Stock Market Technical's Before Earnings Begin
July 09, 2012

Stock Market: Week Ahead Technical Support Remains Bullish

Alcoa Kicks off Earnings

Sentiment Indicators Increase optimism

by Ian Harvey

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July 09, 2012

Introduction

A sleepy and abbreviated week wrapped up in relatively dramatic fashion, as the major market averages recoiled lower on Friday's poorly received nonfarm payrolls report. When all was tallied up, the Dow was off 0.8% for the week.

Due to the technical support it seems appropriate to “remain bullish” – even with a backdrop of significant skepticism, especially as earnings season gets ready to begin.

Alcoa (AA) reports on Monday and this may set the stage for the overall market and reviews as to how stocks have collectively fared on their earnings reporting dates.

Dissecting the Technicals

After a Friday setback related to a lower-than-expected employment number, little has changed relative to last week. The S&P 500 Index (SPX – 1,354.68) comes into the week below resistance at 1,362.16 -- near its 2011 high, its April low, and a 61.8% Fibonacci retracement of the April 2012 high and last month's low.

Situated just below the 1,362 area is the 80-day moving average at 1,358, which capped a mid-June rally. The SPX moved through these resistance areas early last week, but failed to close the week above these levels. Should a pullback from resistance continue -- the 1,333 area -- site of the March 2009 "double low" -- could act as support.

Meanwhile, the S&P 400 Midcap Index (MID – 947.27) is still slightly below resistance in the 950 area.

The Nasdaq Composite (COMP – 2937.33) made a run at the 3,000 millennium level on Thursday, but sold off after getting within 13 points of this round number that acted as short-term resistance and support in March and April, respectively. The COMP's peak last week in the 2,980 area is roughly a 61.8% Fibonacci retracement of the index's March high and June low.

One plus last week was the Russell 2000 Index (RUT) moving above the round-number 800 level and taking out a trendline connecting lower highs in March and April.


Sentiment Indicators Effecting the Stock Market

Most sentiment indicators continue to indicate that there is sideline money available to push the major benchmarks through resistance, most notably from the underweight hedge fund group. Moreover, last week the SPX component short interest was back to levels that preceded a 25% rally in the SPX from October 2011 into April. It was also noted a couple of weeks ago that sentiment among equity options players had hit an extreme in pessimism consistent with major bottoms, as surveys suggested a slow move into the bullish camp among retail players and advisers.

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One sentiment indicator that showed a notable increase in optimism this past week (relative to the prior week) was the National Association of Active Investment Managers (NAAIM) survey, which saw its reading jump from a neutral 44.8 to a more bullish 63.3, above the 2012 average of 57.4. Readings in the 75-80 area have preceded major short-term pullbacks going back to May 2010.


Conclusion

This week is the official beginning of earnings season, with companies such as Alcoa (AA), JPMorgan Chase (JPM) and Wells Fargo (WFC) set to report. For the second quarter, estimates for S&P 500 companies are for growth of 8%, down from 10% at the beginning of the year. The fact that estimates are lower is a positive for bulls, as a lower bar can create more positive surprises. That said, the bar has not been lowered as much as the first quarter, when 6% percent growth was projected in late 2011 but only 2% growth was expected by the time earnings season began.

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It appears that bullishness will set the theme for the week -- there are overloved, underperforming stocks that have rallied into resistance levels, most notably in the coal and financial sectors. If you are looking to hedge your long exposure, you can look to these groups for short positions or put option plays.

Other Articles Relating to the Stock Market in the Week Ahead

1. The Economy and Earnings in the Week Ahead – July 09, 2012

2. The Week Ahead in the Stock Market – July 09, 2012

3. The Major ETFs in the Week Ahead – July 09, 2012

4. The Past Week Stock Market Results – July 09, 2012


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