It's a Break-out!
While stocks are overbought and may well pull back over the short term, market internals are in good shape and suggest stocks will likely headed higher over the intermediate term. Specifically, both breadth and leadership are confirming the ?break-out,' with the next key question being how they compare if and when stocks will challenge their early 2010 highs. A key factor in the strength in equites has clearly been interest rates, which have moved sharply lower over the past six months. This has not only helped stocks move higher, but gold as well.
Looks Like a Bottom!
WWhile the odds suggest stocks are most likely headed higher from here, trend-following indicators such as the 'golden cross' or the weekly MACD have yet to confirm a new intermediate term up trend. The MACD is quite close however, which would reverse the 'sell' signal it registered during the the week of May 7. Commodities are looking ready to move higher as well.
On Critical Support
While stocks have so far held key areas of support, there is a very real chance the equity markets are forming a cyclical top. The action in the weeks ahead will be absolutely critical.
Technical Market Take
Market technical are of concern technically. Specifically, there was not only a noticeable absence of new 52-wk highs during the recent bounce in equities, but last week?s decline saw more than twice the number of new lows, than new highs (A). Most definitely action which supports the opinion that stocks may well be forming some type of cyclical top. The bottom line being, that the market continues to suggest that the wisest course of action going forward is to underweight equities (or avoid them entirely, depending on suitability) while overweighting bonds.
A Quick Review of Gold
Mike Hurley presents charts of prices for gold contracts, as well as two key gold stocks: Newmont Mining and El Dorado Gold Corporation. It looks pretty clear that gold, and the stocks shown, are in good shape technically and ready to move meaningfully higher from here - despite what many of the bears are saying. It will be a very different story once gold breaks the up trend line shown, but until then the market itself is saying that it's 'all clear ahead!'
No Man's Land
Rallying nicely on the month of July, the U.S. markets moved back through key areas of resistance and in doing so have formed what may end up being be ?bear traps? on their charts. While the jury remains out on the direction of equities, however, interest rates literally across the board have broken important support levels. Among these are yields on 10-year U.S. Treasury bonds, which are now below 3 percent, and are headed lower from here. This is a trend which may well have legs, and which advisors should include in their planning for clients going forward.
Mike Hurley?s Technical Take (7/26): A Bear Trap?
While we have not yet seen a trend-following 'buy' signal in the weekly Moving Average Convergence/Divergence, stocks could continue to rally from here over the short term ? particularly given that the Stochastics are just now moving off oversold levels. The more important question is whether or not the strength will become anything more than a 'right shoulder' of a head and shoulders-type topping formation. Mid-cap stocks will most likely outperform on the upside should the market move higher in the weeks ahead.
Failing at Resistance
Technically speaking, after finding support at its 200-day moving average in February while in an uptrend, the S&P 500 is now finding resistance at that key line. This is action indicative of a down-trend, as are the 'lower highs & lower lows' which are clearly taking shape on the chart. The overseas markets are also struggling, with the most glaring example being the EAFE. In the case of the 10-yr U.S. Treasury bonds, breaking 3.2 percent moves yields out of a yearlong trading range and signals that significantly lower yields are most likely ahead.