The short-term trend for stocks changed with Wednesday's gap and breakout. The medium-term and long-term trends were already up. This means that all three trends are up again and we could see a challenge to the March highs. While I hate to play the fundamental card, the fate of Wednesday's breakout and the challenge to new highs will likely depend on the market's reaction to this week's plethora of key economic reports. On the S&P 500 ETF (SPY) chart, the ETF gapped and broke trendline resistance with a surge above 138.50. The gap held and should be considered bullish as long as it holds. With Monday's gap down and Wednesday's gap up, we also have an island reversal on the charts. Because this three day reversal was so extreme and looks out of place, I am opting to draw a trendline right through the gap zone to define the short-term uptrend. At this point, the gap zone, trendline break and trendline extending up from early April mark first support at 138. A pullback or consolidation is allowed after the breakout, but a move below 138 would be deemed too far and call for a reassessment.
It is a HUGE week for economic reporting. Also note that earnings season remains in full blast. This is the week that could make or break the bullish case. Chicago PMI starts it off on Monday. ISM Manufacturing and Auto-Truck Sales are on Tuesday. The first two reports (PMI-ISM) will tell us a lot of about the current state of the economy and could set the tone for the week. The employment preview starts Wednesday with the ADP Employment Change Report. We also have Factory Orders on Wednesday. The Challenger Job Cuts will kick off Thursday and ISM Services will also be reported in the morning. Most likely the market will have already made its move by the time Friday's big employment report hits. A series of worse-than-expected reports would probably derail last week's stock market breakout and put sell-in-May back to the forefront. A series of better-than-expected reports would justify the stock market breakout and could lead to further gains.
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Needless to say, this is also a HUGE week for the treasury market. Better-than-expected economic reports would weigh on treasuries and the 20+ Year T-Bond ETF (TLT) would likely break support at 116. Such a break would be bullish for stocks. Worse-than-expected reports would be positive for treasuries and TLT would likely hold support and continue its uptrend. This would be bearish for stocks.
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The Dollar will also be affected by this week's economic reports. Better-than-expected reports will put upward pressure on interest rates and decrease the chances for QE3 (more money printing). This would be bullish for the Dollar. Worse-than-expected numbers would put downward pressure on interest rates and increase the chances of QE3, especially within an election year. This would put downward pressure on the Dollar. On the price chart, the US Dollar Fund (UUP) remains in an downtrend with key resistance just above 22.
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Better-than-expected economic reports would be bearish for treasuries and bullish for commodities, provided the Dollar does not surge too much. The US Oil Fund (USO) remains in an upswing and is challenging resistance in the 39.80 area. Resistance stems from broken support and the mid April high. Overall, the trend is still down and a break above this resistance zone would reverse the downtrend. Also look for an RSI break above 65. As far as the upswing, which is five days long, I am watching support at 39.20
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I would expect gold to follow the stock market and move counter to the Dollar. However, we could see these two diverge this week, especially if the economic reports are better-than-expected. The Gold SPDR (GLD) surged above first resistance at 160.5 with a strong move on Thursday. With a higher low forming, the potential for a trend reversal is increasing. However, note that gold remains in a bigger downtrend still and RSI has yet to breakout. A break above the mid April high is needed to fully reverse this downtrend. At this point, we need to set a support level to cry "uncle" on this breakout. A move below 159.50 would signal a breakout failure.
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Key Economic Reports:
Mon - Apr 30 - 08:30 - Personal Income & Spending
Mon - Apr 30 - 09:40 - Chicago PMI
Mon - May 01 - 10:00 - ISM Manufacturing Index
Tue - May 01 - 10:00 - Construction Spending
Tue - May 01 - 14:00 - Auto-Truck Sales
Wed - May 02 - 07:00 - MBA Mortgage Index
Wed - May 02 - 08:15 – ADP Employment Report
Wed - May 02 - 10:00 - Factory Orders
Wed - May 02 - 10:30 - Oil Inventories
Thu - May 03 - 07:30 - Challenger Job Cuts Report
Thu - May 03 - 08:30 - Initial Jobless Claims
Thu - May 03 - 10:00 - ISM Services Index
Fri - May 04 - 08:30 - Employment Report
Charts of Interest: Tuesday and Thursday in separate post.
This commentary and charts-of-interest are designed to stimulate thinking. This analysis is not a recommendation to buy, sell, hold or sell short any security (stock ETF or otherwise). We all need to think for ourselves when it comes to trading our own accounts. First, it is the only way to really learn. Second, we are the only ones responsible for our decisions. Think of these charts as food for further analysis. Before making a trade, it is important to have a plan. Plan the trade and trade the plan. Among other things, this includes setting a trigger level, a target area and a stop-loss level. It is also important to plan for three possible price movements: advance, decline or sideways. Have a plan for all three scenarios BEFORE making the trade. Consider possible holding times. And finally, look at overall market conditions and sector/industry performance.
