinlan said.
Sinche said the Chinese had been more amenable to talking about quantitative trade targets than discussing exchange rate flexibility.
"A week ago you would have thought they were heading to something constructive. (Now) the rhetoric out of China surrounding the QE2 announcement is not particularly healthy," said Sinche.. "We saw quotes on the Chinese news that the U.S. is creating another bubble... I heard reports from people visiting China that they no longer call it a global financial crisis. They call it a North Atlantic financial crisis. The Chinese are taking a pretty hard stand that they've gotten this right, and the U.S. had not.
I think maybe when the president looks back on his presidency, I don't think he'd look back on this week and think it was a good one. It wasn't a good one at home, and it won't be a good one overseas," he said.
Appearances by Federal Reserve Officials
Among appearances by Federal Reserve officials:
• Chairman Ben Bernanke and Chicago Fed President Charles Evans speak Saturday in Jekyll Island, Ga.;
• Dallas Fed President Richard Fisher speaks Monday in San Antonio, Texas;
• St. Louis Fed President James Bullard speaks Monday in New York; and
• Atlanta Fed President Dennis Lockhart speaks Thursday in Atlanta.
• The Bank of America Merrill Lynch Defense Outlook Forum on Tuesday in New York;
• Credit Suisse Group Healthcare Conference from Tuesday through Friday in Phoenix;
• JPMorgan Ultimate Services Investor Conference on Tuesday in New York;
• Piper Jaffray Technology, Media & Telecommunications Conference on Tuesday and Wednesday in New York;
• Robert W. Baird Industrial Conference on Tuesday and Wednesday in Chicago;
• Wells Fargo Securities Technology, Media & Telecom Conference on Tuesday and Wednesday in New York;
• UBS Building and Building Products CEO Conference on Wednesday and Thursday in New York; and
• Bank of America Merrill Lynch Global Energy Conference from Wednesday through next Friday in Miami.
Other Significant Happenings
• Federal officials, regulators and leaders of major banks will be featured speakers at the Securities Industry and Financial Markets Association's annual meeting Monday in New York. U.S. Sen. Chris Dodd (D., Conn.), Federal Reserve Governor Kevin Warsh, Securities and Exchange Commission Chairwoman Mary Schapiro, Federal Deposit Insurance Corp. Chairwoman Sheila Bair, Morgan Stanley President and Chief Executive James Gorman and others will discuss financial regulatory reform legislation, capital requirements and market structure.
• Larry Ellison, Oracle Corp.'s (ORCL) co-founder and CEO, is expected to testify Monday in a federal trial of the business-software giant's suit against German rival SAP AG (SAP). The case involves the actions of SAP acquisition target TomorrowNow, which Oracle says improperly downloaded software and documents from its website. SAP is not contesting those allegations, but the two sides have locked horns over how much SAP should pay in damages. Oracle has asked for as much as $2 billion, while SAP has suggested $40 million.
• President Barack Obama will spend the next week in Asia, visiting India and Indonesia before heading to the summit of the Group of 20 largest economic powers in Seoul. The G-20 meeting, which starts Thursday, will address trade surpluses and deficits as part of efforts to restore so-called balanced global growth. The world leaders also will consider stronger global banking regulations.
This Week’s Earnings Expectations
Here's a quick rundown on what reports are due:
Drilling construction contractor McDermott International (MDR), insurer Progressive Corp. (PGR) and Priceline.com (PCLN).
All three have seen huge gains in their shares since the March 2009 market bottom.
InterContinental Hotels (IHG), Marsh & McLennan (MMC) and mortgage insurer MBIA (MBI).
Of these, watch MBIA for a feel on how bad the foreclosure mess is. Also reporting is Playboy Enterprises (PLA), still struggling to find profitability again.
Cisco Systems, Macy's and Polo Ralph Lauren (RL).
Dow component Cisco has driven investors mad all year by reporting fabulous results. Then, the company says it's terribly worried about demand going forward. The company is expected to report 40 cents a share in earnings, up 11% from a year ago on a projected 19% gain in revenue. Macy's and Polo Ralph Lauren will offer a picture on whether reasonably affluent consumers are in the mood to buy. The holiday guidance will be very important.
Walt Disney, chipmaker NIVIDIA and discount department store operator Kohl's.
The key to Disney is the health of its cable TV operations and its ABC television network. And watch to see if Disney's resort operations are seeing new growth. NVIDIA has issued a number of warnings, a function of a glut of semiconductors of all kinds. The question for Kohl's is how the company views the holiday shopping season.
Retailer J.C. Penney (JCP), homebuilder D.R. Horton (DHI) and Wendy's / Arby's Group (WEN).
J.C. Penney cut its guidance in August, another signal that the economy continued to struggle from the recession. The question is whether the outlook has changed. With D.R. Horton, the question is whether there's any uptick in demand since homebuyer tax credits ended.
Further Insight to Companies
• Cisco, which reports Wednesday, is expected to post a sharp gain in sales as analysts note signs that the tech giant managed to regain its footing in an unpredictable market after a shaky start to the quarter.
• Disney, which reports Thursday, is likely to show a slight improvement in revenue with earnings down a bit as it benefits from strong international box-office and consumer-products sales for "Toy Story 3." Disney's prior-year quarter included an extra week, which could hurt theme-park comparisons.
INDICATORS AND MARKET CONDITIONS
SPX and Outperformers
The S&P 500 Index (SPX) is up almost 10% this year, so money managers will be expected to post very impressive gains for 2010. The index is a popular yardstick by which funds are judged. It does not look good for a fund to underperform this benchmark. To avoid such embarrassment, you may have a lot of funds scrambling to catch up in the last two months of this year. How will they do that? One possibility is that they'll throw money at the high-flying stocks in hopes they'll keep flying right through the end of the year. That could mean those outperformers will continue to outperform in the next couple of months. In today's article, this theory is tested by looking back over the last several years.
The theory is that money managers trying to "catch up" to a hot market, i.e., one that has performed well during the first 10 months of the year, will pump money into the high flyers in the final two months. To test this, a focus on years where the S&P 500 was up significantly through October, is taken. After applying some liquidity criteria, and breaking down all the stocks into five brackets, depending on their return from January through October, we end up with workable graphs. Bracket No.1 includes those stocks with the lowest returns January through October. Bracket No. 2 includes the next worst performers -- and so on, until you get to bracket No. 5, which includes the stocks that performed the best.
Below is a table showing the data for 2009. The top performers, January through October, are in bracket No. 5 at the bottom of the table. Just as the theory would predict, those stocks did in fact perform the best over the last two months of the year. They averaged a return of about 15% (median of 13.4%). This was better than any of the other four brackets. The worst grouping of stocks was in the second bracket.
Not included is 2008, because the market tanked all year, so a key criteria for this study, a strong performing benchmark, wasn't met. Below is the data for 2007. The market was up over 9% through October, which is about the time the market began to weaken before the 2008 crash. The S&P 500 was down about 5.2% for the remainder of the year, so no bracket shielded an investor from losses.
However, if you had to have money in the market, those January-October outperformers were the best place to be. The fourth bracket was the only one that outperformed the S&P 500 (down 4.2% vs. the SPX down 5.2%). The bracket of best-performing stocks through October (bracket No. 5) was the next best bracket to be in.
The year 2006 again supports this theory. Bracket No. 5 was the top-performing bracket from November through December of that year.
Skipping past 2004 and 2005, because the SPX was down or up only moderately those years through October, therefore the years do not relate to this theory.
But in 2003 the index gained almost 20% through the first 10 months. However, this year our theory does not hold up. Not even close. The worst stocks through October were the best stocks for the rest of that year. The fifth bracket was awful at the end of 2003. All other brackets saw an average stock gain of at least 5%, but the fifth bracket had an average return that was negative.
The last few times that the SPX was up significantly through October, we saw the stocks that performed well up to that point had a tendency to outperform other stocks in the last two months as well. Fund managers buying these stocks trying to catch up with the market may have contributed to this effect. However, this should not be taken as an infallible green light to dump money into big returning stocks this year. For further information, listed below, are the 25 S&P 500 stocks that have had the best return year-to-date. This list could be a good place to start.
***Further evidence of market conditions can be seen in representations of charts below.
Tracking of SPY, DIA, IWM and QQQQ
The markets finally moved out of the consolidation that had been taking place over the past three weeks and the direction they chose was higher. The markets staged an impressive rally this week that took the Dow, Nasdaq 100 and S&P 500 to new recovery highs. While volume was not spectacular, it did increase over volume levels from the past few weeks. Many market participants feared how the markets would respond to the elections and the Fed’s announcement of the QE2 program, but in the end, the prevailing trend held and the markets broke to higher ground.
S&P 500 SPDRS (NYSE:SPY) ETF
The S&P 500, as represented by the S&P 500 SPDRS (NYSE:SPY) ETF, finally followed in the Nasdaq 100’s footsteps and broke through its April highs. This was a very important technical breakout, as it puts SPY at new recovery highs. One could argue that SPY is officially in a bull market now, since it has made a higher high on the weekly charts. If you look at its price action objectively since the bear market began you can see that SPY bottomed in early 2009 and spent the next several months rallying higher. The markets suffered through some weakness in mid-2010, even threatening to reverse lower. However, the markets broke higher from this consolidation and set the higher high. The most basic definition of an uptrend is for the instrument to be making higher highs and higher lows. With this week's move higher, it's clear that SPY meets this criteria.
The Powershares QQQ ETF (Nasdaq:QQQQ)
The Powershares QQQ ETF (Nasdaq:QQQQ) met this criteria weeks ago, and has been the clear leader in this market for months. In fact, QQQQ was able to get even closer to its prior bull market high of $55.07. Unfortunately, QQQQ has become really extended, especially in light of the gap higher this week. While it remains in a strong trend higher, it is clearly susceptible to a pullback here. The first area to watch would be a pullback to close the open gap near $53; beyond that the breakout area near $50 should also be monitored, as this was also an important pivot high from April.
The Diamonds Trust, Series 1 (NYSE:DIA) ETF
The Diamonds Trust, Series 1 (NYSE:DIA) ETF also managed to break out to new recovery highs and did so on an increase in volume. Now that the small consolidation that took place over the past three weeks has been cleared, it becomes much easier to conclude that an important breakout has occurred. The $110-$111 level is now the clear level to watch for a breakout failure, coinciding with both the April highs and the recent trading range.
The iShares Russell 2000 Index (NYSE:IWM)
While the iShares Russell 2000 Index (NYSE:IWM) also surged higher this week, it couldn’t join its market index peers in reaching new recovery highs. IWM is actually trading up to an important resistance level in the $74s. This level coincides with its April highs and is the level that IWM will need to clear in order to join its peers in a bull market. The recent consolidation near $69-$71 is now the immediate level to watch if IWM stalls at this level. IWM should be monitored: small caps are entering what has been a seasonally strong period for them.
This was a big week for the markets as SPY and DIA joined QQQQ in trading to new highs on the weekly charts. This is a very important technical breakout and puts these index ETFs in new bull markets. While the markets remain well off their all-time highs, this strength needs to be respected regardless of your opinion on the economy or reasons for this move. Price action is the most important indicator to watch and the trend is clearly higher right now. Despite the breakout occurring late in the week, the markets may already be susceptible to some profit-taking after their recent gap. However, traders should focus on the recent consolidation as an important support level to monitor. If the markets fall back under this level, it could signal a reversal, but the uptrend should be considered valid as long as the markets hold above this area on a pullback.
Oil Stocks Poised For A Breakout
In technical analysis, many consolidation patterns have names associated with them due to the shape that forms on the chart. While many traders get caught up with the names and whether the patterns develop perfectly, it is much more important to think about the psychology behind the pattern and why market participants are acting in a certain manner. The ascending triangle is usually a continuation pattern, and the key point traders need to understand is that this pattern often serves as a rest stop for a stock in an uptrend.
When a stock is in an uptrend, it will eventually start to lose momentum as traders who were long begin to take profits. Once buyers and sellers reach a stalemate, the stock will enter a period of consolidation where shares will be exchanged among traders betting on a continuation and other traders betting on a reversal. In an ascending triangle, the stock will typically stall at a fixed price level as it tests the top of the pattern. However, buyers will begin to buy at higher prices on dips, forming higher lows as the pattern progresses. Eventually, the stock will break out of one side of the triangle, confirming the pattern as either a continuation or reversal.
Recently, many oil pipeline stocks cleared an ascending triangle. This could mean a trend move higher for the sector is in the works. For instance, Boardwalk Pipeline Partners LP (NYSE:BWP) settled into an ascending triangle from July through September. It cleared the triangle later in September and after a run to $34 it has settled into a pullback toward the breakout area. The $32 level should be monitored for support; if BWP holds up in this area it could lead to a move to new highs.
El Paso Pipeline Partners LP (NYSE:EPB) just finished breaking out of an ascending triangle a few days ago. One important aspect to look for in a triangle is whether the consolidation becomes more volatile and the stock's trading range narrows over time as traders reach an equilibrium. Notice how the trading range in EPB began in August at almost 4 points and eventually narrowed to under 1 point. This is typically a clue that consolidation is nearing an end.
Atlas Pipeline Partners, L.P. (NYSE:APL) is another pipeline stock that recently cleared a triangle as well. APL formed an ascending triangle from August through October after a sharp gap higher in late July. APL never traded back into the gap, providing a clue that it would eventually resume its uptrend. APL eventually cleared the triangle in October, but has continued trading in a tight range. Traders should monitor the $20 level as the new breakout area.
Buckeye Partners L.P. (NYSE:BPL) is an example of a pipeline that has not cleared its ascending triangle yet. BPL has been consolidating since August, and is currently testing the top of the triangle. Traders should monitor the $65 area as the breakout level, and $62.50 as a mark of a breakdown from the pattern.
Implications It’s interesting that so many stocks in the same sector are following a similar pattern. Institutions will often accumulate a basket of stocks in a sector and it’s possible that this is occurring in this group. While there could be a variety of catalysts for accumulation in this sector, the bottom line is that the charts are showing indications of a possible trend move higher. Traders should monitor the key levels identified by the triangle pattern and act accordingly.
Check Out Last Weeks High Flying Stock
Stocks will be affected all week by commodity prices. These, in turn, will be affected by the dollar. For convenience, it helps to watch the U.S. Dollar Index, which measures the greenback against a basket of currencies.
The dollar was up as much as 13% for the year in June as the European debt crisis roiled markets. Since June, the crisis has ebbed, and the Fed has embarked on its quantitative easing program to boost the economy. And the dollar has lost all of its early gains.
As the dollar has fallen, gold, silver, copper and crude oil have moved higher.
Gold could well top $1,400 this week for the first time, and Goldman Sachs says it could hit $1,650 an ounce within the next year.
Crude oil ended the week at $86.85 a barrel, and there's talk it will hit $90 next week and perhaps $100 a barrel. The big question is whether speculative enthusiasm can overcome the reality that the world is simply awash in oil.
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